clsa asiausa forum takeaways: usa paving way for china

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Global mediaCLSA AsiaUSA Forum takeaways

The group of companies that comprise CLSA are affiliates of Credit Agricole Securities (USA) Inc.For important disclosure information please refer to page 10.

James [email protected](1) 617 295 0120

Wei Fang(1) 617 295 0128

13 November 2011

GLOBALMedia

www.clsa.com

USA paving way for ChinaWe had three expert speakers in the Global Internet and Media spacepresenting at our AsiaUSA forum. Ogilvy Asia Pacific painted a bright outlook for consumer consumptions in China and believes that urbanization is key to generate wealth and thus ad spending. CIC data presented enthusiastically about the prospects of Chinese social media space and characterized Sina weibo as “the portal to the internet”. The Chinese social expert further stated that social is already important to advertisers and leading indicators for monetization look promising. Finally, Webtrends went through the monetization cycles of Facebook, providing a clear map for its Chinese counterparts. The US social expert stated that the inflection point for the Facebook monetization was when advertisers retargeted their fans (after a period of aggregating fans). Maintain our positive view of the Chinese advertising space, especially online. We agree with the urbanization thesis of Ogilvy, which affirmed our bullish call on Focus Media. In addition, we like the prospects of Sina weibo since it has already established deep relationships with its users and advertisers. The Facebook case study provided us confidence that the Chinese social platform will be able to monetize through a similar manner.

Consumer expert says urbanization key to drive ad spendingq Urbanization in tier 2+ markets drives wealth creationq Internet is influential on consumer purchasing decisionsq Predicting strong advertising growth for new mediaq Multi-screen marketing is important

Chinese social media expert says social is fabric of online societyq Sina Weibo is the portal to the web in Chinaq Social risks are manageableq Social is the voice for brandsq Leading indicators for monetization look promising

Facebook expert says USA leads the way for Chinaq Social takes a similar monetization path as search: organic to paidq Facebook starts from fan aggregation (organic) to fan retargeting (paid)q Ad serving platform is critical to monetizationq Top verticals for Facebook advertsing could be a proxy in China:

entertainment, travel and ecommerce.

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US paving way for China Global media

13 November 2011 [email protected] 2

Ogilvy: Positive consumer trends in ChinaChief Knowledge officer of Ogilvy Asia Pacific, Kunal Sinha, provided a positive outlook for consumer spending and offered the following key points to support his views.

Urbanization in tier 2+ markets drives wealth creationMr. Sinha stated that wealth in China was distributed geographically where 60% of billionaires in china live outside of Beijing. Urbanization in tier 2+ markets is an important process as our speaker laid out the major transformations in these markets. For example, Chengdu has transformed itself into an important transportation and communications hub. The city has become a base for electronics and IT industries. The resulting employment opportunities improved the standard of living for the residents in Chengdu and attracted migrant workers into the market. Another example is Shenyang, where the city has turned into a model for alternative energy after many years of pollution from the development of heavy industry. This is consistent with our thesis where the Chinese advertising dollars will be more balancedover time from 60% in tier I markets that have only 9% of urban population.

Figure 1 Figure 2

China urbanization – Chengdu (population = 14m) China urbanization - Shenyang (population = 8.1m)

Source: Ogilvy.

Internet is influential on consumer purchasing decisionsOgilvy believes that an overall increase in china’s wealth will continue to support consumer spending, especially online. As a highlighted in figure 3, Chinese consumers are watching TV less than their US counterparts since the Internet has more interesting entertainment content. In addition, online influence is key to success of many brands in China. For example, 46% of all skincare and cosmetics purchases are determined by the Internet

Expect wealth increase to support consumer online

spending

China urbanization will drive wealth



and 34% for fashion and accessories. With that in mind, the media agency expects China’s online spending will grow 44% YoY in 2012.

Figure 3 Figure 4

Average time spent watching TV (Hour/Day) Estimated total internet ad spend YoY growth in 2012

0

1

2

3

4

5

6

US

Phill

ipin

es

Mala

ysi

a

Indonesi

a

Chin

a

India

(Hour)

0%

10%

20%

30%

40%

50%

China USA

Source: Ogilvy:

Local and global advertisers market differentlyWhen it comes to online advertising, western and Chinese companies typically have different takes. For example, western companies are focused on building the brand so they focus more on telling the story and portraying the lifestyle supporting that brand image. On the other hand, Chinese brands are using the web as a direct response channel, focusing on promotional programs to drive sales. Overtime, we will see the Chinese companies focus on branding as a way to improve its brand image and foreign advertisers move to direct response to tailor advertising messages to demographic and geographic preferences.

Figure 5 Figure 6

Chinese brands focus on selling Western brands focus on image & education

Source: Ogilvy

Multi-screen marketing is importantOgilvy also stressed that targeting consumers in multiple screens is important to capture attention outside the home. As highlighted in figures 7 to 9, outdoor advertising comes in various forms and sizes and we believe it is an important medium to reach targeted audience.

Local and global advertisers use different

strategies

It is important to capture attention outside the

home



Figure 7 Figure 8 Figure 9

Screen in taxis Screens on commercial building Focus media’s screen in office buildings

Source: Ogilvy, Focus Media



CIC: Promises of Chinese social media Sam Flemming, CEO of Chinese social intelligence firm CIC data provided a strong case why social media is “it” in China. In addition, he offered an insider look into the Chinese Netizens’ user behavior and why social is important to advertisers. Most importantly CIC believes that leading indicators for monetization seems to be consistent with those at Facebook.

Sina Weibo is the portal to the web in ChinaCIC said micro-blogging is the Chinese Internet users’ preferred way to go social. As highlighted in figure 10, Chinese netizens use micro-blogging as “national’s water cooler” where people receive and forward interesting information on a real-time basis. The most popular micro-blogging platform by far is Sina Weibo. Mr. Flemming described Sina’s social platform as “the social portal” and “the fabric of the Chinese internet society”. We find itinteresting that there was no mention of Sina’s competitors throughout CIC’s presentation. We believe it speaks volumes of Sina’s dominance in the social media space.

Figure 10

Weibo becomes the social portal in China

Source: CIC

Social risks are manageableDuring the session, the audience’s first question was about the regulatory risk of user generated content in China. CIC responded by saying that publishers in China are extremely good at filtering their own content since it is the most important survival skill for running a media business. At the same time, Mr. Flemming said the people did not give the Chinese enough credit for being “social savvy”. He mentioned that sometimes the government would let Chinese citizens vent through social media to prevent social unrest. We agree with CIC’s view and believe that social media will likely be self-regulated.

Social is the voice for brandsCIC data argued that social marketing would become extremely important to advertisers in China, characterizing weibo as “the voice for brands.” Mr. Flemming laid out several best practices for weibo, including customer service (Dell Computer, Figure 11), reputation management, market research (Ikea, Figure 12) and lead generation (360buy). Dell Computer was highly praised

Chinese internet users use weibo as the social

portal

Chinese internet companies are skilled at

content filtering

Brands already use weibo to communicate with

consumers



by CIC Data for using weibo to respond to customer questions and complaints.

Figure 11 Figure 12

DELL uses weibo as a channel for customer service IKEA uses weibo to do market research

Source: CIC

Leading indicators for monetization look promisingCIC Data believes that leading indicators for Sina weibo’s monetization look promising, including increased fan count, fan quality and engagement. As highlighted in Figure 13, CIC did a study of 13 top luxury brands in Sina weibo and found that the fan base grew impressively at 66.6% in 2Q11 and 42.9% in 3Q11. In addition, the fan quality on Sina Weibo is high based on a different study where fans with fewer than 10 followers (less active) are less than 15% of the total base. Finally, CIC found that weibo fans are very engaging. As highlighted in figure 15, the comment rate for weibo fans of three luxury companies showed a consistent improvement during a recent test by CIC. These metrics are very similar to Facebook’s metrics a few years so we believe Sina is on the right track for monetization.

Figure 13 Figure 14

Luxury cosmetic group fan base growth on Sina weibo 3Q11 Sina weibo brand’s fans quality (by No. of fans)

0

10,000

20,000

30,000

40,000

1Q11 2Q11 3Q11

below 1015%

10-5024%

50-10015%

100-20015%

200+31%

Source: CIC. Note: luxury cosmetic group consists of 13 brands, fans number is group average.

Sina weibo’s leading indicators look promising



Figure 15

Comment rate for 3 luxury groups

0

5

10

15

20

25

30

Jan Feb Mar Apr May Jun Jul Aug Sep

Source: CIC. Notes: comment rate defined as average comments per tweet. Comment rate in the chart is the average of 3 luxury cosmetic groups (L’Oreal Group, Estee Lauder Group, LVMH Group), Jan-Sep 2011



Webtrends: Facebook provides roadmapOur Facebook guru Justin Kistner from Webtrends gave an enthusiastic presentation about advertising on social media. Webtrends is a leading social and analytics firm and works with many advertisers on Facebook marketing. We thought that monetization on Facebook paves a clear pave for social platforms in China, especially Sina Weibo.

Social takes a similar monetization path as searchOur expert noticed that monetization for social is similar to that of search, going from organic to paid. When Google just stated, advertisers wereusing organic search results to drive traffic to their websites by optimizing their URLs according to the search engine’s quality scores. In other words, it’s important to create relevant web pages to match relevant search results. When AdWord (keyword bidding platform) was introduced, we saw a meaningful adoption because advertisers have already used organic search so paying for keywords to drive additional traffic was a natural progression. In other words, it’s important to create a relevant ad linking to a relevant web page. Mr. Kistner is seeing a similar evolution for social (highlighted in Figure 16), with advertisers initially setting up their own profiles to listen to and communicate with Facebook users. These tools are organic (free) and designed to aggregate fans (people who hit the like button). Once the fan base reaches a critical mass, monetization starts to take off according to our expert. Advertisers are using paid campaigns to retarget people that have an affinity to the brand. As highlighted in Figure 17, Facebook has continued to gain market share ahead of other competitors. We feel the Chinese social media platforms like Sina weibo is following a similar path and is currently at the “fan aggregation” stage.

Figure 16 Figure 17

Facebook monetization from organic to paid Facebook gains market share on display vs. competition

Source: Webtrends

Ad serving platform is critical to monetizationAccording to Mr. Kistner, the click-through rate for Facebook ads is 7x higherwhen targeting a fan (compare to non-fans). Webtrends stats show that on average, a Facebook user only follows 9 brands and therefore targeting these followers are important to improve ROI. For example, 36% of consumers buy more after becoming a fan. That said, it makes more sense to spend ads on existing customers than acquiring new ones. The principle of 80/20 rules applies here and therefore advertisers get a higher ROI on marketing dollars from fan retargeting than fan acquisitions. As a result, we believe a strong ad serving platform is critical to support the advertiser demand for conversions. We feel that building a good ad serving platform requires three things: a strong targeting technology, an easy-to-use ad-buying interface;

Facebook went through the free-to-paid path in

monetization

We believe an easy-to-use ad-buying system is

the key to succeed



and an effective analytics system that allows advertisers to measure results. Google and Facebook took about 2 to 3 years to develop such a platform, we believe it will take time for Chinese social media companies to develop and refine that capability.

Top verticals for Facebook could be a proxy in ChinaWhen looking at Facebook advertising in the US, industries that are more sociable (eg, more talked and shared by users) advertise more on Facebook.As highlighted in Figure 18, these industries include entertainment, travel, ecommerce and retail. Sectors that are less sociable include healthcare and financial services. We believe the industries that are early adopters of social in the USA are a good indicator for China.

Figure 18

Sociability index

Source: Webtrends

The most social industries in US could be a proxy for

China



Figure 19

Global Media comp sheet

Segment

Company GOOG YHOO LNKD AMZN EBAY EXPE PCLN BIDU SINA SOHU FMCN* CTRP Tencent** Alibaba** YNDX MAIL.ru

Price 608.35 16.27 79.01 217.39 31.76 27.98 533.31 137.76 79.16 59.11 23.36 34.27 161.20 9.34 25.54 32.94

Shares (F/D) 327.4 1,308.0 97.1 461.0 1,309.3 277.0 48.0 349.6 65.8 39.1 140.4 152.4 1,861.9 5,140.6 325.3 208.3

Market Cap 199,198 21,281 7,672 100,217 41,583 7,750 25,599 48,161 5,211 2,311 3,280 5,223 300,138 48,013 8,308 6,861

Net Debt (39,094) (3,255) (104) (6,326) (1,469) 90 (1,005) (1,570) (784) (734) (558) (631) (19,990) (10,998) (563) (118)

Enterprise Value 160,104 18,026 7,568 93,891 40,114 7,840 24,594 46,591 4,427 1,577 2,722 4,592 280,148 37,015 7,745 6,743

Net Cash per Share 94.32 2.49 1.07 13.72 1.12 (0.32) 20.94 4.49 11.91 15.39 3.97 4.14 10.74 2.14 1.73 0.57

Estimates

Revenue 10CL 22,004 4,588 243 34,204 9,156 3,348 3,085 1,199 384 613 580 437 23,372 6,637 440 325

Revenue 11CL 29,549 4,388 507 48,771 11,584 3,904 4,331 2,231 465 846 706 551 34,944 7,974 665 482

Revenue 12CL 36,364 4,927 769 64,848 13,653 4,340 5,422 3,478 578 1,060 829 697 45,184 9,173 938 618

Growth '10-'11 34% -4% 109% 43% 27% 17% 40% 86% 21% 38% 22% 26% 50% 20% 51% 48%

Growth '10-'12 29% 4% 68% 38% 22% 14% 33% 70% 23% 32% 20% 26% 39% 18% 46% 38%

GAAP EPS 10CL 26.31 0.91 0.07 2.53 1.36 1.46 10.35 1.53 1.73 3.62 1.21 1.06 5.17 0.35 0.44 0.48

GAAP EPS 11CL 32.19 0.84 0.02 1.20 1.84 1.72 20.60 2.95 0.95 4.62 1.74 1.13 7.03 0.45 0.60 0.81

GAAP EPS 12CL 39.18 0.84 0.32 2.06 1.90 1.98 27.04 4.52 1.47 5.60 2.21 1.44 8.84 0.51 0.84 1.11

Growth '10-'11 22% -8% 114% -53% 35% 18% 99% 93% -45% 27% 44% 7% 36% 30% 36% 69%

Growth '10-'12 22% -4% -100% -10% 18% 16% 62% 72% -8% 24% 35% 17% 31% 22% 38% 52%

Operating Margin

2010 40% 17% 8% 4% 29% 25% 28% 49% 24% 38% 34% 37% 50% 28% 39% 30%

2011CL 37% 18% 0% 2% 27% 22% 33% 53% 7% 34% 38% 33% 43% 29% 36% 41%

2012CL 37% 17% 6% 2% 27% 22% 35% 64% 13% 32% 43% 35% 43% 29% 36% 45%

EV/Sales 2010 7.3 3.9 31.1 2.7 4.4 2.3 8.0 38.9 11.5 2.6 4.7 10.5 12.0 5.6 17.6 20.7

EV/Sales 2011 5.4 4.1 14.9 1.9 3.5 2.0 5.7 20.9 9.5 1.9 3.9 8.3 8.0 4.6 11.6 14.0

EV/Sales 2012 4.4 3.7 9.8 1.4 2.9 1.8 4.5 13.4 7.7 1.5 3.3 6.6 6.2 4.0 8.3 10.9

P/E 2010 23.1 17.9 nm 85.9 23.4 19.2 51.5 90.0 45.8 16.3 19.3 32.3 31.2 27.0 58.0 68.6

P/E 2011 18.9 19.4 nm 181.2 17.3 16.3 25.9 46.7 83.3 12.8 13.4 30.3 22.9 20.8 42.6 40.7

P/E 2012 15.5 19.4 246.9 105.5 16.7 14.1 19.7 30.5 53.9 10.6 10.6 23.8 18.2 18.2 30.4 29.7

Cash-adj.P/E 2010 19.5 15.1 nm 80.5 22.5 19.4 49.5 87.1 38.9 12.1 16.0 28.4 29.1 20.8 54.1 67.4

Cash-adj.P/E 2011 16.0 16.4 nm 169.7 16.7 16.5 24.9 45.2 70.8 9.5 11.1 26.7 21.4 16.0 39.7 40.0

Cash-adj.P/E 2012 13.1 16.4 243.6 98.9 16.1 14.3 18.9 29.5 45.7 7.8 8.8 20.9 17.0 14.1 28.3 29.2

Global Emerging Markets

Note: Except for GOOG, YHOO, FMCN, all estimates are First Call consensus. *EPS for FMCN are on a pro forma basis. **in HK dollar. Priced as of November 11, 2011.



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clsa asiausa forum takeaways: usa paving way for china

Business

ad serving

clsacredit

credit agricole

underperform

similar monetization

united states

investment

comment rate