Insights Chinas Internet Goes Mobile

China / Hong Kong Industry Focus
China Internet Sector

Refer to important disclosures at the end of this report
DBS Group Research . Equity 3 December 2014
The makings of an empire HSI: 23,654

Leading internet players are actively positioning on NASDAQ: 4,756
mobile internet to enhance growth prospects
Riding on its vast user base, Tencent could
cooperate with strategic partners including JD.com ANALYST
to strengthen its presence especially in the e- Mark LI, CFA +852 2971 1935
commerce value chain mark_li@hk.dbsvickers.com
Initiate coverage on Tencent with BUY, HK$148 TP Recommendation & valuation

(on 0.9x PEG, or 32x 12-month rolling core PE);
initiate coverage on JD.com with BUY, US$30.8 TP T arg et 15F 15F
(on 1.5x 12-month rolling P/Sales ratio) Co mp an y Pric e Pric e U p sid e R ec o m PE P/ Sales
L o c al$ L o c al$ % x x
Mobile transformation underway. Chinas internet
sector has benefited from rising penetration of mobile Tencent*^
HKD 119.6 148 23 Buy 26.0 9.0
(700 HK)
devices, and robust mobile revenue contribution has
J D.Com*^
become the main growth driver. As such, leading players USD 23.91 30.8 29 Buy n.a. 1.2
(J D US)
especially the BAT (Baidu, Alibaba Group and Tencent)
A libaba#
are striving to enhance their mobile presence via both USD 109.9 n.a. n.a. NR 36.2 15.7
(BA BA US)
organic growth and strategic cooperation.
Baidu
USD 234.7 n.a. n.a. NR 27.5 5.8
Tencent Family rides on its platform value. In (BIDU US)
particular, Tencent has been actively cooperating with
strategic partners such as JD.com, Dianping.com, Didi # 2015: FY3/16
Taxi and LY.com. Building on Tencents large user base ^ Core PE
especially for Weixin and Mobile QQ, its integration with
Note: We expect JD.com to turn profitable in 2016F.
partners e-commerce, search, travel and O2O services
could help to establish ecosystems around Tencents key Source: Thomson Reuters, *DBS Vickers
platforms.
Buy the winners. Within the internet sector, we believe
e-commerce has the best monetization potential, thanks
to its transaction-based business model. The strategic
cooperation between Tencent and JD.com could
enhance their control on the e-commerce value chain,
and improve user experience especially in product quality,
payment methods and delivery speeds. Besides, more
synergies could emerge in other key segments such as
online games and online ads. We initiate coverage on
Tencent with BUY rating and TP of HK$148 (based on
0.9x PEG, or 32x 12-month rolling core PE). We also
initiate coverage on JD.com with BUY call and TP of
US$30.8 (based on 1.5x 12-month P/Sales ratio).
www.dbsvickers.com
ed-JS & TH / sa- MH
Industry Focus
Table of Contents
Investment summary 3
Going mobile 4
Consolidations taking place 6
(A) Horizontal expansion Synergies emerging 10
(B) Vertical integration Riding on e-commerce value chain 13
Valuations & recommendations 16
Stock Profiles 20
Tencent 20
JD.com 38
Appendix 58
Page 2
Industry Focus
Investment summary Horizontal expansion creates synergies. Cooperating closely

with its partners, Tencent has incorporated functions like e-
The internet sector is embracing the mobile age. Thanks to commerce, online taxi bookings, restaurant rating and travel
rising penetration of smart devices, the number of mobile services into its Weixin and Mobile QQ apps (applications). We
netizens has grown rapidly and exceeded 40% of total expect such cooperation to generate good user traffic and
population in China. Mobile internet users are likely to stay consumption for Tencents partners, and increase users time
online for >10 hours per day, which we believe is 5-10x the spent on Weixin and Mobile QQ. Thanks to synergies that arise
amount of time users spend on PCs. According to iResearch, from such cooperation, Weixin and Mobile QQ could become
mobile revenue contributed 22% of Chinas internet sector the Super Apps that users would go to whenever they surf
revenue in 2Q14, and could trend up further. In addition, the mobile internet.
mobile internet could breed new customer demand such as
Vertical expansion along e-commerce value chain. Thanks to its
online taxi bookings. Hence, there is immense potential for the
transaction-based model, we believe e-commerce is best-
winners in mobile internet, in our view.
positioned to achieve monetization (i.e. generating revenues
Leaders strive to strengthen mobile presence. Seeing solid and profits). As such, Tencent has formed strategic cooperation
growth and bright prospects in mobile internet, leading with JD.com, with the aim of enhancing their control on the e-
internet players including the BAT (Baidu, Alibaba Group and commerce value chain. In the partnership, JD.com would ride
Tencent) have invested heavily in mobile transformation, on its expertise in supplier management, online platform
especially in their core businesses such as mobile search, online development and in-house fulfilment operations, and Tencent
maps, mobile e-commerce and mobile games. As a result, BAT would provide support on user traffic and key processes such
has recorded robust mobile revenue growth, and their mobile as payment channels. In this way, Tencent and JD.com could
revenue contributions have outperformed the market. In strengthen their e-commerce presence, and compete head-to-
addition to organic growth, we believe these leaders are willing head with leaders such as Alibaba Group.
to acquire quality players, to enhance their ecosystems in
mobile internet. Valuations and recommendations. We like Tencents leadership
in online games, emerging presence in online ads, and large
The Tencent Family stands out on its platforms with user active user base riding on its QQ and Weixin platforms. We
traffic advantage. In our view, social network operators have also think highly of JD.coms self-operated model that ensures
advantages in the mobile era, given keen user demand for easy product quality as well as delivery speeds. More synergies could
communication. Tencent has leveraged on its large user base emerge from their strategic cooperation, to enhance their
of >550m MAU (monthly active users) for its Mobile QQ and competitiveness especially in e-commerce. We initiate coverage
Weixin platforms, to cooperate with strategic partners on Tencent with BUY rating and TP of HK$148 (based on 0.9x
including JD.com, Dianping.com, Didi Taxi and LY.com. PEG, or 32x 12-month rolling core PE). We also initiate
Together with these players, the Tencent Family is well- coverage on JD.com with a BUY and TP of US$30.8 (pegged to
poised to establish ecosystems spanning multiple segments, 1.5x 12-month rolling P/Sales ratio).
such as online gaming, online ads, e-commerce, search, travel,
Risks and concerns. Key risks to Tencent could include
O2O and logistics services.
slowdown in mobile game revenue, unsuccessful monetization
efforts on Weixin and Mobile QQ, and rising content costs in
videos and online games. Key risks related to JD.com could
include intensifying competition with e-commerce leaders
especially Alibaba Group.
Page 3
Industry Focus
Going mobile
Revenue breakdown for China internet sector (2013)
Decent growth in the internet sector. More and more people in

China are embracing the internet, to enjoy its various
advantages such as convenience, transparency and cost savings. Online ads
As of June 2014, the netizen population in China stood at Online
21%
Online payment
632m (14m higher than Dec 2013), and internet penetration 3%
games
rate reached 47% (source: CNNIC). Driven by rising netizen 15%
numbers and higher online spending, internet operators have
registered decent revenue growth. According to market
research firm iResearch, total revenue for the China internet Others
6%
sector could record 47% CAGR for 2011-2014F to reach
E-commerce
RMB826bn, and is projected to grow at 28% CAGR for 2014F-
55%
2017F to RMB1,723bn. The pie is large and growing, and all
players are striving to get a share.
China internet sector Total revenue size

Source: iResearch
RMB bn
CAGR= 28% %
2,000 60% Mobile contribution trending up. The promotion of mobile
52% 51% 1,723
1,800 devices (e.g. smart phones and tablets) and development of
1,600 50% mobile internet in China have offered huge opportunities for
1,400 38% internet operators. Thanks to the convenience of mobile
40%
1,200 devices, users could access mobile internet for >10 hours per
1,000 826 30% day, which could be 5-10x the time users spent on internet in
800 the PC era (according to Mr. Huateng Ma, founder and
600
600 20% Chairman of Tencent).
398
400 262
10% According to iResearch, mobile revenue contributions have
200
0 0%
increased steadily, and accounted for 22% of total revenue in
2011 2012 2013 2014F 2017F 2Q14. This ratio could trend up further, in our view. In the
initial phase, we believe growth could mainly come from users
Market size (LHS) Growth y-o-y (RHS) experimental consumption on the apps (applications). As the
apps become more user-friendly, and user habits on mobile
Source: iResearch internet are established, we believe mobile revenue could
achieve explosive growth, and make significant revenue
E-commerce, ads and games are major contributors. Breaking contributions for internet operators.
down the internet revenue for 2013, e-commerce accounted
for 55% of total revenue, and online ads (21%) as well as
online games (15%) were the other major contributors. Online
payments share was 3%, with good potential to grow. Aided
by its transaction-based model, we believe e-commerce is best-
positioned to achieve monetization (i.e. generate revenues and
profits). Online ads and online games could also ride on
customers migration to mobile devices to fuel growth. Online
payment could likely contribute to the sectors longer-term
growth, as payment infrastructure and regulations improve.
Page 4
Industry Focus
Mobile penetration rate Ecosystem is the key. In spite of the bright prospects for mobile
internet, it could be difficult for the players to achieve
25% monetization, unless an ecosystem is established. For example,
21.8% mobile e-commerce could be much more effective if customers
20.1% have access to convenient online payment methods, and goods
20% 18.0% are delivered via efficient logistics systems. Hence, we expect
14.9% leading internet players to invest on both horizontal expansion
15% (across segments) and vertical integration (along value chains)
11.7% to create ecosystems in the mobile era.
10% Winner takes it all. Mainly due to screen size, mobile devices
could display limited content compared to PCs. Thus, users
5% attention could be concentrated on a few apps. According to a
recent survey by iiMedia, >75% of smart phone users in China
would frequently use 6-15 apps, and less than 20% would use
0%
2011 2012 2013 1Q14 2Q14
>15 apps frequently. As such, we believe the mobile internet
market could consolidate over the longer-term, with a few
Note: Penetration = mobile revenue / total revenue for China internet leaders enjoying majority of the market share.
sector.
Consolidations ahead. Given mobile internets immense
Source: iResearch
potential, emerging new services, and market concentration
down the road, we believe leading internet players especially
Leaders are on the move. Seeing strong growth and immense
the BAT could be interested to strengthen their positions
potential in mobile internet, leading internet players especially
through M&As and strategic partnerships. Besides, since they
the BAT (Baidu, Alibaba Group and Tencent) have placed much
are listed companies, these leaders could ride on their strong
attention on growing their mobile arms. Baidu has penetrated
financial positions to acquire quality players in other segments
mobile internet users with its strengths in mobile search, online
or along the value chains, in our view.
maps and appstores; Alibaba has focused on mobile e-
commerce such as Mobile Taobao (); Tencent aims
Net cash level for BAT
to strengthen its positions in mobile games and social networks
(e.g. Weixin, Mobile QQ and Mobile Qzone). Alibaba and
Tencent have also offered subsidies to customers, to encourage RMB m
the use of their mobile payment solutions (e.g. Alipay, Weixin 41,000 38,070
Payment and Mobile QQ Wallet). 36,000
31,000 26,526
Overall, mobile revenue growth for BAT has been robust, and 26,000 23,271
they have led the industry in mobile revenue contributions. 18,547
21,000
Looking ahead, we believe BAT aim to further accelerate their
16,000
mobile transformations, via both organic growth and 9,748
11,000 7,495
cooperating with strategic partners in their non-core segments. 4,858
6,000 2,287
1,000
Mobile revenue contributions for BAT
(4,000) (3,109)
1Q 20 1 4 2Q 2 01 4 3 Q 2 0 14 2011 2012 2013
Baidu >25% 33% 36% Baidu Alibaba Group * Tencent
Alibaba Group * 27% 33% 36%
Tencent ** 17% 27% 23% * Alibaba Group: 2011: FY3/12; 2012: FY3/13; 2013: FY3/14.
Alibaba raised c.US8bn / c.RMB50bn from its IPO in Sep 2014.
Note: Mobile revenue as percentage of total revenue. Based on
calendar year. Source: Companies, DBS Vickers
* Alibaba Group: Based on GMV (gross merchandise value).
** Tencent: For online games only. Its mobile game revenue saw
temporary disruption in 3Q14, due to delayed launches of upgrades
on Weixin and Mobile QQ apps.
Source: Companies
Page 5
Industry Focus
Consolidations taking place Social networking is crucial in the mobile era. Social
networking has been the major beneficiary of mobile internet,
Taking a shortcut. In the mobile era, internet players have thanks to its portability and convenience. Users of instant
increasingly adopted the M&A approach to strengthen their messaging apps could communicate on a real-time basis with
industry positions. Total value of M&As in China internet sector friends, at literally no cost. A recent survey by Enfodesk shows
posted 116% CAGR during 2009-2013 to US$14.3bn, and that 91% of mobile netizens have used social networking apps
could grow by 60% this year to US$23bn. As the mobile such as Tencents Weixin (), Mobile QQ ( QQ) and
internet market consolidates, M&As and strategic cooperation Qzone (QQ ). Being the dominant leader in social
could be the preferred solutions for leaders to further increase networking, Tencent has accumulated a large user base of
their market shares. >550m monthly active users (MAU) for its apps including
Mobile QQ and Weixin. With the advantage in mobile users,
Tencent is well-positioned to penetrate into other segments of
China internet sector Total M&A size
mobile internet.
USD m %
Mobile internet Penetration by category (1H14)
25,000 164% 22,955 180%
160%
20,000 100% 91%
140%
114% 108%
14,349 120%
15,000 80%
86% 100%
60% 80% 60% 56% 55% 53%
10,000
60%
5,425 36%
40% 40% 35% 31%
5,000 2,602
654 1,401 20%
20%
0 0%
2009 2010 2011 2012 2013 2014F
0% E-commerce
Games
Readers
Video
Social network
Total size (LHS) Growth y-o-y (RHS)
News
Music
Source: PEdata.cn, ChinaVenture, DBS Vickers
Horizontal and vertical expansions. In our view, M&As and

strategic partnerships could happen in two dimensions Note: Penetration is defined by number of users that have used the
horizontal and vertical. Horizontal expansions enable internet relevant app, divided by mobile internet user population in China.
players to quickly establish presence in new segments that are Source: EnfoDesk
crucial to the ecosystem, creating synergies with their core
businesses. At the same time, internet players could leverage
on vertical expansions to enhance their management of the
value chains, and ultimately improve service quality to the
customers.
Page 6
Industry Focus
Based on our analysis, Tencent has concluded >30 major M&As

Tencent: An active acquirer. Building on its strengths in user
since 2012, mainly in online games, O2O (online-to-offline)
traffic and solid net cash position, Tencent has become the
and e-commerce services. We believe this is in line with the
most active acquirer among BAT. The company has accelerated
companys strategy to enhance its competitive advantage in
its pace of M&As and strategic cooperation since 2010, and
online gaming, expand horizontally into new segments to form
has launched the Tencent Industry Win-Win Fund (
the ecosystem, and strengthen its vertical control on the e-
)in 2011, focusing on both acquisitions and strategic
commerce value chain.
investments.
Brief list: Major M&As by Tencent (since 2012)
Dat e Deal Cat egory Inv est ment siz e
2014:
J un 2014 24% stake in 58.com (58; NYSE: WUBA) LBS >US$830m
May 2014 11% stake in Nav Info (; 002405.CH) LBS RMB1.2bn
May 2014 c.18% stake in J D.com E-commerce n.a.
Mar 2014 15% stake in Leju LBS US$180m
Mar 2014 28% stake in CJ Games Games KRW533bn
F eb 2014 20% stake in Dianping.com () LBS c.US$400m
F eb 2014 Increased its stake in LY.com () to c.20% Trav el n.a.
J an 2014 c.12% stake in China South City (; 1668.HK) Logistics c.HK$2.3bn
J an 2014 Increased its stake in Didi Taxi () LBS Tencent inv ested a total of US$45m
2013:
Sep 2013 c.37% stake in Sogou () Search RMB3.2bn
J ul 2013 c.6% stake in Activ ision Blizzard (NASDAQ: ATV I) Games US$1.4bn
J un 2013 Raised stake in Cheetah Mobile (NYSE: CMCM) by 8ppts to 18% Mobile software RMB290m
2012:
Nov 2012 Inv ested in Meilishuo E-commerce n.a.
J un 2012 48% stake in Epic Games Games RMB2.1bn
May 2012 Acquired Yixun.com () E-commerce c.RMB500m
Apr 2012 Acquired 14% stake in Kakao Corp (now Daum Kakao) Social network RMB401m
Note: For the detailed list of major acquisitions by Tencent, pls refer to Appendix.
LBS: Location-based Services, an important part of O2O that rides on the GPS positioning system.
Source: Companies, PEdata.cn, media websites, DBS Vickers
Page 7
Industry Focus
In e-commerce, Tencent has formed strategic cooperation with

Ecosystem is taking shape. Mr. Huateng Ma, founder and
JD.com since Mar 2014, and it has invested in Meilishuo (
Chairman of Tencent, has mentioned that the companys core
), the shopping guide service provider. The company has also
value lies in building a platform that connects large number of
invested in China South City (1668 HK) to beef up its presence
users with service providers. With this aim, Tencent has
in logistics. Tencent acquired stakes in Sogou (, online
developed open systems such as QQ and Weixin, and is
search engine), and has developed integrated search services to
collaborating with 3rd-party players to establish a
connect its key platforms such as Weixin and QQ. Besides,
comprehensive ecosystem. To ensure service quality, Tencent
Tencent has invested in several LBS service providers including
controls key sections in the ecosystem (e.g. online payment
Dianping.com () in restaurant rating, Didi Taxi (
channels, social networking and search functions), and
) in online cab booking, 58.com (58 , NYSE: WUBA) in
cooperates with strong players in other sections, including e-
online classified ads, Leju (, NYSE:LEJU) in online real
commerce, travel, logistics and O2O / LBS (location-based
estate services, and NavInfo (002405.CH) in online map data.
services). Coupled with rising 3rd-party contributions in
In addition, Tencent has invested in LY.com () and
Tencents core business of online gaming, the companys
eLong (), the online travel / ticketing service providers.
desired ecosystem is gradually taking place.
Cross-sector expansion by Tencent
S ocial Online O nline E-

T ravel L BS S earch L ogistics
ne twork ga mes a dvertising c ommerce
Note: LBS Location-based services. Yixun.com could be gradually incorporated into JD.com.
Source: Companies, DBS Vickers
Page 8
Industry Focus
That said, we believe the Tencent Family does not have

Aiming to fulfill users needs. Thanks to its portability, users
presence in sports and vehicle-related segments, and Tencent
could access mobile internet for >10 hours per day, which is 5-
could potentially cooperate with quality players in these
10x the amount of time users spend on the PCs. Hence, we
segments, in our view. We believe it could likely include online
believe mobile internet could better fulfill peoples needs in
/ offline sports event organizers (e.g. Wisdom Group, 1661 HK),
almost every aspect of their daily lives. By grouping services
wearable sports device operators, and online vehicle sales / ads
offered by the Tencent Family (i.e. Tencent and its strategic
platforms (e.g. Autohome and BitAuto).
partners) according to different needs of an individual, we can
see that the Tencent Family could already fulfill user demand
in social networking, e-commerce, job hunting, housing,
entertainment and travel, etc.
Tencent family could cover most of users needs
F ood
S ocial network Restaurant: Dianping.com
Weixin, QQ He althcare
Guahao.com (), DXY.cn
S hopping ()
JD.com, Meilishuo, Yixun.com
Ba nking / Investment J obs

Webank () 58.com
Housing
E ntertainment Leju (), 58.com
Tencent Games, Tencent Video
User
V e hicle
T ravel
LY.com (), eLong () S ports Any ?
Any ?
Page 9
Industry Focus
(A) Horizontal expansion Synergies emerging
its partners, we believe the companys horizontal expansion to

Treasures of large user base. Sitting on >800m active users for
other key segments could create much synergies. Besides,
its multiple platforms including QQ, Weixin and Qzone,
many of Tencents active users (especially for QQ) are based in
Tencent has large user traffic with good monetization potential.
low-tier markets, helping its partners to expand into these
As such, the company aims to become the platform operator,
areas.
providing user traffic and key services (e.g. online payment) to
its cooperators. Since Tencents size of MAU is >2x bigger than
Tencents large user base to benefit its strategic partners
Tencent:
Target: To form a strong social circle.
58.com JD.com
>200m >80m
QQ Sharing
820m
LY.com
c.1m
Leju
>21m
Dianping
>130m
Weixin & Wechat
468m Sogou
c.260m
Note: Based on monthly active user (MAU) numbers in 3Q14.
Leju & LY.com: Mobile MAU.
Source: Companies, iResearch, DBS Vickers
Aiming to create the Super App. Mainly due to limitation on

the screen size, mobile users are likely to concentrate on only a
few apps. As such, Tencent targets to add more functions into
Weixin and Mobile QQ, so as to improve user stickiness on
these apps. For example, Weixin and Mobile QQ could now
offer services like taxi bookings, e-commerce, restaurant rating
and purchase of travel packages. By incorporating more
functions, Weixin and Mobile QQ are on track to become the
Super Apps that could garner a lot of user attention.
Page 10
Industry Focus
Post-M&A synergies. To create cross-selling opportunities,

Service offerings on Weixin & Mobile QQ
Tencent would introduce cooperators services into its multiple
Weixin: Mobile QQ: platforms including Weixin, Mobile QQ and Qzone. In this way,
user traffic could be directed to its partners, helping to achieve
better monetization.
Take Weixins cooperation with LY.com () as an

example: Weixin users could access LY.com by clicking the Air
Didi Taxi
ticket button in the Wallet page. Users could then view
LY.coms offerings of air tickets and travel packages. After
JD.com selecting the desired flights and packages, users could settle
Didi Taxi
the bills via Weixin Payment (). The entire process
completes with just a few clicks within the Weixin app, and
user stickiness towards Tencents ecosystem could be
Dianping.com enhanced.
Meilishuo
LY.com
Source: DBS Vickers
Case study: Weixins cooperation with LY.com
Search
Weixin
Payment
LY.com
Source: DBS Vickers
Page 11
Industry Focus
More benefits emerge. Riding on its cooperation with Tencent,

Case study: LY.coms O2O cooperation with Weixin
LY.com could enjoy strong demand from Weixin users. In Payment
LY.coms own app, users could also log in with their Weixin /
QQ IDs (identifications). This login arrangement not only
encourages Weixin / QQ users to visit LY.com, but also
facilitates the sharing of customer information between
Tencent and its partners.
Besides, the strategic partners have been promoting their

collaboration with Weixin and Mobile QQ, to Tencents
benefits. For instance, LY.com has offered discounted tickets
at RMB1 (1 ) to encourage customers to pay via Weixin
Payment. According to media reports, LY.com would be
spending c.RMB350m to subsidize c.20m customers this year,
and many customers could likely become loyal users of Weixin
Payment.
Source: Company websites
Page 12
Industry Focus
(B) Vertical integration Riding on e-commerce value

China B2C e-commerce market share (2013)
chain
Tencent
Joining hands with JD.com. Within the internet sector, we 5.6%
believe e-commerce is best-positioned to monetize (i.e. Suning.com
generating revenue and profits), given its transaction-based 3.7%
business model that naturally involves the payment process. As JD.com Amazon
such, Tencent has strived to strengthen its e-commerce 16.4% China
presence, launching Paipai.com () in 2005, QQ 2.0%
Wanggou (QQ ) in 2011, and acquiring Yixun.com () VIPShop
1.9%
in 2012. However, Tencents e-commerce business has
Dang Dang
registered slower growth compared to leaders like Alibaba Others 1.6%
Group and JD.com, mainly attributable to Tencents less Tmall 7.6% GOME
aggressive expansion strategy, in our view. 57.7% 1.6%
Yihaodian
VANCL 1.3%
0.6%
Note: In terms of gross merchandise value (GMV).
Source: iResearch
Realizing that cooperation with leading players could be a

better option, Tencent formed strategic cooperation with
JD.com in Mar 2014, and Tencent would gradually incorporate
its e-commerce businesses (QQ Wanggou, Paipai.com and
Yixun.com) with JD.com, in return for c.18% stake in JD.com.
In addition, Tencent would provide Level-1 access for
JD.com from Weixin and Mobile QQ, as well as promotion
services from other key platforms such as Qzone and Tencent
News.
Page 13
Industry Focus
Tencent familys e-commerce value chain
arranged by
S upplier management JD.com
Weixin
P ortals JD.com / Meilishuo User traffic Mobile QQ
P a yment CO D / 3rd-party payment - Weixin Payment, Mobile

Q Q Wallet, Chinabank Payment
Logistics JD.com / China South City
arranged by
A fter-sales services JD.com
Note: COD - Cash on delivery.
Better supply chain management. Through the integration, JD.com takes over e-commerce operations. Tencents QQ
Tencent and JD.com could gain valuable access to the entire e- Wanggou (B2C marketplace) and Paipai.com (C2C marketplace)
commerce value chain. In particular, JD.com could leverage on had been incorporated into JD.com since 2Q14. Particularly,
its established relationship with >6,000 suppliers and >50,000 QQ Wanggou was renamed as JD Wanggou () in
merchants (on its online marketplace) to offer >40m SKUs Sep 2014, and we believe it could be gradually absorbed by
(stock keeping units) to Tencents users. JD.com, given their similarity in business nature. By acquiring
Paipai.com, JD.com could gain valuable access to the C2C
Traffic support from Tencent. According to the strategic marketplace business, and compete head-on with Alibabas
cooperation, Tencent provides Level-1 access to JD.com, Taobao () platform.
from the Weixin and Mobile QQ apps. This means users of
Weixin and Mobile QQ could visit JD.com with only 1 click on As for Yixun.com (B2C direct sales arm), JD.com currently owns
the apps. Besides, Tencent directs user traffic to JD.com from c.10% stake in Yixun, and has the right to purchase the
its other key platforms such as Qzone and Tencent News. remaining stake. Given Yixuns logistics strength in selective
Thanks to Tencents support, mobile orders accounted for areas (e.g. Shanghai and Shenzhen), the integration could
c.40% of JD.coms total orders during the Singles Day likely complement JD.coms existing businesses.
promotion in Nov14. In our view, JD.com could benefit
substantially from Tencents large active user base (820m MAU Overall, we believe the integration with Tencents e-commerce
for QQ, and 468m MAU for Weixin & WeChat in 3Q14), arm could enhance JD.coms presence across B2C direct sales,
especially over the medium-term. B2C marketplace and C2C marketplace. For the first time,
JD.com could have the capability to compete with Alibaba
Group across these segments, in our view.
Focusing on user experience. The ultimate goal of Tencent and

JD.coms strategic cooperation is to ensure high level of service
Page 14
Industry Focus
quality to e-commerce customers. In addition to synergies in e-

Next step: Internet finance. JD.com aims to develop its finance
commerce platforms, Tencent could offer online payment
units, and ultimately provides consumer financing (e.g.
solutions (e.g. Tenpay, Weixin Payment and Mobile QQ Wallet)
consumer credit services and instalments) and supplier
that complement well with JD.coms COD model (cash on
financing services (e.g. receivable pledging) to its stakeholders.
delivery). Besides, JD.coms in-house fulfilment operations
We believe there could be good synergies between Tencent
could provide timely delivery services to its customers. This
and JD.com, building on Tencents online payment channels
could be critical to user experience, especially when large
such as Tenpay (), Weixin Payment and Mobile QQ
amount of parcels are delivered to customers during the peak
Wallet ( QQ ). Tencents corporate customers (e.g. its
months for e-commerce (e.g. June and November).
online ad clients) could also have demand for JD.coms supplier
financing products, in our view. More importantly, Tencents
Low-tier markets to drive growth. So far, majority of JD.coms
development in internet finance, such as the establishment of
sales come from the 1st & 2nd-tier markets in China, and we
Webank (), could potentially benefit JD.com
estimate that sales from the rural areas could account for
over the longer-term.
<10% of its overall revenue. Besides difficulties in logistics,
user awareness on JD.com could be weaker in the low-tier
An empire on three pillars. To sum up, Tencent could benefit
markets. Thanks to its large active customer base especially for
from its active stance on M&As, as well as subsequent
QQ (which is popular in rural areas), we believe Tencent is well-
cooperation with its partners to build the ecosystem. With
positioned in the low-tier markets, and it could help JD.com to
further development in payment and logistics services, we
better penetrate these areas.
believe the alliance could embrace greater success ahead. By
that time, the Tencent Family could likely become an
Breakdown of mobile internet users in China (1H14) internet empire building on three pillars, namely online gaming,
online ads and e-commerce.
4th-tier &
below 1st-tier
40% cities
13%
2nd & 3rd-

tier cities
47%
Note: In terms of user number.
Source: Enfodesk, DBS Vickers
Page 15
Industry Focus
Valuations & recommendations JD.com: 4Q14 previews. We expect JD.com to achieve

RMB32.2bn revenue in 4Q14 (+60% y-o-y), mainly driven by
148% growth in service incomes. Such estimate is in line with
Tencent: 4Q14 previews. We expect Tencent to register better
company guidance of RMB32-33bn revenue for the quarter.
performance in 4Q14, with core profit (non-GAAP) to grow Gross margin could ease to 11% in 4Q14 (vs. 12% for 3Q14),
56% y-o-y to RMB7bn for the quarter (vs. 47% core profit as JD.com could offer greater discounts to gain market share
growth in 3Q14). This could mainly attribute to higher mobile during the peak season, especially the Singles Day
gaming revenue (c.RMB3bn for 4Q14), as well as robust promotion in Nov14. Coupled with higher marketing expenses,
contribution from online ads, thanks to the Guangdiantong we forecast RMB501m core loss (non-GAAP) for 4Q14. That
() ad system. Overall, we expect another quarter of said, we believe the market has priced in JD.coms loss-making
solid growth for Tencent, with better outlook for mobile status in 2014-2015, and strong revenue growth could serve as
gaming and online ads (please see p.17 for detailed share price catalyst for the counter (please see p.18 for detailed
breakdown). breakdown).
Initiate Tencent with BUY rating, and HK$148 TP. Based on our
Initiate JD.com with BUY rating, and US$30.8 TP. We believe it
estimates, Tencent is currently trading at c.26x 12-month
is justified to compare JD.com with other major online direct
rolling core PE, or c.0.7x PEG. Given its leading position in
sales players, namely VIPShop, China Dangdang and Jumei in
online gaming, platform value of Weixin and Mobile QQ, and
China, as well as Amazon in the US. Based on consensus
good potential in online ads as well as e-commerce, we believe
estimates, these players are trading at average 1.5x 12-month
Tencent could trade at 0.9x PEG, average valuation for Alibaba
rolling P/Sales ratio, which we believe is a reasonable target for
and Baidu, the other two internet leaders in China. Our Target
JD.com. Hence, our Target Price for JD.com is set at US$30.8,
Price is set at HK$148 on 0.9x PEG, or 32x 12-month rolling
offering 29% upside.
core PE, offering 23% upside to the current share price.
Page 16
Industry Focus
Tencent: 4Q14 & 2014 preview
RM B m 1Q14 2Q14 3Q14 4Q 14F 2014F Remark

V alue added serv ices (V A S) 14,413 15,713 16,047 16,553 62,726 Expect mobile game rev enue to reach c.RM B3bn in
4Q14F (3Q14: RM B2.6bn)
Online adv ertising 1,177 2,064 2,440 2,599 8,280 M ainly driv en by v ideo ad and mobile ad, especially
performance-based ad in "Guangdiantong"
E-commerce transactions 2,524 1,324 459 493 4,800 E-commerce business mostly trasferred to J D.com
Others 286 645 862 895 2,688
R ev en u e 18,400 19,746 19,808 20,540 78,494
Cost of rev enue (7,800) (7,574) (7,167) (6,686) (29,227)
G ro s s p ro f it 10,600 12,172 12,641 13,853 49,266
Interest income 375 406 452 500 1,733
Other gains/(losses), net 1,607 691 118 - 2,416 Included disposal gains of e-commerce assets to
J D.com
Selling & marketing expenses (1,855) (1,973) (1,906) (2,665) (8,399)
General & admin expenses (2,937) (3,453) (3,790) (3,949) (14,129) M ainly driv en by R&D expenditure
O p erat in g p ro f it 7,790 7,843 7,515 7,739 30,887
F inance costs, net (238) (354) (317) (262) (1,171)
Share of profit/(losses) of 44 23 (139) (23) (95)
associates & J V s
Pro f it b ef o re t ax 7,596 7,512 7,059 7,455 29,622
Income tax expenses (1,164) (1,686) (1,383) (1,247) (5,480)
Noncontrolling interests 25 10 (19) (20) (4)
N et p ro f it 6,457 5,836 5,657 6,188 24,138
One-off items (1,263) 38 776 827 378 Mainly included non-cash items such as share-based
compensation, amortization of intangibles and
impairments
Co re p ro f it ( n o n - G A A P) 5,194 5,874 6,433 7,015 24,516
G ro w t h ( y - o - y ) : 1Q14 2Q14 3Q14 4Q14F 2014F

- V alue added serv ices (V A S) 35% 46% 38% 39% 39%
- Online adv ertising 39% 59% 76% 74% 64%
- E-commerce transactions 32% -40% -81% -85% -51% E-commerce business mostly trasferred to J D.com
- Others 141% 374% 471% 312% 332%
Group rev enue 36% 37% 28% 21% 30%
Operating profit 54% 72% 56% 63% 61%
Profit before tax 49% 63% 46% 57% 54%
Net profit 60% 59% 46% 58% 56%
Core profit (non-GA A P) 29% 41% 47% 56% 44%
M arg in s :
Gross margin 58% 62% 64% 67% 63% Improv ing gross margin as e-commerce sales decline
(w ith low margins)
Operating margin 42% 40% 38% 38% 39%
Profit before tax margin 41% 38% 36% 36% 38%
Net margin 35% 30% 29% 30% 31%
Core net margin (non-GA A P) 28% 30% 32% 34% 31%
Source: DBS Vickers
Page 17
Industry Focus
JD.com: 4Q14 & 2014 preview
RM B m 1Q 14 2Q 14 3Q 14 4Q14F 2014F R emark

Online direct sales 21,781 27,018 27,369 30,210 106,378
Serv ices & others 876 1,595 1,643 1,946 6,060 Support from QQ Wanggou and Paipai.com from
J D.com's Strategic Cooperation w ith Tencent in Mar14
N et rev en u es 22,657 28,613 29,012 32,156 112,437
Cost of rev enue (20,396) (25,458) (25,468) (28,463) (99,784)
G ro s s p ro f it 2,261 3,155 3,544 3,693 12,653
F ulfillment expenses (1,360) (2,002) (2,119) (2,306) (7,787)
Marketing expenses (594) (1,066) (880) (1,107) (3,647) Higher marketing expenses in 2Q and 4Q, peak season for
e-commerce
Technology & (285) (420) (512) (514) (1,731)
content expenses
General & admin (3,874) (455) (439) (460) (5,228) 1Q14: High share-based pay ments
expenses
L o s s f ro m (3,852) (788) (407) (694) (5,740)
o p erat io n s
Interest income 98 155 198 61 511
Interest expenses (5) (8) (8) (6) (28)
Others, net (39) 59 59 1 80
L o s s b ef o re t ax (3,798) (582) (158) (639) (5,177)
Income tax expenses 3 (0.4) (6) (0.4) (4)
Preferred shares (1,494) (6,464) - - (7,958) Preferred shares of J D.com w ere redeemed before its IPO.
redemption v alue
accretion
A t t rib u t ab le lo s s (5,289) (7,046) (164) (639) (13,139)
One-off items 5,208 7,034 535 138 12,916 Mainly included one-off items such as preferred shares
redemption v alue accretion, share-based pay ments and
amortization of intangibles
Co re p ro f it ( n o n - (81) (12) 371 (501) (223)
G A A P)
G ro w t h ( y - o - y ) : 1Q 14 2Q 14 3Q 14 4Q14F 2014F
- Online direct sales 63% 60% 57% 56% 59%
- Serv ices & others 117% 186% 185% 148% 161%
Group rev enue 65% 64% 61% 60% 62%
M arg in s : 1Q 14 2Q 14 3Q 14 4Q14F 2014F

Gross margin 10% 11% 12% 11% 11%
Operating margin -17% -3% -1% -2% -5%
Loss before tax margin -17% -2% -1% -2% -5%
Net margin -23% -25% -1% -2% -12%
Core net margin (non- -0.4% -0.04% 1% -2% -0.2%
GA A P)
Source: DBS Vickers
Page 18
Industry Focus
Peers comparison
Mkt PE PE PEG PEG P/Sales P/Sales ROE RO E

Currenc y Pric e Cap F isc al 15F 16F 15F 16F 15F 16F 15F 16F
Company Name Code L oc al$ US$m Yr x x x x x x % %
HK - list ed peers
Tencent Holdings*^ 700 HK HKD 119.6 144,468 Dec 26.0 20.2 0.7 0.7 9.0 7.0 32.5 31.2
Hc International 2280 HK HKD 8.17 703 Dec 12.4 8.6 0.3 0.2 3.2 2.5 26.8 29.1
Cogobuy Group 400 HK HKD 4.75 842 Dec 14.9 11.0 0.2 0.3 0.5 0.4 17.0 19.2
Boy aa Interactiv e Intl. 434 HK HKD 6.01 587 Dec 8.7 6.8 0.3 0.2 2.9 2.2 25.7 26.6
F orgame Holdings 484 HK HKD 14.3 234 Dec 18.2 10.0 n.a. 0.1 1.5 1.3 15.3 29.1
Netdragon Websoft 777 HK HKD 12.8 840 Dec 14.1 12.8 2.2 1.3 4.7 4.2 7.1 7.3
IGG 8002 HK HKD 3.25 574 Dec 6.4 5.0 0.3 0.2 2.3 1.9 27.9 30.7
Haier Electronics* 1169 HK HKD 20.85 7,218 Dec 13.2 11.2 0.6 0.6 0.5 0.5 26.3 24.6
Gome* 493 HK HKD 1.16 2,537 Dec 10.9 9.5 1.6 0.6 0.2 0.2 8.3 9.1
A v erage 13.9 10.6 0.8 0.5 2.8 2.2 20.8 23.0
US- list ed peers

Alibaba# BABA US USD 109.89 273,152 Mar 36.2 27.3 1.0 0.8 15.7 12.2 29.0 29.0
J D.Com*^ J D US USD 23.91 33,044 Dec n.a. 158.9 n.a. n.a. 1.2 0.8 (8.1) (4.8)
Baidu BIDU US USD 234.74 64,654 Dec 27.5 20.1 0.8 0.6 5.8 4.4 30.0 30.0
V IPShop V IPS US USD 22.17 12,577 Dec 42.2 26.6 0.6 0.5 2.1 1.4 51.1 47.6
China Dangdang DANG US USD 10.09 548 Dec 17.9 14.6 0.1 0.6 0.4 0.3 34.9 39.6
J umei Int'l J MEI US USD 16.45 1,413 Dec 20.2 13.6 0.5 0.3 2.0 1.5 19.2 23.3
A v erage 28.8 20.5 0.6 0.6 3.8 2.9 26.0 27.5
G lobal play ers

Amazon.Com AMZN US USD 326.31 151,084 Dec 367.5 96.1 n.a. n.a. 1.4 1.2 13.9 18.9
EBay EBAY US USD 55.02 68,355 Dec 16.8 15.0 1.5 1.3 3.4 3.0 15.7 18.5
F acebook F B US USD 75.46 167,818 Dec 39.6 29.6 n.a. 0.9 9.9 7.5 16.3 21.5
Google 'A' GOOGL US USD 538.59 153,399 Dec 17.7 15.0 1.0 0.8 2.0 1.7 17.3 17.9
A v erage 24.7 19.9 1.3 1.0 4.2 3.4 15.8 19.2
# FY15: FY16; FY16: FY17
^ Core EPS
Note: We exclude JD.com and Amazon in calculating average PE, as they operate under the direct sales model with low earnings.
Source: Thomson Reuters, *DBS Vickers
Page 19
China / Hong Kong Company Focus
Tencent
Bloomberg: 700 HK Equity | Reuters: 0700.HK Refer to important disclosures at the end of this report
BUY HK$119.60 HSI : 23,654 Connectivity is king

(Initiate Coverage)
Price Target: 12-Month HK$148
Reason for Report: Initiate coverage Being a leader in online gaming, Tencent has actively
Potential Catalyst: Strong mobile game and online ads revenue; expanded into mobile games to drive growth
M&As Vast user base for its Weixin / Mobile QQ platforms
DBSV vs Consensus: Our FY14F / FY15F net profits are 3% / 2%
offers good monetization potential
above consensus
Strategic cooperation with various partners (e.g.
Analyst
Mark LI CFA, +852 2971 1935
JD.com, 58.com and Dianping.com) could create
mark_li@hk.dbsvickers.com greater synergies over the medium-term
Initiate with BUY recommendation, and TP of HK$148
Price Relative
is based on 0.9x PEG (or 32x 12-month rolling core PE)
HK$ Relative Index
146.1
126.1
387
Dominating the online game segment. We like Tencents
106.1
337
strong position in online games, especially in the fast-
growing mobile games. Building on its solid track record,
287
86.1 237
66.1 187
wide game offerings, strong distribution channels and
46.1 137
payment solutions, Tencent has enjoyed good customer
26.1 87 recognition, and has led the industry in monetization.
Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
Tencent (LHS) Relative HSI INDEX (RHS)

Riding on the Super Apps. Tencent has been successful
with its social network products, particularly Mobile QQ
Forecasts and Valuation and Weixin. With MAU of 542m / 468m in 3Q14, the two
FY Dec (RMB m) 2013A 2014F 2015F 2016F
apps have become the Super Apps that garner a lot of
Turnover 60,437 78,494 98,911 127,323
EBITDA 23,218 32,419 42,526 54,101
user attention. By offering more services to the large
Pre-tax Profit 19,281 29,622 37,967 49,071 number of users, Tencent could explore even bigger
Net Profit 15,502 24,138 30,714 39,697 opportunities in mobile gaming, ads and e-commerce.
Core Profit (non-
17,063 24,516 33,401 42,958
GAAP) Joining hands for a better future. In addition to organic
Core EPS (RMB) 1.86 2.68 3.65 4.69 growth, Tencent aims to enhance its business outlook via
Core EPS (HK$) 2.35 3.38 4.60 5.91
Core EPS Gth (%) 18.9 43.7 36.2 28.6
M&As and partnerships. Specifically, we believe its strategic
DPS (HK$) 0.20 0.31 0.39 0.51 cooperation with JD.com could bear fruits over the
BV Per Share (HK$) 7.85 10.89 14.75 19.73 medium-term, enabling both companies to enjoy strong e-
Core PE (X) 50.9 35.5 26.0 20.2 commerce growth. We initiate coverage on Tencent with a
P/Cash Flow (X) 35.7 30.1 24.2 19.0
P/Free CF (X) 43.9 37.2 29.4 22.6 BUY recommendation, and our Target Price of HK$148
EV/EBITDA (X) 35.8 25.4 18.9 14.4 (based on 0.9x PEG or 32x 12-month rolling core PE) offers
Net Div Yield (%) 0.2 0.3 0.3 0.4 23% potential upside.
P/Book Value (X) 15.2 11.0 8.1 6.1
Net Debt/Equity (X) CASH CASH CASH CASH
ROAE (%) 31.2 34.9 32.5 31.2 At A Glance
Issued Capital (m shrs) 9,367
Earnings Rev (%): New New New
Consensus EPS, based on Net Mkt. Cap (HK$m/US$m) 1,120,331 / 144,468
2.57 3.30 4.20 Major Shareholders
Profit (RMB):
Other Broker Recs: B: 34 S: 1 H: 4 Naspers Limited (%) 34.0
ICB Industry: Technology Ma Huateng (%) 10.3
ICB Sector: Software & Computer Services Zhang Zhidong (%) 6.2
Principal Business: A leading online game operator in China 5.0
JPMorgan Chase & Co. (%)
Free Float (%) 44.5
Source of all data: Company, DBSV, HKEX
Avg. Daily Vol.(000) 19,842
www.dbsvickers.com
ed-TH & JS / sa-CW
Industry Focus
INVESTMENT THESIS
Profile Rationale
Tencent stands as a dominant leader in Chinas online game Leading online game player
industry, with rising exposure to the fast-growing mobile game
Tencent enjoys leading positions in client games and
segment. It also rides on large active user base for Weixin and
web games, and it has increasingly focused on the
Mobile QQ platforms, offering good monetization potential.
mobile game segment leveraging on its Weixin and
Mobile QQ platforms.
Online ads segment drives growth

Leveraging on its Guangdiantong ads system,
Tencent could offer more performance-based ads on its
key platforms, so as to enhance sales growth and
profitability ahead.
Valuation Risks
We benchmark our Target Price for Tencent at 0.9x PEG User experience is the key
(implying 32x 12-month rolling core PE), the average valuation
Potential downside could include unsuccessful
for Alibaba and Baidu, the other two internet leaders in China.
monetization efforts on Weixin and Mobile QQ that
could affect user experience.
Source: DBS Vickers
Page 21
Industry Focus
SWOT Analysis
Strengths Weakness
Leading position in online games with rising mobile Its e-commerce operations would be gradually
exposure absorbed by JD.com following their strategic
cooperation in Mar14, while Tencent could have
Traffic advantage thanks to its large active user base
limited influence on JD.com
Multiple social network platforms could enhance customer
recognition
Solid financial position facilitates M&A initiatives
Opportunities Threats
Rising synergies between mobile games, online ads and Slowdown in online game revenue
social networks
Licensed games contributions could improve return on Unsuccessful monetization on Weixin and Mobile QQ
investment and reduce execution risk that could affect user experience
Performance-based ads (Guangdiantong) could enhance

growth in online ads
Greater synergies with strategic cooperators such as JD.com,
58.com, Dianping.com and LY.com
Efforts in developing mobile payment systems to pay off
Source: DBS Vickers
Page 22
Industry Focus
Business review
A leader in online gaming. Tencent stands as a dominant player Mobile game market share in China (2Q14)
in Chinas online gaming industry, with 50% market share in
client games (), 36% share in web games, and 39% Lilith Games
share in mobile games during 2Q14 (source: Enfodesk). For ()
9M14, Tencent reported online game revenue of RMB33bn, up 4% 5agame
()
40% y-o-y, and we believe it continues to outperform the Tencent 4%
overall market. Games Babeltime
39%
()
In the more mature client game / web game segments, Tencent 3%
has leveraged on the success of key products such as Crossfire Locojoy
()
(), League of Legends () and Blade &
3%
Soul (). Coupled with strong user recognition on its game
platforms, we believe Tencent could gain market share in client Linekong
Others ()
game / web game segments ahead. 42% 3%
Positioning for mobile games. The mobile game segment has YH

()
been the bright spot in online games, and the mobile game 2%
market size grew 83% y-o-y to RMB12.5bn in 1H14 (or +56%
h-o-h). Being the leader in this segment, Tencent has launched Note: Market share for mobile game developers.
successful mobile games such as Timi series () and Source: Enfodesk
Everybody series (). According to iResearch,
Tencents mobile games took 9 of the top 10 places on the
Apple iOS platform during 2Q14, and 6 of the top 10 places on
the Android platform. We believe Tencent could register
c.RMB10bn revenue in mobile games this year, representing
>350% growth.
Top mobile games in China (2Q14)
Name Company Daily Name Company Daily

appearanc e appearanc e
A pple iO S plat f orm: A ndroid plat f orm:
1 Timi Run Ev ery day Tencent 295,000 1 Timi Run Ev ery day Tencent 745,000
( ) ( )
2 Timi Speed Ev ery day Tencent 286,000 2 Space-time Hunters Huay i Brothers 717,000
( ) ( ) ( )
3 We F ly Tencent 261,000 3 F ight the Landlord Tencent 644,000
( ) ( )
4 Rhy thm Master Tencent 258,000 4 Rhy thm Master Tencent 610,000
( ) ( )
5 Timi Match Ev ery day Tencent 250,000 5 Timi Speed Ev ery day Tencent 573,000
( ) ( )
6 F ight the Landlord Tencent 188,000 6 We F ly Tencent 451,000
( ) ( )
7 QQ F ight the Landlord Tencent 175,000 7 Dota Hero Longtu Game 396,000
(QQ ) ( ) ( )
8 Timi Link Ev ery day Tencent 149,000 8 Timi Match Ev ery day Tencent 355,000
( ) ( )
9 We F ight Tencent 123,000 9 I Am MT Online Locojoy 336,000
( ) ( MT Online) ( )
10 Space-time Hunters Huay i Brothers 103,000 10 F ight the Landlord Boyaa Interactiv e 333,000
( ) ( ) ( ) ( )
Source: iResearch
Page 23
Industry Focus
Social network rides on vast user base. Tencents key

Penetration for social network websites in China (1H14)
competitive strength lies in its large active user number. The
number of monthly active users (MAU) for QQ and Weixin ()
60% 57.3%
reached 820m / 468m in 3Q14, respectively. In a recent CNNIC
survey, >65% of respondents have been using QQ and Weixin, 50%
57% of respondents have been using Qzone (QQ ), 40%
indicating Tencents dominant position in social networks. 30%
Coupled with the companys other platforms such as Pengyou 20% 16.4% 14.8%
10.2% 9.3% 8.5% 8.3%
(), Tencent has huge user traffic to be better utilized over 6.1%
10%
the medium-term.
0%
Pengyou ()
Papa ()
Renren ()
Qzone (QQ)
51.com (51)
Kaixin ()
Douban ()
Weishi ()
Heading into the mobile era, Tencent aims to unlock the
monetization potential of its large number of social network
users (i.e. generating greater revenues and profits). The
company would further strengthen e-commerce, LBS (location-
based services) and online payment functions for its Weixin and
Mobile QQ ( QQ) apps, to fulfil user demand.
Note: Percentage of respondents who had used the website. Qzone,

Penetration for instant messengers in China (1H14) Pengyou and Weishi are operated by Tencent; Kaixin is invested by
Tencent.
80% 78% Source: CNNIC survey (sample size =30,000)
70% 65%
60%
50% 21% Synergies with mobile games. Tencent has provided easy access
15% to mobile games on its Weixin and Mobile QQ apps, and users
40% 10.2%
30% 9.8% could enter the game center with just 1 click in these apps.
20% 5.6% 2.9% 2.7% Users game scores are also ranked, allowing them to compare
1.8%
10% 4.2% 2.7% 1.8% 0.6%
their scores with friends. Thanks to these initiatives, popularity
0% of mobile games on Weixin and Mobile QQ has improved
QQ Talk (QT)
Laiwang ()
Whatsapp
Renren Desktop
Ali Wangwang
QQ
YY
Feixin ()
Skype
Miliao ()
Yixin ()
Weixin
Immomo ()
Line
significantly, and >60% of the top mobile games in 2Q14 were

launched on these apps.
Given Weixin and Mobile QQs social networking nature, as well

as users fragmented time spent on these apps, casual games
have been welcomed by the customers. Average revenue per
user (ARPU) of Weixin / Mobile QQ games was RMB100-
Note: Percentage of respondents who had installed the app. QQ, RMB110 in 3Q14 (vs. >RMB200 ARPU for other games). With
Weixin and QQ Talk are operated by Tencent.
improving graphics for mobile devices and development in
Source: CNNIC survey (sample size =30,000) online payment systems, we believe Tencent could potentially
raise ARPU for its Weixin / Mobile QQ games ahead.
Page 24
Industry Focus
Preparing for the next leap. Following decent mobile game

Mobile game entrances on Weixin & Mobile QQ
performance in 1H14, Tencent believes its mobile game revenue
Weixin: Mobile QQ: could normalize in the near-term, as it could take some time to
beef up licensed games revenue contributions. 3Q14 was a bit
slow, with mobile game revenue down 13% q-o-q to
RMB2.6bn, mainly due to delayed game upgrades at Weixin
and Mobile QQ platforms. We believe this could be mostly one-
off, and mobile game revenue could rebound to c.RMB3bn for
Game
4Q14F. As revenue from licensed mobile games picks up, we
expect Tencents mobile game revenue to further accelerate in
2015.
Quarterly mobile game revenue
RMB bn
Game
3.5 250%
200% 3.0 3.0
3.0 200%
2.6
2.5
150%
2.0 1.8
Source: DBS Vickers 100%
1.5 67%
50%
1.0 -13%
0.6 15%
0.5 0%
Increasing focus on licensed games. Aimed to be the leading
platform for both self-developed games and licensed games, 0.0 -50%
Tencent has encouraged licensed mobile games to be launched 4Q13 1Q14 2Q14 3Q14 4Q14F
on Weixin and Mobile QQ. Some of the licensed games have Mobile game revenue (LHS) Growth q-o-q (RHS)
been quite successful on these apps. For instance, Thunder
Fighter ()was launched on Weixin and Mobile QQ in Source: Company, media websites, DBS Vickers
Feb 2014, and it had generated c.40m user accounts in about 2
months. MoDoo Marble (, developed by CJ Games) Mobile games could account for c.23% of Tencents online
became the top mobile game on the iOS platform in Aug14, game revenue, or c.13% of its overall revenue this year (as per
and Candy Crush Saga (developed by King Digital) reached our estimates), and we believe accelerating growth momentum
the top in Sep14. in mobile games could enhance Tencents overall revenue
growth ahead.
Riding on licensed games, Tencent could widen its game
offerings to customers, and the company could still enjoy good
margins as the channel provider. According to industry sources,
Tencent could receive c.70% of gross revenue of the licensed
mobile games, with the rest going to game developers.
Operating under this model, Tencent could save most of the
development costs, and lower the execution risk. Hence,
Tencent is able to focus on promoting licensed games and
benefit both parties, in our view.
Page 25
Industry Focus
Online ads: Emerging contributor. Tencent is relatively new to

On its mobile platforms such as Mobile Qzone, Tencent News
the online ad segment, and its market share was merely 5% in
and Tencent Video, Tencent has adopted various ad formats
2Q14, much lower than Baidu (32%) and Alibaba Group (25%).
including banner ads (), splash screen ads ()
Despite its smaller presence, we believe Tencent has good
and overlay ads (). Coupled with Tencents PC-based
potential to catch up with the leaders in the burgeoning mobile
platforms such as QQ.com, Qzone, Microblog and QQ Game
ads market. According to iResearch, the mobile ads market is
Platform, ad clients could tap their target audience with both
expected to reach RMB27.3bn this year, up 76% y-o-y. Its
PC ads and mobile ads. Besides, Tencent has leveraged on
CAGR for 2014F-2017F could also stand at 67%. Thanks to its
major public events, such as the 2014 FIFA World Cup, to
mobile games and social network products with good user
launch promotion campaigns on Tencent News, Tencent Video,
recognition, Tencent could launch more ads on these platforms
Weixin and Mobile QQ, helping ad clients to catch attention of
to generate ad revenue. The company has also implemented a
their target audience.
joint platform advertising strategy (coordinated by
Guangdiantong ad system), to increase its bargaining power
as well as effectiveness of the ads. Tencents online ad offerings
Online ad market share in China (2Q14)
Tencent, 4.6%
Google China,
4.2%
Sohu, 3.5%
Qihoo 360,
3.0%
Alibaba Group, Splash

25% Sina, 2.5% Banner ads
screen ads
Appstore
Youku Tudou, ads Overlay
2.4%
ads
Baidu, 32%
Source: iResearch
Source: Company, media websites
Page 26
Industry Focus
Performance-based ads gaining traction. Traditionally, online E-commerce: Joining hands with JD.com. Tencent formed
ads were priced according to time or number of showcases. strategic cooperation with JD.com in Mar 2014, and provides
Pricing models of these ads were predominantly CPT (cost per Level-1 access to JD.com on Weixin and Mobile QQ apps. In
time) and CPM (cost per mille). Seeing ad clients rising demand this way, users of Weixin and Mobile QQ can access JD.coms
for performance-based ads (i.e. ads are priced according to their webpage by clicking only once on their apps. Besides, Tencent
effectiveness), Tencent launched the Guangdiantong ( would direct user traffic to JD.com from other platforms such as
)online ad system in Jun 2013, and combined its ad Qzone and Tencent News. Tencent would also dispose QQ
resources on multiple platforms into the system. Wanggou (B2C online marketplace) and Paipai.com (C2C online
marketplace), as well as 10% stake of Yixun.com (B2C direct
Together, Tencents platforms have >800m active users, and sales platform) to JD.com. JD.com would have the right to buy
>10bn user visits per day. Guangdiantong uses CPC (cost per out Yixun.com at its fair value or RMB800m, whichever is higher.
click) and CPA (cost per action) as major pricing models, helping In return, Tencent acquires c.18% stake in JD.com (post IPO),
to align interests of Tencent and its ad clients. Besides, and receives RMB631m in cash from JD.com.
Guangdiantong adopts a real-time bidding system for ad
clients, helping Tencent to enjoy better pricing for its prime ad Following the cooperation, most of Tencents e-commerce
resources. operations would be incorporated into JD.com. Thanks to
Tencents support on user traffic and key processes including
Since its launch, Guangdiantong has helped to drive ad online payment channels, we believe JD.com would have better
revenues for Tencent. For instance, upon purchasing Tencents potential to compete with Alibaba Group in e-commerce. As for
ad resources via Guangdiantong, Xiaomi () launched its Tencent, it could leverage on JD.coms e-commerce success,
RedMi mobile phones at Qzone last year. Over 7m customers and generate greater synergies with its core businesses such as
placed orders for RedMi, and 100,000 units were sold out online gaming and online ads.
within 90 seconds of the launch. Vanke () spent only a
small sum of RMB30,000 on Guangdiantong to send ad
messages via QQ to selective customers, and it generated >20m
user views and RMB4m property sales, implying good return on
the investment.
Page 27
Industry Focus
Growth drivers
Mobile game market size in China
Mobile gaming to outperform. We believe the mobile game RMB bn

market in China bears great potential, especially with 45 42.7 180%
improvements in mobile games graphics and online payment 40 160%
156%
channels. According to Enfodesk, the mobile game market in 33.8
35 140%
China could achieve 45% CAGR for 2013-2016F, to reach
30 120%
RMB42.7bn. Given Tencents steady performance of self- 23.8
25 100%
developed games and rising contributions from licensed games,
we believe the company will be able to outperform the market 20 71% 80%
13.9
in the future. 15 37% 42% 60%
10 26% 40%
4.0 5.4
Regarding monetization, mobile game ARPU for Tencent 5 20%
reached RMB100-RMB110 in 3Q14, versus average of 0 0%
>RMB200 ARPU for its PC-based games, based on our estimates. 2011 2012 2013 2014F 2015F 2016F
As mobile games progressively integrate with social network
Market size (LHS) Growth y-o-y (RHS)
platforms such as Weixin and Mobile QQ, and online payment
methods (e.g. Weixin Payment and Mobile QQ Wallet) become
Source: Enfodesk
more mature, we believe Tencents ability to raise ARPU for its
mobile games would improve further.
Creating the ecosystem. Tencent aims to develop Weixin and
Mobile QQ into the Super Apps that could attract as much
user attention as possible. Hence, we believe Tencent would
look to add new functions into these apps, so as to improve
user experience. When user stickiness is established, Tencent
could start the monetization process, such as recommendation
of mobile games, online ads and e-commerce.
To ensure that user experience is not affected by too much ads

and promotions, Tencent is likely to monetize its franchise step-
by-step. For instance, the company launched online ads on
Weixin in May 2014, and users could view the ads in articles
within Weixins Public Accounts (). Online ads have
done well on other platforms such as Qzone, and have become
the key driver for Tencents ads business. As such, we believe
ads on Weixin also have good potential over the medium-term.
Page 28
Industry Focus
Development of mobile ads
Source: Company
RMB11,944bn, and Tencents market share is relatively low at

Multiple propellers for online ads. In addition to advertising
c.20% (vs. Alibabas c.50% share). As Tencent incorporates
potential on Weixin and Mobile QQ, we believe more synergies
more payment-related functions to its Weixin / Mobile QQ
could be created across Tencents multiple platforms, thanks to
ecosystem (e.g. game centers, e-commerce, taxi booking, and
better coordination under Guangdiantong ad system. For
catering), the company could be a long-term winner in the
instance, we have seen more offerings of video clips on Tencent
mobile payment segment.
News, and video ad clients could tap into the news audience in
this way. At the same time, Tencent Video could cover more
In addition, Tencent has cooperated with Baiyeyuan Investment
customers, increasing its bargaining power versus ad clients.
() and Li Ye Group () to establish Webank
Online ads only account for c.11% of Tencents total revenue
(), in which Tencent has c.30% stake.
this year, and Tencents c.5% ad market share is significantly
Webank was approved by China Banking Regulatory
below Baidu (32%) and Alibaba Group (25%). As such, we
Commission (CBRC) in July 2014, and it is likely to commence
believe online ads could be among the key drivers for Tencent
operations in early 2015. Combining Webanks financial
ahead.
product offerings with Tencents strong online presence, we
believe Tencent could benefit as a pioneer in internet finance.
Internet finance is the next step. Since the launch of its mobile
payment tool Mobile QQ Wallet in Mar 2014, Tencent has
Overseas expansion. Tencent has implemented a two-way
organized promotion campaigns to enhance user awareness of
expansion strategy in overseas markets. On one hand, WeChat
its payment channels. For instance, those using Mobile QQ
(overseas version of Weixin) has penetrated overseas markets
Wallet to pay their mobile phone bills could receive subsidies
especially South-east Asia. According to media reports,
from Tencent. As a result, the company has seen robust user
WeChats overseas users have exceeded 200m this year
growth for both Mobile QQ Wallet and Weixin Payment
(implying >100% growth), and we believe it would become an
this year. iResearch expects the mobile payment market in
important MAU driver ahead.
China to achieve 60% CAGR for 2014-2017 to reach
Page 29
Industry Focus
On the other hand, Tencent has invested in a series of Tencent has not started the monetization process given its focus
international internet companies, such as CJ Games, Activision on user experience.
Blizzard, Epic Games and Daum Kakao (previously Kakao Corp.).
Tencents overseas acquisitions have created good synergies Looking into the upcoming years, we believe mobile game
with its core businesses (especially online games and social would gather steam again on accelerated game launches,
networks), and we think it is a wise way to swiftly build up its especially for licensed games. Online ads could be well
overseas presence. supported by further ramp-up of Guangdiantong ad system,
and e-commerce may be less of a drag on an easier base. We
Better years ahead. Overall, Tencents near-term performance are encouraged to see Tencents efforts in monetizing its
could likely be dragged by mild revenue growth for mobile strengths in online gaming, social networks and online ads, and
games, and decline in e-commerce sales following disposal of we believe rising synergies with JD.com would allow both
most e-commerce operations to JD.com. Besides, many new parties to become strong e-commerce players, and thus
functions have just been added to Weixin and Mobile QQ, and enhance Tencents medium-term outlook.
Page 30
Industry Focus
Valuation & recommendation In view of Tencents leadership in online gaming, platform value
with QQ and Weixins large user base, as well as good potential
Trading at a discount to Alibaba and Baidu. As per our in online ads and e-commerce (cooperating with JD.com), we
estimates, Tencent is currently trading at c.26x 12-month rolling believe it is justified to compare Tencents valuation with
core PE, or c.0.7x PEG. The stock has been trading between 25x Alibaba Group and Baidu, the internet leaders in China.
to 35x rolling core PE this year, as investors value its decent According to consensus, Alibaba is trading at c.39x 12-month
mobile game development and dominant positions for Weixin rolling PE or c.1.0x PEG, and Baidu trades at c.28x rolling PE or
and Mobile QQ. c.0.9x PEG. Hence, we believe 0.9x PEG is a reasonable target
multiple for Tencent.
Core PE band chart for Tencent (since 2013)
As a cross-check, global internet leaders such as Google and
eBay on average trades at c.1.3x PEG, given their technological
Share Price (HK$) advantages and international exposure. Tencents 0.9x target
200 PEG could be justified, in our view.
35x
180
160 31x Initiate coverage with BUY and TP of HK$148. At 0.9x PEG, the
140 27x target PE multiple for Tencent is 32x 12-month rolling core PE.
120 22x Our Target Price is hence set at HK$148, offering 23% upside.
100 18x We initiate coverage on Tencent with BUY recommendation.
80
60 Key risks and concerns. In our view, downside risk may come
40 from slowdown in game revenue especially for client games and
20 web games, unsuccessful monetization efforts on Weixin and
0 Mobile QQ, and rising content costs for video and games amid
intensifying competition.
Oct-13
Oct-14
Apr-13
Apr-14
Apr-15
Jan-13
Jan-14
Jan-15
Jul-13
Jul-14
Source: Thomson Reuters
Core PE band chart PB band chart
Share Price (HK$) Share Price (HK$)

250 300 14.8x
38x
250
200
11.5x
31x
200
150 24x 8.2x
150
100 17x
100 5.0x
50 9x
50
1.7x
0 0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers
Page 31
Industry Focus
Key Assumptions
FY Dec 2012A 2013A 2014F 2015F 2016F
MAU of QQ 798.2 808.0 818.7 828.4 837.2
Smart device MAU of QQ 244.8 426.0 599.0 720.6 779.2
Combined MAU of
160.8 355.0 547.1 754.2 897.1
Weixin & Wechat
Segmental Breakdown (RMB m)

FY Dec 2012A 2013A 2014F 2015F 2016F
Revenues (RMB m)
Value added services
35,718 44,985 62,726 81,191 101,507
(VAS)
Online advertising 3,382 5,034 8,280 12,818 18,086
E-commerce transactions 4,428 9,796 4,800 0 0
Others 366 622 2,688 4,902 7,730
Total 43,894 60,437 78,494 98,911 127,323
Gross profit (RMB m)
23,654 29,601 43,908 56,834 71,562
(VAS)
Online advertising 1,649 2,257 3,961 6,131 8,742
E-commerce transactions 236 557 0 0 0
Others 148 244 1,398 2,294 3,618
Total 25,687 32,659 49,266 65,259 83,922
Gross profit Margins (%)
66.2 65.8 70.0 70.0 70.5
(VAS)
Online advertising 48.8 44.8 47.8 47.8 48.3
E-commerce transactions 5.3 5.7 0.0 N/A N/A
Others 40.4 39.2 52.0 46.8 46.8
Total 58.5 54.0 62.8 66.0 65.9
Source: Company, DBS Vickers
Page 32
Industry Focus
Income Statement (RMB m) Margins Trend

FY Dec 2011A 2012A 2013A 2014F 2015F 2016F 42.0%
Revenue 28,496 43,894 60,437 78,494 98,911 127,323 40.0%
Cost of Goods Sold (9,928) (18,207) (27,778) (29,227) (33,652) (43,401) 38.0%
Gross Profit 18,568 25,687 32,659 49,266 65,259 83,922 36.0%

34.0%
Other Opng (Exp)/Inc (6,062) (9,897) (13,727) (19,809) (26,565) (34,358)
32.0%
Operating Profit 12,506 15,790 18,932 29,457 38,694 49,564
30.0%
Other Non Opg (Exp)/Inc 0 0 0 0 0 0 28.0%
Associates & JV Inc (190) (80) 171 (95) (76) (61) 26.0%
Net Interest (Exp)/Inc 504 488 1,230 562 1,705 2,524 24.0%
Dividend Income 16 407 509 76 331 305 2012A 2013A 2014F 2015F 2016F
Exceptional Gain/(Loss) (737) (1,554) (1,561) (378) (2,687) (3,261) Operating Margin % Net Income Margin %
Pre-tax Profit 12,099 15,051 19,281 29,622 37,967 49,071

Tax (1,874) (2,266) (3,718) (5,480) (7,214) (9,323)
Minority Interest (22) (53) (61) (4) (39) (51)
Preference Dividend 0 0 0 0 0 0
Net Profit 10,203 12,732 15,502 24,138 30,714 39,697
Core Profit (non-GAAP) 10,940 14,286 17,063 24,516 33,401 42,958
EBITDA 14,271 18,738 23,218 32,419 42,526 54,101
Growth
Revenue Gth (%) 45.0 54.0 37.7 29.9 26.0 28.7
EBITDA Gth (%) 30.1 31.3 23.9 39.6 31.2 27.2
Opg Profit Gth (%) 23.7 26.3 19.9 55.6 31.4 28.1
Net Profit Gth (%) 26.7 24.8 21.8 55.7 27.2 29.2
Margins & Ratio

Gross Margin (%) 65.2 58.5 54.0 62.8 66.0 65.9
Opg Profit Margin (%) 43.9 36.0 31.3 37.5 39.1 38.9
Net Profit Margin (%) 35.8 29.0 25.6 30.8 31.1 31.2
ROAE (%) 40.6 36.5 31.2 34.9 32.5 31.2
ROA (%) 22.0 19.3 17.0 18.7 18.3 19.0
ROCE (%) 29.5 27.0 23.1 24.8 23.6 23.7
Div Payout Ratio (%) 8.2 8.7 9.5 9.5 9.5 9.5
Net Interest Cover (x) NM NM NM NM NM NM
Page 33
Industry Focus
Interim Income Statement (RMB m)

FY Dec 1H2012 2H2012 1H2013 2H2013 1H2014
Revenue 20,175 23,719 27,931 32,505 38,146

Cost of Goods Sold (8,148) (10,060) (12,544) (15,234) (15,374)
Gross Profit 12,027 13,659 15,388 17,271 22,772
Other Oper. (Exp)/Inc (4,144) (5,344) (5,895) (7,323) (9,145)
Operating Profit 7,883 8,315 9,493 9,948 13,627
Other Non Opg (Exp)/Inc 0 0 0 0 0
Associates & JV Inc (12) (69) 151 21 67
Net Interest (Exp)/Inc 178 310 532 697 189
Exceptional Gain/(Loss) (618) (937) (466) (1,095) 1,225
Pre-tax Profit 7,431 7,620 9,710 9,571 15,108
Tax (1,358) (908) (1,955) (1,763) (2,850)
Minority Interest (23) (30) (31) (30) 35
Net Profit 6,050 6,682 7,724 7,778 12,293
Core Profit (non-GAAP) 6,667 7,619 8,190 8,873 11,068
Growth
Revenue Gth (%) N/A N/A 38.4 37.0 36.6
Opg Profit Gth (%) N/A N/A 20.4 19.6 43.5
Net Profit Gth (%) N/A N/A 27.7 16.4 59.2
Margins
Gross Margin (%) 59.6 57.6 55.1 53.1 59.7
Opg Profit Margin (%) 39.1 35.1 34.0 30.6 35.7
Net Profit Margin (%) 30.0 28.2 27.7 23.9 32.2
Page 34
Industry Focus
Quarterly Income Statement (RMB m)

FY Dec 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 3Q2014
Revenue 14,384 15,535 16,970 18,400 19,746 19,808

Cost of Goods Sold (6,590) (7,036) (8,198) (7,800) (7,574) (7,167)
Gross Profit 7,794 8,499 8,772 10,600 12,172 12,641
Other Oper. (Exp)/Inc (3,081) (3,516) (3,807) (4,448) (4,697) (4,802)
Operating Profit 4,713 4,983 4,965 6,152 7,475 7,839
Other Non Opg (Exp)/Inc 0 0 0 0 0 0
Associates & JV Inc 31 39 (18) 44 23 (139)
Net Interest (Exp)/Inc 338 314 383 137 52 135
Exceptional Gain/(Loss) (472) (504) (591) 1,263 (38) (776)
Pre-tax Profit 4,610 4,832 4,739 7,596 7,512 7,059
Tax (926) (955) (808) (1,164) (1,686) (1,383)
Minority Interest (4) (10) (20) 25 10 (19)
Net Profit 3,680 3,867 3,911 6,457 5,836 5,657
Core Profit (non-GAAP) 4,152 4,371 4,502 5,194 5,874 6,433
Growth
Revenue Gth (%) 36.6 34.3 39.6 35.8 37.3 27.5
Opg Profit Gth (%) 17.0 17.2 22.2 28.7 58.6 57.3
Net Profit Gth (%) 18.7 20.1 12.9 59.7 58.6 46.3
Margins
Gross Margin (%) 54.2 54.7 51.7 57.6 61.6 63.8
Opg Profit Margin (%) 32.8 32.1 29.3 33.4 37.9 39.6
Net Profit Margin (%) 25.6 24.9 23.0 35.1 29.6 28.6
Page 35
Industry Focus
Balance Sheet (RMB m) Asset Breakdown

FY Dec 2011A 2012A 2013A 2014F 2015F 2016F Net Fixed
Debtors - Assets -
3.9% 13.8%
Net Fixed Assets 6,065 7,959 10,734 12,881 15,457 18,548
Invts in Associates & JVs 4,495 7,345 12,179 42,744 51,352 61,717
Other LT Assets 10,740 23,443 30,636 31,532 32,512 33,588
Cash & ST Invts 31,271 29,709 43,982 52,647 73,800 100,882 Assocs'/JVs -
Inventory 0 568 1,384 692 0 0 Inventory - 46.0%
0.7%
Debtors 2,021 2,354 2,955 3,663 4,886 6,290
Bank, Cash
Other Current Assets 2,212 3,878 5,365 6,217 8,106 10,783 and Liquid
Assets -
Total Assets 56,804 75,256 107,235 150,376 186,113 231,808 35.5%
ST Debt 7,999 1,077 2,589 2,848 3,133 3,446

Creditors 2,244 4,212 6,680 5,730 6,598 8,509
Other Current Liab 10,940 15,376 23,998 27,684 30,421 33,431
LT Debt 0 2,106 3,323 3,655 4,021 4,423
Other LT Liabilities 6,533 10,337 12,182 29,465 32,328 35,472
Shareholders Equity 28,464 41,298 57,945 80,372 108,867 145,632
Minority Interests 625 850 518 622 746 895
Total Cap. & Liab. 56,804 75,256 107,235 150,376 186,113 231,808
Non-Cash Wkg. Capital (8,951) (12,788) (20,974) (22,842) (24,027) (24,867)

Net Cash/(Debt) 23,271 26,526 38,070 46,144 66,647 93,014
Debtors Turn (avg days) 23.9 18.2 16.0 15.4 15.8 16.0
Creditors Turn (avg days) 82.8 75.6 82.2 86.3 74.8 70.5
Inventory Turn (avg days) N/A 6.7 14.7 14.4 4.2 N/A
Asset Turnover (x) 0.6 0.7 0.7 0.6 0.6 0.6
Current Ratio (x) 1.7 1.8 1.6 1.7 2.2 2.6
Quick Ratio (x) 1.6 1.6 1.4 1.6 2.0 2.4
Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) (0.8) (0.6) (0.7) (0.6) (0.6) (0.6)
Capex to Debt (%) 68.8 128.4 77.2 84.7 88.5 92.5
Z-Score (X) 17.9 9.2 21.4 18.1 0.0 NA
Page 36
Industry Focus
Cash Flow Statement (RMB m) Capital Expenditure (RMB m)

FY Dec 2011A 2012A 2013A 2014F 2015F 2016F
8000
Pre-Tax Profit 12,099 15,051 19,281 29,622 37,967 49,071 7000
Dep. & Amort. 1,939 2,621 3,606 2,981 3,577 4,292 6000
5000
Tax Paid (1,836) (2,225) (3,118) (5,480) (7,214) (9,323)
4000
Assoc. & JV Inc/(loss) 190 80 (171) 95 76 61 3000
(Pft)/ Loss on disposal of FAs 97 21 0 0 0 0 2000
Chg in Wkg.Cap. 1,177 3,507 5,915 1,979 2,392 2,772 1000
Other Operating CF (308) 374 (1,139) (292) (848) (1,165) 0
2012A 2013A 2014F 2015F 2016F
Net Operating CF 13,358 19,429 24,374 28,905 35,951 45,708
Capital Expenditure (-)
Capital Exp.(net) (5,504) (4,088) (4,564) (5,506) (6,332) (7,282)
Other Invts.(net) (3,697) (11,427) (9,841) 0 0 0
Invts in Assoc. & JV (3,724) (3,668) (4,465) (5,124) (5,893) (6,777)
Div from Assoc & JV 0 0 0 0 0 0
Other Investing CF (2,431) 2,913 (264) (1,380) (1,587) (1,825)
Net Investing CF (15,355) (16,270) (19,134) (12,011) (13,812) (15,884)
Div Paid (838) (1,108) (1,468) (2,286) (2,909) (3,760)
Chg in Gross Debt 6,678 (1,059) 4,699 591 650 715
Capital Issues (1,326) 97 (1,295) 0 0 0
Other Financing CF (140) (316) (228) (6,947) (3,106) (4,907)
Net Financing CF 4,373 (2,386) 1,708 (8,642) (5,365) (7,951)
Currency Adjustments (172) (2) (103) 0 0 0
Chg in Cash 2,204 771 6,845 8,252 16,774 21,873
Opg CFPS (RMB) 1.34 1.74 2.02 2.94 3.66 4.69
Free CFPS (RMB) 0.86 1.68 2.16 2.55 3.23 4.19
Page 37
Regional Company Focus
JD.com
Bloomberg: JD US Equity | Reuters: JD.O Refer to important disclosures at the end of this report
BUY US$23.91 USA - NASDAQ : 4,756 On fast track

(Initiate coverage)
Price Target: 12-Month US$ 30.8
The leading online retailer in China with a direct sales
Reason for Report: Initiate coverage
Potential Catalyst: Swift expansion of online marketplace; synergies
model
from Strategic Cooperation with Tencent In-house e-commerce and logistics operations improve
DBSV vs Consensus: Our 2015F / 2016F revenue estimates are 1% / user experience
4% above Bloomberg consensus
Strategic cooperation with Tencent enhances medium-
Analyst term business outlook
Mark LI CFA, +852 2971 1935
mark_li@hk.dbsvickers.com We initiate coverage with BUY rating and TP of
US$30.8, based on 1.5x 12-month rolling P/Sales ratio
Price Relative
US$ Relative Index
35.1
33.1
209 An online direct sales leader. JD.com is Chinas leading
31.1 189
B2C direct sales operator, and stands out on its product
29.1
27.1
169
149
quality, competitive pricing and self-operated logistics
capability. The company is leveraging on its integrated
25.1
23.1 129
21.1
19.1
109 business model to enhance user experience, and its logistics
17.1
May-14 Aug-14 Nov-14
89
network could be further improved by the ramp-up of
JD.com Inc (LHS) Relative CCMP INDEX (RHS)
facilities, especially the Asia No.1 automated warehouses.
More synergies from Tencent cooperation. JD.com has
Forecasts and Valuation formed strategic cooperation with Tencent since Mar 2014,
FY Dec (RMB m) 2013A 2014F 2015F 2016F where JD.com would incorporate Tencents QQ Wanggou
Turnover 69,340 112,437 170,845 245,566
EBITDA 182 1,366 1,545 3,126 and Paipai.com to enhance its own e-commerce presence.
Pre-tax Loss (2,485) (13,135) (2,266) (1,242) As more users can access JD.com via Weixin and Mobile QQ
Net Loss (2,485) (13,139) (2,266) (1,242) platforms, we believe JD.com could benefit from rising
Core Profit (non-
GAAP)*
224 (223) (173) 1,280 mobile contributions and stronger user traffic down the road.
EPS (RMB) (1.80) (9.51) (1.64) (0.90) Better scalability ahead. Riding on its logistics capability,
EPS (US$) (0.29) (1.55) (0.27) (0.15)
Core EPS (US$)* 0.03 (0.03) (0.02) 0.15 as well as Tencents support in terms of user traffic and
Core EPS (RMB)* 0.16 (0.16) (0.13) 0.93 online payment channels, JD.coms online marketplace had
Core EPS Growth (%)* N/A N/A (22) N/A generated 214% y-o-y GMV growth in 9M14, and it could
BV Per Share (US$) 1.09 3.41 3.14 2.98
Core PE (X)* 907.8 nm nm 158.9 enhance the companys overall profitability ahead. We
P/Cash Flow (X) 57.0 301.1 40.3 26.0 currently expect JD.com to turn profitable in 2016F (based
P/Free CF (X) 86.2 nm 52.2 31.8 on core profit), and our TP of US$30.8 is based on 1.5x 12-
EV/EBITDA (X) 1043.6 131.4 115.6 56.2
Net Div Yield (%) 0.0 0.0 0.0 0.0
month rolling P/Sales ratio. Initiate coverage with BUY
P/Book Value (X) 22.0 7.0 7.6 8.0 recommendation.
Net Debt/Equity (X) CASH CASH CASH CASH
ROAE (%) (47.2) (68.7) (8.1) (4.8) At A Glance
* Core profit excludes one-off / non-cash items such as losses from
Issued Capital (m shrs) 1,382
preferred share redemption, share-based compensation & amortization.
Earnings Rev (%): New New New Mkt. Cap (US$m) 33,044
Consensus EPS (RMB) (0.004) 0.024 0.284 Major Shareholders
Other Broker Recs: B: 12 S: 0 H: 8 Mr. Richard Qiangdong Liu (%) 20.1
ICB Industry: Consumer Services Tencent (%) 17.6
ICB Sector: General Retailers Tiger Global Management (%) 15.6
Principal Business: A leading online direct sales operator in China, Hillhouse Capital Management (%) 11.0
with emerging marketplace operations DST Global (%) 6.8
Free Float (%) 28.9
Source of all data: Company, DBSV, Thomson Reuters, HKEX Avg. Daily Vol.(000) 5,135
www.dbsvickers.com
ed-TH/ sa- MH
Industry Focus
INVESTMENT THESIS
Profile Rationale
JD.com is the leading online direct sales operator in China, and Focus on user experience
stands out on its good product quality, high service standards
JD.coms direct sales model and in-house fulfilment
and timely delivery capability. The company launched its online
infrastructure could enhance product quality and
marketplace in 2010, helping to enhance its growth prospects
delivery speeds, so as to improve customer experience
ahead.
especially during the peak season for e-commerce.
Online marketplace improves outlook

Riding on JD.coms high service standards and
self-operated fulfilment facilities, its online marketplace
could register strong sales performance ahead.
Valuation Risks
Our Target Price is based on 1.5x 12-month rolling P/Sales ratio, Intensifying competition
which is the average valuation for online direct sales operators
Downside could include intensifying competition with
such as VIPShop, Jumei, China Dangdang and Amazon.
leading e-commerce operators, especially Alibaba
Group.
Source: DBS Vickers
Page 39
Industry Focus
SWOT Analysis
Strengths Weakness
Leading B2C direct sales operator in China High requirement in management of working capitals,
especially inventories
Stands out on product quality and competitive pricing,
thanks to its direct operation model Direct operating model could carry low margins
Timely delivery capability aided by in-house fulfilment
infrastructure
Opportunities Threats
Rising contributions from online marketplace could widen Intensifying competition with leading online
product offerings marketplace operators, especially Alibaba Group
Launch of Asia No.1 automated warehouses could beef
up logistics capability ahead
Penetration into the low-tier markets enhances business
outlook
Strategic Cooperation with Tencent to bear fruit
Internet finance could be the long-term driver
Source: DBS Vickers
Page 40
Industry Focus
Company overview
China B2C direct sales market share (2013)
An online direct sales leader. JD.com stands as the leading
B2C direct sales operator in China, with c.47% market share Amazon
Yixun.com China,
in 2013 (source: iResearch). The company was founded by Mr.
Suning.com *, 5.8% 5.6%
Richard Qiangdong Liu in 2004, and it stands out on good VIPShop,
, 10.7% 5.4%
product quality, competitive pricing and timely delivery
capability. The company launched its online marketplace in Dang Dang,
4.7%
2010, aiming to widen product offerings to fulfil customer
needs. As of 3Q14, JD.com had c.46m active customer GOME
Online,
accounts, with c.50,000 merchants operating on its online 3.9%
marketplace.
JD.com, Yihaodian,
46.5% 3.7%
Vancl,
1.7%
Others,
12%
Note: In terms of sales revenue for online direct sales players.

* Yixun.com () would be gradually incorporated into JD.com,
according to JD.coms strategic cooperation with Tencent since Mar
2014.
Source: iResearch
Milestones for JD.com
M ar: Strategic cooperation

with Tencent; acquired
Tencent's QQ Wanggou (B2C)
J a n: Mr. Richard and Paipai (C2C) operations,
Qiangdong Liu launched and 10% stake of Yixun (
a website that mainly );
sells computer products, Started to offer e-books, May: Listed on NASDAQ (ticker:
the predecessor of private label products JD); offered 108m American
JD.com. By 2007, sales Started to offer food, and travel-related Depositary Shares (c.8% stake)
were gradually Started to offer beverage, nutritional products; at US$19ps;
expanded to mobile general supplements and Oct: Acquired online Oc t: JD.com's first highly
handsets, consumer merchandise books; payment service automated "Asia No.1"
products, and autoparts products and Oct: Launched online provider Chinabank warehouse was officially
/ accessories. home appliances marketplace Payments () launched in Shanghai
2004 2007 2008 2009 2010 2011 2012 2013 2014
Started to build Started to Started to sell Started to sell

and operate own sell cosmetics movie tickets groceries and fresh
nationwide and other and other media produce
fulfillment personal care products
infrastructure items
Source: Company
Page 41
Industry Focus
Stands out on product quality and service standards. Riding

In addition, JD.com has established comprehensive after-sales
on its direct sales model, JD.com could effectively control the
service standards for its customers. For instance, the company
quality of its products. Besides, the company has established
promises that customers could return the goods that they
good relationship with >6,000 suppliers, offering authentic
purchased without any reason, as long as they file for a return
products at competitive prices. According to a survey by
within 7 days of purchase. For quality-related issues, JD.com
CNNIC, 83% of respondents believe outstanding product
could provide free delivery services. JD.com also offers 1-year
quality is the main reason for repeat purchase on JD.com. As
repair services to its customers. We believe JD.com could
such, JD.com has earned good customer recognition on its
enjoy better customer recognition ahead, thanks to its high
product quality and service standards.
standards of after-sales service offerings compared to peers.
Reasons for repeat purchase on JD.com
100%
83% 79%
80%
65% 63% 62%
60% 52% 50%
40%
26%
20%
0%
Product variety
After-sales services
Product quality
Price & discounts
Gifts
Website user
Logistics service
Used to it
experience
Note: Percentage of respondents that agreed to the reasons.

Source: CNNIC survey (sample size: 30,000)
E-commerce order flow for JD.com
Source: Company
Page 42
Industry Focus
JD.coms nationwide fulfilment network
Note: Fulfilment infrastructure includes warehouses and delivery operations.

Source: Company
Fulfilment capability is the key. Besides product quality and was launched in Oct 2014, with GFA of c.100,000 s.m. (for
service standards, we believe timeliness of product deliveries the 1st phase). The warehouse operates on automated sorting
could be essential to good customer experience. As such, technologies that could sort up to 16,000 packages per hour,
JD.com has operated own fulfilment infrastructure (i.e. with 99.99% accuracy. The Shanghai Asia No.1 warehouse
warehousing and delivery facilities) since 2007. We believe significantly enhances JD.coms delivery capability in E.China,
JD.com runs the largest e-commerce fulfilment operations in especially during the peak season of Singles Day promotion
China, with 118 warehouses (total GFA of c.2.3m s.m.), 2,045 in Nov 2014.
delivery stations and 1,045 pickup stations across 1,855
Construction of Asia No.1 warehouses in Guangzhou,
counties and districts as of 30 Sep 2014. Majority of JD.coms
Wuhan and Shenyang has started, targeting to be launched in
products could be delivered to end customers within 3 days of
2015. More Asia No.1 warehouses in Beijing, Chengdu and
purchase, versus peers that could spend up to a week.
Xian have been planned for the coming years, helping to
In particular, JD.com has focused on constructing highly- further improve JD.coms logistics capability in these areas.
automated warehouses, Asia No.1 (), in the key
areas. The companys fist Asia No.1 warehouse in Shanghai
Page 43
Industry Focus
Details of JD.coms delivery services
Pro g ram n ame Co v erag e D et ails

( as o f Sep 2 0 1 4 )
"211 (211 )" 130 counties and Orders placed before 11am could be deliv ered w ithin the same day ; orders placed
districts before 11pm could be deliv ered by 3pm the next day .
Small-sized products that use J D.com's w arehousing and deliv ery serv ices could be
entitled to the program. c.41% of the orders placed in 2013 w ere under this program.
Next-day deliv ery 815 counties and Orders placed could be deliv ered the next day . Products that use J D.com's
( ) districts w arehousing and deliv ery serv ices could be entitled to the program.
Night-time deliv ery Beijing, Shanghai, Orders placed by 3pm could be deliv ered at 7pm-10pm that day . Small-sized products
( ) Chengdu, Guangzhou, that use J D.com's w arehousing and deliv ery serv ices could be entitled to the program.
Wuhan
Timed deliv ery Selectiv e regions Specific deliv ery time could be set in the 7 day s follow ing the orders (10 day s for
( ) home appliances). Products that use J D.com's w arehousing and deliv ery serv ices could
be entitled to the program.
Speed deliv ery Beijing, Shanghai, RMB49/order. Products could be deliv ered w ithin 3 hours of purchase.
( ) Guangzhou, Chengdu
Tw o-day deliv ery Regions not cov ered by Products could be deliv ered w ithin 48 hours of purchase. Products that use J D.com's
( ) "211" and "Next-day w arehousing and deliv ery serv ices could be entitled to the program.
deliv ery "
"211 for home Selectiv e regions Orders placed before 11am could be deliv ered w ithin the same day ; orders placed
appliances before 6pm could be deliv ered by 8pm the next day . Large-sized products that use
( 211 )" J D.com's w arehousing and deliv ery serv ices could be entitled to the program.
Night-time deliv ery for Beijing, Shanghai, Orders placed by 3pm could be deliv ered at 6pm-10pm that day . Large-sized products
home appilances Guangzhou, Shenzhen that use J D.com's w arehousing and deliv ery serv ices could be entitled to the program.
( )
Customer pickup 1,045 pickup stations Customers could pay and collect the products at J D.com's pickup stations.
( )
Source: Company
JD.coms delivery operations in Beijing
Source: DBS Vickers
Expanding sales categories. JD.com started off selling digital Currently JD.com is working with >6,000 suppliers to offer
products in 2004. Aimed to enhance its growth prospects, the >2.4m SKUs (stock-keeping units) at its direct sales operations.
company has actively expanded to new categories including
Leveraging on customer recognition and supports such as in-
home appliances, general merchandise, personal care
house fulfilment capacity and after-sales services, JD.com
products, food & beverage, auto parts and media products.
launched its B2C online marketplace in 2010, allowing
Page 44
Industry Focus
merchants to sell their products at its website. Within a few GMV growth by segment
years, the online marketplace has attracted >50,000
merchants, offering c.38m SKUs in total (vs. >2.4m SKUs 472%
500%
offered by JD.coms direct sales arm). GMV (gross 450%
merchandise value) of online marketplace had also been 400%
growing rapidly to account for 36% of total GMV in 9M14 (vs. 350%
25% for 2013). JD.com aims to offer standardized products 300%
(e.g. digital and home appliance products) mainly at its direct 250% 214%
sales platform, while non-standardized products are mainly 200%
sold at its marketplace. 150% 92%
100%
Percentage of GMV from online marketplace 50% 90%
0% 65% 68%
2012 2013 9M14
40% 36% Online direct sales
35% Services & other revenues (online marketplace)
30% Note: Growth for online marketplace picked up in 9M14, thanks to

25%
23% contributions from QQ Wanggou and Paipai.com since 2Q14.
25%
20%
Solid management control. According to JD.coms prospectus,
15%
9% its founder, Chairman and CEO Mr. Richard Qiangdong Liu
10% has c.20% stake in the company. Listed on NASDAQ, JD.com
adopts a dual class ordinary share structure, in which Class B
5%
Ordinary Shares are entitled to twenty votes per share on all
0% matters, versus one vote per share for Class A Ordinary Shares.
2011 2012 2013 9M14 Being the only holder of Class B shares, Mr. Liu has c.84%
Source: Company voting power in JD.com. Having >15 years of solid experience
in retail and e-commerce, we believe Mr. Lius firm control on
the company could ensure smooth execution of its business
Joining hands with Tencent. JD.com has formed Strategic
strategies.
Cooperation with Tencent since Mar 2014, aiming to further
strengthen its presence in e-commerce. Tencents QQ
Wanggou (B2C marketplace) and Paipai.com (C2C Shareholding & voting power structure
marketplace) has been incorporated into JD.com since 2Q14,
Sh areh o ld ers St ak e V o t in g
enhancing its competitiveness especially in the C2C segment.
p o w er
Paipai.com launched the mobile store division, Paipai Mr. Richard Qiangdong Liu 20.1% 83.6%
Weidian () in Oct 2014, and merchants could Tencent 17.6% 3.7%
leverage on Tencents Guangdiantong ad system to Tiger Global Management 15.6% 3.2%
promote their stores at platforms like Weixin, Mobile QQ and Hillhouse Capital Management 11.0% 2.3%
Mobile Qzone. At the initial stage, c.40% of orders on Paipai DST Global 6.8% 1.4%
Weidian came from Weixin users, and c.20% from Mobile Capital Today 6.5% 1.3%
QQ users, showing good progress in monetizing Tencents Bull Capital 1.9% 0.4%
strong user traffic. Thanks to contributions from QQ Sequoia Capital 1.4% 0.3%
Wanggou (now renamed to JD Wanggou) and Paipai.com, Others 19.0% 3.8%
GMV growth of JD.coms online marketplace accelerated to 100.0% 100.0%
214% y-o-y growth for 9M14, and we expect robust growth Note: Mr. Richard Qiangdong Liu owns c.556m shares of Class B
in the future. Ordinary Shares, which are entitled to twenty votes per share on all
matters (vs. one vote per share for Class A Ordinary Shares).
Source: Company
Page 45
Industry Focus
Marketplace to boost margins. We believe JD.coms online

Growth prospects marketplace division could ride on the companys self-
E-commerce carries good potential. The e-commerce market operated fulfilment facilities, as well as support from Tencent
posted 60% CAGR for 2010-2013 to reach RMB1,892bn, and in online payment channels and user traffic. Hence, its online
accounted for c.8% of Chinas total retail sales in 2013. marketplace could attract more merchants and register better
iResearch expects it to register 31% CAGR for 2013-2017F, sales growth momentum. Of note, the number of merchants
thanks to growing online customer numbers and their rising on JD.coms online marketplace has exceeded 50,000,
e-commerce spending. Of note, online customers account for compared to c.29,000 in Mar14. GMV of marketplace also
c.60% of total netizens in China, and we believe the reached RMB63.5bn for 9M14, up 214% y-o-y.
penetration could rise further, on development of online JD.com charges 2%-10% of commission to marketplace GMV
payment channels and delivery operations. (depending on categories), and commission income carries
much higher profitability versus its direct sales operations. As
E-commerce market size in China such, we expect rising contributions from marketplace could
lift JD.coms gross margin to 13.3% in 2016F (vs. 11.2% for
9M14).
RMB bn
75% 5,634 80%
6,000 70%
70% 4,772 JD.coms online marketplace GMV
5,000 59%
51% 3,780 60%
4,000 46%
50% RMB bn %
37%
3,000 2,760 40% 472%
26% 70 63.5 500%
1,892
2,000 18% 30% 60
1,187 20%
785 400%
1,000 461 50
10%
0 0% 40 300%
31.8 214%
2014F
2015F
2016F
2017F
2010
2011
2012
2013
30 200%
E-commerce market size (LHS) 20 16.6 92%
Growth y-o-y (RHS) 100%
10 2.9
Note: In terms of GMV (general merchandise value). 0 0%
Source: iResearch 2011 2012 2013 9M14
Online marketplace GMV (LHS)

Number of e-commerce customers in China Growth y-o-y (RHS)
m Source: Company
60%
450 70%
390
400 49% 60% Fulfilment: Building up strengths in key regions. JD.coms first
350 302 Asia No.1 automated warehouse in Shanghai was launched
43% 50%
300 38% in Oct 2014, helping to enhance its delivery capability
35% 242
250 40% especially during the Singles Day promotion in Nov14.
194
200 161 30% JD.com has been constructing another three Asia No.1
150 warehouses in Guangzhou, Wuhan and Shenyang, to be
20%
100 completed in 2015. It also has plans to develop more Asia
50 10%
No.1 warehouses in cities like Beijing, Chengdu and Xian.
0 0%
2010 2011 2012 2013 2014F In addition, JD.com has set up Forward Distribution Centers
Number of customers (LHS) (FDC, ) around its key warehouses, to improve
As % of total netizen (RHS) logistics coverage especially for the best-selling products. The
company has operated multiple FDCs in cities like Jinan,
Source: CNNIC Nanjing and Chongqing. Riding on its fulfilment network
covering >1,800 counties and districts, JD.com provides
Page 46
Industry Focus
delivery services to >90% of orders from direct sales, and Rising synergies from Tencent cooperation. Mobile orders
>30% of orders from merchants in its online marketplace. We accounted for c.30% of JD.coms total orders in 3Q14, and
believe JD.coms strengthening delivery capability could attract the majority of mobile orders were generated via JD.coms
more merchants to cooperate, and improve customer own app, rather than Weixin and Mobile QQ. We believe
experience ahead. there could be good potential for Weixin and Mobile QQ to
ramp up their contributions to JD.com. The company has
JD.coms Asia No.1 Warehouse in Shanghai actively cooperated with Tencent to develop better access
points on Weixin / Mobile QQ, and we stay confident on rising
mobile contribution for JD.com down the road.
Going rural. So far, JD.coms success has been mostly built on

robust customer demand in the 1st & 2nd-tier markets, and
orders from low-tier markets could potentially account for
merely single-digits sales for the company. According to
CNNIC, rural e-commerce customers could grow at a faster
pace, implying bigger potential for e-commerce in Chinas
rural areas.
Number of e-commerce customers in China
m
300
+ 22%
243
250
200
200
150
100
59
42 + 40%
50
0
2012 2013
Urban online customers Rural online customers
Source: CNNIC
Thanks to improving awareness among rural customers, as

well as expanding coverage of logistics networks, JD.com
achieved c.150% y-o-y sales growth in the low-tier markets
Source: Company
during 3Q14 (vs. 60% overall sales growth). Building on rising
rural affluence as well as promotions via Mobile QQ and
Weixin platforms, we believe these markets could become the
growth driver for JD.com over the medium-term.
Page 47
Industry Focus
Internet finance could be the longer-term driver. Seeing plenty

Pattern of usage between urban & rural netizens in of opportunities in internet finance (e.g. consumer finance
China (2013) and supplier finance), JD.com is striving to improve its finance
F unc t ion Urban Rural Dif f erenc e capability. The company acquired online payment service
usage usage (A - B) provider Chinabank Payments () in Oct 2012, and
(A ) (B) launched its supplier financing product Jing Bao Bei (
Instant messaging 86.3% 86.0% 0.3% ) in Nov12. JD.com then introduced its consumer financing
Blogs 70.9% 70.5% 0.4% product Consumer Credit Line ()in Feb14, crowd
Group buy ing 25.4% 15.2% 10.2% financing () product Cou Fen Zi ()in Jul14, and
Music 77.3% 66.9% 10.4% financing product Jing Xiao Dai () for its merchants
Games 58.4% 46.7% 11.7% on marketplace in Nov14.
Search 82.8% 70.5% 12.3%
Altogether, these products could fulfill the financing needs of
V ideo 74.4% 55.0% 19.4%
its customers, suppliers and merchants, and offer good
Online pay ment 47.9% 25.7% 22.2%
margins for JD.com. For instance, gross margin of supplier
E-commerce 55.2% 31.1% 24.1%
financing products could potentially reach 90%, as per media
Note: Percentage of urban / rural respondents that had used the reports. Given JD.coms >RMB20bn net cash on hand, the
functions. E-commerce, online payment and video have bigger company is in a sound position to support its financial product
potential in the rural areas. offerings. In addition, user information collected from the
Source: CNNIC survey (sample size: 30,000) financial services could in turn create cross-selling
opportunities for JD.com.
Structure of JD.coms Finance Unit ()
JD.com
Fina nce Unit
C o n sumer finance
S u pply chain fina nce O n line payment F ina ncia l products C r ow d funding ( )
Consumer Credit Line
Jing Bao Bei ( ) Chinabank Payments Jing Xiao Dai( ) Cou Fen Zi ( )
( )
Source: Company, media websites
Page 48
Industry Focus
Valuation & recommendation DCF valuation implies fair price of US$31.4. We have run a DCF
valuation to cross-check our valuation for JD.com. Based on a
Scale is the priority. JD.com believes that gaining market share is
10-year horizon, 4% terminal growth and 13% WACC, our
the winning strategy in e-commerce, hence it does not have any
DCF-based fair price for the company could be US$31.4, which
profit target for 2014F-2015F. That said, thanks to better scale
is fairly in line with our TP of US$30.8.
and rising contributions from online marketplace (with higher
margins than direct sales), we expect JD.coms overall gross
DCF valuation for JD.com
margin to gradually improve to 12.4% / 13.3% for 2015F /
2016F (vs. 11.2% for 9M14), and the company could become
T erminal grow t h: 3.5% 4.0% 4.5%
profitable starting 2016F (based on non-GAAP core profit).
Initiate with BUY. Given JD.coms direct sales model (direct sales RM B m
could account for c.95% of total net revenue this year), we Equit y v alue 253,792 262,462 272,156
believe it is justified to compare its price-to-sales valuation with
other major online direct sales players, namely VIPShop, China F air Pric e (USD) 30.4 31.4 32.6
Dangdang and Jumei in China, as well as Amazon in the US.
Based on consensus estimates, these players on average trade at A ssumpt ions:
c.1.5x 12-month rolling P/Sales ratio, which we believe is Risk-free rate 2.2% Cost of debt 4.0%
reasonable for JD.com. Hence, our TP is hence set at US$30.8, Beta 1.5 D/E ratio 0.1%
offering 29% upside. We initiate coverage on JD.com with BUY
rating. Market return 9.5% RMB/USD 0.17
(NASDAQ) rate
WACC 13.0%
Price-to-sales valuation for JD.com
Source: Bloomberg Finance L.P., DBS Vickers
Pric e t o sales (x ) 2014F 2015F 2016F
Risks and concerns. Major risks related to JD.com could include
J D.Com*^ 1.8 1.2 0.8 intensifying online price competition that could hurt its margins,
as well as pressure from major marketplace operators, especially
V IPShop 3.4 2.1 1.4 the Alibaba Group.
China Dangdang 0.4 0.4 0.3
J umei Int'l 2.6 2.0 1.5
Amazon.Com 1.7 1.4 1.2
A v erage 2.0 1.5 1.1
Note: We exclude marketplace operators such as Alibaba Group and

eBay, as they operate on different business model (e.g. marketplace
model with higher margins).
Source: Thomson Reuters, *DBS Vickers
Page 49
Industry Focus
P/Sales band chart PB band chart
Share Price (US$) Share Price (US$)

40 35
1.8x 33
10.1x
35 31
1.7x
29 9.1x
30 1.5x 27
8.1x
1.3x 25
25 23 7.1x
1.1x
21
20 19 6.1x
17
15 15
May-14
May-14
Oct-14
Oct-14
Sep-14
Sep-14
Aug-14
Aug-14
Jun-14
Jun-14
Nov-14
Nov-14
Jul-14
Jul-14
Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers
Page 50
Industry Focus
Management profile
Direc t ors & A ge Posit ion / T it le Remark

Ex ec ut iv e
O f f ic ers
Mr. Richard 41 F ounder, Chairman Mr. Liu has >15 y ears of experience in retail and e-commerce industries. He receiv ed
Qiangdong Liu of the Board & awards such as "2011 China Economic Person of the Year" (by CCTV ), and "2012 Chinese
( ) CEO Businessman" (by F ortune China). He receiv ed a bachelor's degree in Sociology from
People's Univ ersity of China, and EMBA degree from the China Europe International
Business School.
Mr. Martin Chi Ping 41 Director Mr. Lau is President and Executiv e Director of Tencent. Prior to joining Tencent in 2005, he
Lau worked at Goldman Sachs. He receiv ed a bachelor's degree in Electrical Engineering from
( ) the Univ ersity of Michigan, a master's degree in Electrical Engineering from Stanford
Univ ersity , and MBA degree from Kellogg School of Management, Northwestern
Univ ersity .
Prof. Ming Huang 50 Independent Prof. Huang has been a professor of F inance at China Europe International Business School
( ) Director since 2010. He receiv ed a bachelor's degree in Phy sics from Peking Univ ersity , Ph.D. in
Theoretical Phy sics from Cornell Univ ersity , and Ph.D. in F inance from Stanford Univ ersity .
Mr. Louis T. Hsieh 50 Independent Mr. Hsieh has serv ed as the CF O of New Oriental Education & Technology Group since
( ) Director 2005. He receiv ed a bachelor's degree in Industrial Engineering and Engineering
Management from Stanford Univ ersity , MBA degree from Harv ard Business School, and
J .D. degree from Univ ersity of California at Berkeley .
Prof. Dav id Daokui 50 Independent Prof. Li is currently the Mansfield F reeman Chair Professor of the School of Economics &
Li Director Management of Tsinghua Univ ersity . He is currently a delegate to the Beijing People's
( ) Congress and a member of the Chinese People's Political Consultativ e Committee (CPPCC).
He receiv ed a bachelor's degree in Management Information Sy stems from Tsinghua
Univ ersity , and Ph.D. in Economics from Harv ard Univ ersity .
Mr. Haoy u Shen 44 CEO of J D Mall Mr. Shen has serv ed as CEO of J D Mall since Apr 2014. In Aug 2011-Apr 2014, he was
( ) (B2C business COO in charge of supply chain management and customer serv ice functions. Prev iously ,
group) Mr. Shen worked at Baidu (2007-2011) and American Express (2011-2007). He receiv ed a
bachelor's degree in International F inance from People's Univ ersity of China, and MBA
degree from Univ ersity of Iowa. He is a CF A Charterholder.
Mr. Ye Lan 44 Chief Marketing Mr. Lan has serv ed as CMO since F eb 2012, in charge of procurement, sales, marketing
( ) Officer (CMO) and public relations functions. He has >18 y ears of experience in sales and marketing. Prior
to joining J D.com, he was Executiv e V ice President in China at Acer Group (2010-2012),
President and CEO of F ounder Technology Group (2008-2010), and Lenov o Group
(1993-2008). He receiv ed EMBA degree from Tsinghua Univ ersity .
Ms. Yu Long 39 Chief Human Ms. Long has serv ed as Chief Human Resources Officer and General Counsel since Aug
( ) Resources Officer 2012. Prev iously , she was Senior V ice President at UTStarcom Holdings (2010-2012). She
& General Counsel receiv ed her bachelor's degree in Economics Law from China Southwest Political & Law
Univ ersity , and EMBA degree from China Europe International Business School. She is a
qualified attorney in the PRC.
Mr. Sidney Xuande 49 CF O Mr. Huang has serv ed as CF O since Sep 2013. Prev iously , he was CF O of Pactera
Huang ( ) Technology (2006-2013). Mr. Huang is currently Director of Bitauto Holdings. He receiv ed
bachelor's degree in Accounting from Bernard M. Baruch College, and MBA degree from
Kellogg School of Management at Northwestern Univ ersity .
Mr. Shengqiang 38 CEO of Internet Mr. Chen has serv ed as CEO of Internet F inance Group since Sep 2013. He has >15 y ears
Chen F inance of experience in F inance and Accounting Management. He was CF O of J D.com (Mar
( ) 2012-Sep 2013), F inance V ice President (J an 2009-Mar 2012), and F inance Controller
(Apr 2007-Dec 2008). He receiv ed a bachelor's degree in Accounting from Beijing
Technology & Business Univ ersity , and MBA degree from Beijing Institute of Technology .
He has also completed his studies at the EMBA Program of China Europe International
Business School.
Mr. Daxue Li 44 Senior V ice Mr. Li is in charge of R&D and IT infrastructure. He joined J D.com in May 2008. Prev iously ,
( ) President of he was V ice President of China Popular Computer Week Management Co. (2006-2008),
Technology and Chief Technology Officer of Tianji Media Group (1999-2005). He receiv ed bachelor's
degree from Shandong Univ ersity , and master's degree from Chongqing Univ ersity .
Source: Company
Page 51
Industry Focus
Key Assumptions
FY Dec 2012A 2013A 2014F 2015F 2016F
GMV - online direct sales
56.7 93.7 148.7 223.0 317.6
(RMB bn)
GMV - online
16.6 31.8 89.8 163.6 257.7
marketplace (RMB bn)
GMV (RMB bn) 73.3 125.5 238.6 386.6 575.3
Segmental Breakdown (RMB m)
FY Dec 2012A 2013A 2014F 2015F 2016F

Revenues (RMB m)
Services & other incomes 1,046 2,322 6,060 11,363 18,411
Total 41,381 69,340 112,437 170,845 245,566
Gross profit (RMB m)
Services & other incomes 1,046 2,322 6,060 11,363 18,411
Total 3,483 6,844 12,653 21,248 32,718
Gross profit Margins (%)
Online direct sales 6.0 6.7 6.2 6.2 6.3
Total 8.4 9.9 11.3 12.4 13.3
Note: Services & other incomes are mainly from online marketplace, and margins are high.
Page 52
Industry Focus
Income Statement (RMB m) Margins Trend

FY Dec 2012A 2013A 2014F 2015F 2016F 1.0%
Revenue 41,381 69,340 112,437 170,845 245,566 -1.0% 2012A 2013A 2014F 2015F 2016F
Cost of Goods Sold (37,898) (62,496) (99,784) (149,597) (212,848)
-3.0%
Gross Profit 3,483 6,844 12,653 21,248 32,718
-5.0%
Other Opng (Exp)/Inc (5,206) (7,149) (13,436) (21,920) (31,993)
-7.0%
Operating Profit (1,724) (305) (783) (672) 724
Other Non Opg (Exp)/Inc 60 194 80 0 0 -9.0%
Associates & JV Inc 0 0 0 0 0 -11.0%
Net Interest (Exp)/Inc 167 335 483 498 556 -13.0%

Dividend Income 0 0 0 0 0
Exceptional Gain/(Loss) (1,814) (2,709) (12,916) (2,093) (2,522) Operating Margin % Net Income Margin %
Pre-tax Loss (3,310) (2,485) (13,135) (2,266) (1,242)

Tax (6) 0 (4) 0 0
Minority Interest 0 0 0 0 0
Preference Dividend 0 0 0 0 0
Net Loss (3,316) (2,485) (13,139) (2,266) (1,242)
Core Profit (non-GAAP) (1,502) 224 (223) (173) 1,280
EBITDA (1,478) 182 1,366 1,545 3,126
Growth
Revenue Gth (%) 95.8 67.6 62.2 51.9 43.7
EBITDA Gth (%) (23.6) N/A 651.5 13.1 102.3
Opg Profit Gth (%) N/A N/A N/A N/A N/A
Net Profit Gth (%) N/A N/A N/A N/A N/A
Margins & Ratio

Gross Margin (%) 8.4 9.9 11.3 12.4 13.3
Opg Profit Margin (%) (4.2) (0.4) (0.7) (0.4) 0.3
Net Profit Margin (%) (8.0) (3.6) (11.7) (1.3) (0.5)
ROAE (%) (180.1) (47.2) (68.7) (8.1) (4.8)
ROA (%) (23.3) (11.3) (33.3) (4.0) (1.9)
ROCE (%) (26.1) (3.5) (3.9) (2.3) 2.6
Div Payout Ratio (%) N/A N/A N/A N/A N/A
Net Interest Cover (x) NM NM NM NM NM
Note: Core profit excludes one-off / non-cash items such as losses from preferred share redemption, share-based compensation and amortization of
intangibles.
Page 53
Industry Focus
Interim Income Statement (RMB m)

FY Dec 1H2013 2H2013 1H2014
Revenue 31,178 38,162 51,270

Cost of Goods Sold (28,150) (34,346) (45,854)
Gross Profit 3,028 3,816 5,416
Other Oper. (Exp)/Inc (3,128) (4,021) (5,771)
Operating Profit (100) (205) (355)
Other Non Opg (Exp)/Inc 93 101 20
Associates & JV Inc 0 0 0
Net Interest (Exp)/Inc 129 206 240
Exceptional Gain/(Loss) (1,556) (1,154) (12,242)
Pre-tax Loss (1,433) (1,052) (12,338)
Tax (3) 3 3
Minority Interest 0 0 0
Net Loss (1,436) (1,049) (12,335)
Core Profit (non-GAAP) 119 105 (93)
Growth
Revenue Gth (%) N/A N/A 64.4
Opg Profit Gth (%) N/A N/A N/A
Net Profit Gth (%) N/A N/A N/A
Margins
Gross Margin (%) 9.7 10.0 10.6
Opg Profit Margin (%) (0.3) (0.5) (0.7)
Net Profit Margin (%) (4.6) (2.7) (24.1)
intangibles.
Page 54
Industry Focus
Quarterly Income Statement (RMB m)

FY Dec 1Q2014 2Q2014 3Q2014
Revenue 22,657 28,613 29,012

Cost of Goods Sold (20,396) (25,458) (25,468)
Gross Profit 2,261 3,155 3,544
Other Oper. (Exp)/Inc (2,399) (3,372) (3,416)
Operating Profit (138) (217) 129
Other Non Opg (Exp)/Inc (39) 59 59
Associates & JV Inc 0 0 0
Net Interest (Exp)/Inc 93 147 190
Exceptional Gain/(Loss) (5,208) (7,034) (535)
Pre-tax Loss (5,292) (7,046) (158)
Tax 3 0 (6)
Minority Interest 0 0 0
Net Loss (5,289) (7,046) (164)
Core Profit (non-GAAP) (81) (12) 371
Growth
Revenue Gth (%) 65.1 63.9 60.8
Opg Profit Gth (%) N/A N/A N/A
Net Profit Gth (%) N/A N/A N/A
Margins
Gross Margin (%) 10.0 11.0 12.2
Opg Profit Margin (%) (0.6) (0.8) 0.4
Net Profit Margin (%) (23.3) (24.6) (0.6)
intangibles.
Page 55
Industry Focus
Balance Sheet (RMB m) Asset Breakdown

FY Dec 2012A 2013A 2014F 2015F 2016F Net Fixed
Debtors - Assets -
3.1% 12.8%
Net Fixed Assets 1,001 2,262 4,574 5,717 7,146
Invts in Associates & JVs 0 0 0 0 0 Assocs'/JVs -
0.0%
Other LT Assets 1,205 1,268 11,948 12,347 12,841
Cash & ST Invts 10,177 14,603 25,063 26,143 29,388
Inventory 4,754 6,386 8,893 12,923 17,512
Debtors 479 502 1,104 1,443 1,939 Inventory -
24.9%
Other Current Assets 269 989 1,231 1,575 2,000 Bank, Cash
and Liquid
Total Assets 17,886 26,010 52,812 60,148 70,828 Assets -
59.2%
ST Debt 867 933 1,166 1,458 1,822

Creditors 8,097 11,019 16,628 24,518 34,302
Other Current Liab 2,519 4,818 6,021 7,525 9,405
LT Debt 0 0 0 0 0
Other LT Liabilities 0 0 0 0 0
Shareholders Equity 6,403 9,240 28,997 26,647 25,300
Minority Interests 0 0 0 0 0
Total Cap. & Liab. 17,886 26,010 52,812 60,148 70,828
Non-Cash Wkg. Capital (5,114) (7,960) (11,421) (16,103) (22,254)

Net Cash/(Debt) 9,310 13,670 23,897 24,685 27,567
Debtors Turn (avg days) 3.2 2.6 2.6 2.7 2.5
Creditors Turn (avg days) 56.8 56.1 51.6 51.0 51.0
Inventory Turn (avg days) 36.4 32.7 28.5 27.0 26.4
Asset Turnover (x) 2.9 3.2 2.9 3.0 3.7
Current Ratio (x) 1.4 1.3 1.5 1.3 1.1
Quick Ratio (x) 0.9 0.9 1.1 0.8 0.7
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) 89.4 129.8 198.2 78.4 78.4
Z-Score (X) NA NA NA NA NA
Page 56
Industry Focus
Cash Flow Statement (RMB m) Capital Expenditure (RMB m)

FY Dec 2012A 2013A 2014F 2015F 2016F
2500
Pre-Tax Profit (1,723) (50) (5,177) (2,266) (1,242)
2000
Dep. & Amort. 186 293 2,069 2,217 2,402
Tax Paid 0 0 (4) 0 0 1500
Assoc. & JV Inc/(loss) 0 0 0 0 0 1000

(Pft)/ Loss on disposal of FAs 0 0 0 0 0
500
Chg in Wkg.Cap. 2,721 3,111 3,461 4,681 6,152
Other Operating CF 220 216 326 408 510 0
2012A 2013A 2014F 2015F 2016F
Net Operating CF 1,404 3,570 675 5,040 7,822
Capital Expenditure (-)
Capital Exp.(net) (775) (1,211) (2,312) (1,143) (1,429)
Other Invts.(net) (2,080) (800) (2,045) (987) (1,234)
Invts in Assoc. & JV 0 0 0 0 0
Div from Assoc & JV 0 0 0 0 0
Other Investing CF (514) (660) (9,039) (821) (1,026)
Net Investing CF (3,369) (2,671) (13,395) (2,951) (3,689)
Div Paid 0 0 0 0 0
Chg in Gross Debt 872 75 233 292 364
Capital Issues 1,571 2,720 32,963 0 0
Other Financing CF 410 0 (12,061) (2,288) (2,486)
Net Financing CF 2,854 2,795 21,136 (1,996) (2,122)
Currency Adjustments 1 (59) 0 0 0
Chg in Cash 889 3,635 8,415 92 2,012
Opg CFPS (RMB) (0.95) 0.33 (2.02) 0.26 1.21
Free CFPS (RMB) 0.46 1.71 (1.18) 2.82 4.63
Page 57
Industry Focus
Appendix
China internet sector Total revenue size Revenue breakdown for China internet sector (2013)
RMB bn
CAGR= 28% %
2,000 52% 60%
51% 1,723
1,800 Online ads
50% Online
1,600 21%
Online payment
1,400 38% 3%
40% games
1,200 15%
1,000 826 30%
800 600
20% Others
600 398 6%
400 262
10% E-commerce
200 55%
0 0%
2011 2012 2013 2014F 2017F
Market size (LHS) Growth y-o-y (RHS)
Note: E-commerce only captures revenue, instead of gross merchandise

value (GMV).
Source: iResearch Source: iResearch
Number of netizens & mobile netizens in China Number of e-commerce customers in China
m m
60%
700 618 632 450 70%
564 390
600 527 400 49% 60%
513 500
500 457 350 302
420 43% 50%
384 300 38%
400 356 35% 242
298 303 250 40%
300 194
233 200 161 30%
200 118 150
20%
100 100
50 10%
0
0 0%
Jun-14
2008
2009
2010
2011
2012
2013
2010 2011 2012 2013 2014F

Number of customers (LHS)
Netizen Mobile netizen As % of total netizen (RHS)
Source: CNNIC Source: CNNIC
Page 58
Industry Focus
E-commerce market size in China E-commerce market size in China (quarterly)
RMB bn RMB bn
75% 5,634 80%
6,000 70% 800 81% 90%
59% 4,772 70% 700 68% 80%
5,000 64%61%
51% 60% 600 70%
4,000 46% 3,780 51% 50% 60%
50% 500 44%46%
37% 43%42% 50%
3,000 2,760 40% 400
26% 31% 40%
1,892 30% 300
2,000 18% 30%
1,187 20% 200
785 20%
1,000 461 10% 100
217 260 287 422 364 427 462 640 525 624 691 10%
0 0% 0 0%
2010
2011
2012
2013
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
2014F
2015F
2016F
2017F
E-commerce market size (LHS) Growth y-o-y (RHS) E-commerce market size (LHS) Growth y-o-y (RHS)
Note: In terms of gross merchandise value (GMV). Note: In terms of gross merchandise value (GMV).
Breakdown of China e-commerce market B2C market share breakdown (2013)
Tencent B2C
100% 5.6%
90%
Suning.com
80% 42% 40% 3.7%
52% 46%
70% 65% 60%
75% JD.com Amazon
60% 86% 16.4% China
50% 2.0%
40% VIPShop
1.9%
30% 58% 61%
48% 54% Dang Dang
20% 35% 40% Others
25% 1.6%
10% Tmall 7.6% GOME
14%
0% 57.7% 1.6%
2014F
2015F
2016F
2017F
2010
2011
2012
2013
Yihaodian
VANCL 1.3%
0.6%
B2C C2C
Note: B2C Business to consumers; C2C Consumers to consumers. Note: In terms of gross merchandise value (GMV).
Page 59
Industry Focus
China: Mobile operating system (OS) market share (2013) China: Preferred mobile internet connections (1H14)
60% 55%
50%
Windows
2%
Apple iOS 40%
23%
Symbian 30%
0.4%
Others
7% 20% 17%
Android 15%
68%
10% 6%
0%
Wifi 4G 3G 2G & 2.5G
Source: CNNIC Source: CNNIC survey (sample size = 30,000)
China: Breakdown of mobile internet users by city tier China: Pattern of internet usage between urban & rural
(1H14) netizens (2013)
F unc t ion Urban Rural Dif f erenc e

usage usage (A - B)
(A ) (B)
4th-tier & Instant messaging 86.3% 86.0% 0.3%
below 1st-tier Blogs 70.9% 70.5% 0.4%
40% cities Group buy ing 25.4% 15.2% 10.2%
13%
Music 77.3% 66.9% 10.4%
Games 58.4% 46.7% 11.7%
Search 82.8% 70.5% 12.3%
V ideo 74.4% 55.0% 19.4%
2nd & 3rd-
tier cities Online pay ment 47.9% 25.7% 22.2%
47% E-commerce 55.2% 31.1% 24.1%
Note: Percentage of respondents that had used the function.
Source: Enfodesk Source: CNNIC survey (sample size = 30,000)
Page 60
Industry Focus
China: Paid service categories for mobile netizens (1H14) Number of mobile game users in China
70% 62% m
60% 250 50%
215
50% 200 40%
33% 43%
40% 30%
34% 139
31% 150 26% 30%
30% 25% 107
19%
18% 100 78 20%
20% 14%
10% 7% 45
50 10%
0%
management
0 0%
Education
network
Games
Readings
News
Life-style
Social
2009 2010 2011 2012 2013

Time
Mobile game users (LHS)

As % of mobile netizen (RHS)
Note: Among all the respondents that had paid for internet services.
Source: CNNIC survey (sample size = 30,000) Source: CNNIC
Popularity of mobile games by genre (1H14) Reasons to choose game platforms (2013) Strong
influence from social networks
M ult i- play er game Single- play er game

60%
Parkour ( ) 48% Chess & cards 47% 50%
Chess & cards 46% Racing 47% 50%
Racing 44% Casual 47% 40%
Music 38% Parkour ( ) 45% 31% 31%
Shooter 31% Music 37% 30% 24% 23% 21%
Casual 30% Puzzle 30% 20% 12%
Puzzle 27% Shooter 26%
10%
RPG 26% Strategy 25%
Strategy 20% RPG 25% 0%
Brand awareness
Game variety
Free resources
Game quality
Easy to operate
Easy to register
Friends are using
Adv enture 19% Adv enture 25%

F ighting 16% F ighting 20%
Sports 15% Sports 15%
Note: Percentage of respondents that had played the genre of game. Note: Percentage of respondents that agreed with the reason.
Source: CNNIC survey (sample size = 30,000) Source: CNNIC survey (sample size = 30,000)
Page 61
Industry Focus
Purpose to pay for mobile games (2013) Payment methods in mobile games
100% 60% 52%

77% 47% 44%
80% 50% 43%
40%
60%
30% 26% 24% 23%
40% 18% 16%
27% 25% 22% 20% 13% 13% 11%
18%
20% 13% 10% 5.4% 6.6%
0% 0%
Pay via Telecom
Tenpay ()
Credit cards
Mobile accounts
Online banking
Point cards /
Alipay ()
Recharge accounts
Purchase game cards

Activate checkpoints
Purchase weapons &
Subscription services
Pay to down games
Q Coin
operators
in games
items
2012 2013
Note: Among all the respondents that had paid for mobile games. Note: Among all the respondents that had paid for mobile games.
Factors to consider when purchasing online (2013) Percentage of e-commerce customers that have made
purchases via mobile devices
100% 7% 5% 50% 46%

8% 7%
80% 8% 8%
9% 40%
60%
17% 28%
40% 22% 30%
23%
20% 38%
25%
20%
0%
Familiar products Unfamiliar products
User feedback Website awareness 10%
Price Past experience
Brand Logistics & services
0%
Others
2012 2013
Note: Percentage of respondents that would consider the factor. Note: Among all the respondents that had made online purchases.
Page 62
Industry Focus
Penetration of instant messengers (1H14) Penetration of social network websites (1H14)
80% 78% 60% 57.3%

70% 65%
50%
60%
50% 21% 40%
15%
40% 10.2% 30%
30% 9.8% 20% 16.4% 14.8%
20% 5.6% 2.9% 2.7% 10.2% 9.3% 8.5% 8.3%
1.8% 10% 6.1%
10% 4.2% 2.7% 1.8% 0.6%
0% 0%
QQ Talk (QT )
Laiwang ()
Whatsapp
Renren Desktop
Pengyou ()
Papa ()
Renren ()
Ali Wangwang
QQ
Qzone (QQ)
YY
Feixin ()
Skype
Miliao ()
Yixin ()
51.com (51)
Kaixin ()
Weixin
Douban ()
Weishi ()
Immomo ()
Line
Note: Percentage of respondents that had used the product. Products in Note: Percentage of respondents that had used the product. Products in
red are invested by Tencent. red are invested by Tencent.
China: Market share of app stores (1H14) China: Market share of mobile app (1H14)
Wandoujia Sogou Map

Tencent (Mobile () ()
Housekeeper & 8% Mobile's own 10%
YingYongBao) app stores
7% AMAP Google Map
15% 9%
()
Apple App Store 21%
Qihoo (360 7%
PP Assistant Tencent Map
Mobile Assistant)
(PP) 8%
19%
5%
Tiger Map
Anzhi App
Market ()
() Baidu Map Others 3%
3% 42% 6%
Others China Mobile's
Baidu (Baidu & 7% China Mobile's Map
91 Wireless) AppChina app store
() ()
25% 2% 1%
2%
Source: CNNIC Source: CNNIC
Page 63
Industry Focus
Ranking of popular apps in China (1H14)
M ale F emale
A ge 24 & below 25- 40 41 & abov e A ge 24 & below 25- 40 41 & abov e
1 QQ Weixin Weixin QQ Weixin Weixin
2 Weixin QQ QQ Weixin QQ QQ
3 UC Browser UC Browser QQ Browser Qzone Taobao 360 Mobile

Security
4 Qzone QQ Browser 360 Mobile Taobao QQ Browser Taobao
Security
5 QQ Browser Tencent Mobile Tencent Mobile Weibo Qzone QQ Browser
Housekeeper Housekeeper
( ) ( )
6 Tencent Mobile 360 Mobile UC Browser Tencent Mobile Tencent Mobile Tencent Mobile
Housekeeper Security Housekeeper Housekeeper Housekeeper
( ) ( ) ( ) ( )
7 Taobao Taobao Tencent News QQ Browser 360 Mobile Tencent News
Security
8 Youku V ideo Tencent Baidu UC Browser Sogou Piny in Sogou Piny in
YingYongBao
( )
9 Tencent Tencent News 360 Mobile Youku V ideo UC Browser Qzone
YingYongBao Security
( )
10 360 Mobile Security Qzone Tencent Sogou Piny in Weibo UC Browser
YingYongBao
( )
Source: EnfoDesk
Page 64
Industry Focus
Tencents major M&As (since 2012)
D at e B u y er D eal Seller Cat eg o ry In v est men t D et ails D ev elo p men t

siz e
Oct 2014 Tencent 7% stake in China n.a. Lottery HK$446m China LotSy nergy mainly prov ides technology and serv ices for n.a.
LotSy nergy lottery sy stems, terminal equipment, gaming products and
( ; 1371.HK) operations in China. It was transferred to Main Board of HK
Stock Exchange (from GEM Board) in Oct13. Tencent has
option to increase its stake to 10%.
Oct 2014 Tencent Inv ested in Guahao.com n.a. Healthcare n.a. Guahao.com is a leading healthcare appointment website in n.a.
( ) China.
Sep 2014 Tencent Inv estsed in DXY.cn n.a. Healthcare c.US$70m DXY.cn is the largest online professional social network in the Tencent may explore potentials in prov iding
( ) healthcare industry in China. healthcare information on Weixin and
Mobile QQ.
J un 2014 Tencent 24% stake in 58.com n.a. LBS >US$830m 58.com is China's largest online marketplace serv ing local 58.com could receiv e traffic from Tencent's
(58 ; NYSE: WUBA ) merchants; Tencent raised its stake to 24% (16% of v oting platforms, and cooperate in O2O.
rights).
J un 2014 Tencent 0.1% stake in CITIC n.a. Conglomerate US$50m CITIC Group is the leading financial and industrial conglomerate Tencent has cooperated with CITIC Bank in
Group (267.HK) in China. internet finance (e.g. WeChat Credit Card).
May 2014 Tencent 11% stake in Nav Info China Surv ey LBS RMB1.2bn Nav Info is one of the leading prov iders of digital map, Nav Info prov ides map data for Tencent
( ; 002405.CH) ( ) telematics, dy namic traffic information serv ice and big data Map. Both companies launched car internet
v ertical application serv ices in China. product WeDriv e ( ) in Oct14.
May 2014 Tencent c.18% stake in J D.com n.a. E-commerce n.a. A cquired 15% stake in Mar14 by cash, certain e-commerce Tencent offers "Lev el-1 access" at Weixin
assets, and 10% stake in Yixun; J D.com could acquire 90% and Mobile QQ to J D.com. It also promotes
stake of Yixun at the higher of RMB800m and its fair v alue. J D.com on its other key platforms.
Tencent acquired another 5% stake of J D.com for US$1.3bn in
May 14 (c.18% stake in total, after dilutions).
Mar 2014 Tencent 15% stake in Leju E-House ( ; LBS US$180m Leju is a leading prov ider of real estate online serv ices including Leju could receiv e user traffic from
( ) NYSE: EJ ) adv ertising, listings and product launch information, and O2O e- Tencent's Weixin, contact customers v ia
commerce serv ices. Leju was listed on NYSE in A pr 2014. Weixin's Official A ccounts, and settle v ia
Weixin Pay ment.
Mar 2014 Tencent 28% stake in CJ Games CJ E&M Games KRW533bn CJ Games is an online and mobile game dev eloper and publisher CJ Games to dev elop game titles, to be
in South Korea. published and distributed by Tencent.
Mar 2014 Tencent Controlling stake in n.a. E-commerce n.a. Mmb.cn is an e-commerce operator with focus in mobile e- Mmb.cn could access to Tencent's QQ
Mmb.cn ( ) commerce in low-tier markets, with an edge in sales of mobile customer base.
phones.
Page 65
Industry Focus
Tencents major M&As (since 2012, continued)
D at e B u y er D eal Seller Cat eg o ry In v es t men t D et ails D ev elo p men t

s iz e
F eb 2014 Tencent 20% stake in n.a. LBS c.US$400m Dianping is China's leading online prov ider of merchant Dianping w ould receiv e user traffic from
Dianping.com ( information, consumer ratings, group-buy ing, online restaurant Tencent's Weixin and M obile QQ platforms;
) reserv ation, take-aw ay serv ice, e-coupon promotions and other it w ould also ride on Weixin Pay ment.
O2O serv ices. Should Dianping hav e IPO, Tencent could raise
another 5% stake.
F eb 2014 Tencent Increased its stake in n.a. Trav el n.a. LY.com is one of China's leading online prov iders of trav el LY.com has access points at Weixin in
LY.com ( ) to serv ices, w ith an edge in ticketing of tourist attractions. A pr14. LY.com promotes Weixin Pay ment
c.20% Tencent inv ested in LY.com in M ay 12. as the preferred pay ment method.
J an 2014 Tencent c.12% stake in China n.a. Logistics c.HK$2.3bn China South City (CSC) is one of the leading dev elopers and CSC may ride on Weixin's customer base,
South City ( ; operators of large-scale integrated logistics and trade centers in and potentially cooperate w ith J D.com's
1668.HK) China. deliv ery netw ork.
J an 2014 Tencent Increased its stake in Didi n.a. LBS Tencent Didi Taxi is one of the leading taxi-booking apps in China. Didi Taxi has access points at Weixin.
Taxi ( ) inv ested a Tencent inv ested c.US$15m in M ay 2013. Tencent could promote Weixin Pay ment v ia
total of Didi Taxi.
US$45m
Dec 2013 Tencent Cy anogenMod n.a. Mobile softw are n.a. Cy anogenMod is a dev eloper of mobile open source ROM n.a.
sy stems based in the US.
Dec 2013 Tencent QuizUp n.a. Games n.a. QuizUp is a mobile game dev eloper based in the US. n.a.
Dec 2013 Tencent Inv ested in How buy n.a. Wealth n.a. How buy is one of the leading 3rd-party inv estment consultancy How buy launched the first fund trading
( ) management firms in China, and w as granted 3rd-party fund sales license in platform on Weixin in A ug13.
F eb12.
Nov 2012 Tencent Inv ested in Meilishuo n.a. E-commerce n.a. One of the leading female fast-fashion e-commerce platforms in Tencent prov ides access points for
( ) China. Meilishuo.com in Mobile QQ.
Sep 2013 Tencent c.37% stake in Sogou Sohu.com ( ; Search RMB3.2bn Sogou is one of the leading search serv ice prov iders in China. Sogou prov ides search serv ices to Tencent's
( ) NYSE: SOHU) Tencent has 25% v oting rights. Tencent's Soso.com and QQ products such as Weixin, QQ, Qzone,
Piny in (QQ ) w ere incorporated into Sogou. QQ.com, QQ Explorer, etc. Tencent directs
user traffic to Sogou.
J ul 2013 Tencent c.6% stake in A ctiv ision V iv endi SA (EPA : Games US$1.4bn A ctiv ision Blizzard (A B) is one of the w orld's largest game Tencent partners w ith A B to bring A B's
Blizzard (NA SDA Q: V IV ) dev elopers and publishers. "Call of Duty Online" game to China.
A TV I)
J un 2013 Tencent Raised stake in Cheetah Kingsoft Mobile softw are RMB290m Cheetah Mobile (CM) is 2nd-largest internet security softw are Tencent pay s CM to promote its products
Mobile (NYSE: CMCM) (3888.HK) prov ider in China, w ith good ov erseas exposure. on CM 's platforms.
by 8ppts to 18%
Page 66
Industry Focus
Tencents major M&As (since 2012, continued)
D at e B u y er D eal Seller Cat eg o ry In v es t men t D et ails D ev elo p men t

s iz e
J un 2013 Tencent Inv ested in US e- n.a. E-commerce n.a. F ab.com is a leading e-commerce platform for designer products Tencent w ould take a board seat in
commerce operator based in the US. F ab.com, and helps its expansion into A sia.
F ab.com
Sep 2012 Tencent 100% stake in TongCard DF J & Shenzhen A dv ertising & c.US$10m TongCard is one of the leading prov iders of CRM (Customer Tencent could enhance its CRM serv ices to
( ) Capital Group promotion Relationship Management) in China, w ith an edge in membership its customers (i.e. offline stores).
promotion for the catering industry .
J ul 2012 Tencent <20% stake in Caixin n.a. Media c.RMB60m Caixin Media is a multimedia platform in China w ith an edge in Caixin Media could be a content prov ider
Media ( ) financial new s reports. for Tencent New s.
J ul 2012 Tencent Inv ested in Lew a n.a. Mobile softw are c.RMB50m Lew a is a leading 3rd-party mobile ROM sy stem dev eloper in Lew a's Lew aOS could cooperate w ith
( ) China. Tencent WeSecure ( )
J un 2012 Tencent 48% stake in Epic n.a. Games RMB2.1bn Epic Games is a US dev eloper in game engine technology Epic could ride on Tencent's distribution
Games ("Unreal Engine") and game titles (e.g. Gears of War, Unreal, channels to access the A sian market.
Unreal Tournament, Infinity Blade).
May 2012 Tencent A cquired Yixun.com n.a. E-commerce c.RMB500m Yixun.com is a B2C online retailer in China. Tencent has inv ested J D.com acquired 10% stake in Yixun.com
( ) in Yixun.com since 2010. in Mar 2014, w ith options to acquire its
remaining stake.
A pr 2012 Tencent A cquired 14% stake in n.a. Social netw ork RMB401m Daum Kakao mainly prov ides instant messaging and content Tencent's mobile game could introduce
Kakao Corp (now Daum distribution serv ices v ia its KakaoTalk app. successful games on KakaoTalk.
Kakao)
J an 2012 Tencent A cquired 49% stake in MIH (major Games RMB348m Lev el Up is a publisher of online games and game magazines Lev el Up could help Tencent identify
Lev el Up International shareholder of based in Singapore. Tencent has options to increase its stake to opportunities in online game sector in
Tencent) 67%. Emerging Markets like Brazil and Philippines.
J an 2012 Tencent 8% stake of ChinaV ision n.a. Media HK$248m The company is mainly engaged in media-related businesses, ChinaV ision Media w as acquired by A libaba
Media (1060.HK) including production, publishing and distribution of TV dramas Group in Mar14 (subsequently renamed to
and mov ies, as w ell as other operations. A li Pictures), and Tencent sold its stakes.
Page 67
Industry Focus
Tencents service offerings
Communic at ions:
Name M onet iz at ion User Base
QQ IM F ree 820m MAU (3Q14)

542m MAU from smart dev ices (3Q14)
Weixin & WeChat F ree 468m combined MAU (3Q14)
V alue A dded Serv ic es (V A S):

F ee-based V AS registered subscriptions as of J un14: 88m
a) Soc ial Net w ork s:
QQ Membership RMB10 per month Not disclosed

Super V IP RMB20 per month Not disclosed
Qzone F ree; monthly subscription fee for V IP priv ileges (RMB10); and items 629m MAU (3Q14)
sales from apps on open platform
Tencent Microblog F ree 157m MAU (2Q14)
QQ Show (Av atars) F ree; monthly subscription fee for V IP priv ileges (RMB10); or item sales Not disclosed
QQ Music F ree; monthly subscription fee for V IP priv ileges (RMB10); or item sales Not disclosed
QQ Mail F ree 227m MAU (2Q14)
Mobile V AS Monthly subscription fee for V IP priv ileges (RMB5-15); or item sales Not disclosed
(RMB1- 2 per item)
b) Online G ames:
QQ Game Platform Monthly subscription fee for V IP priv ileges (RMB10-15) or item sales Not disclosed
ACGs Monthly subscription fee for V IP priv ileges (RMB10-30) or item sales Combined ACU of 7.7m (3Q14)
(See Table 2)
MMOGs Monthly subscription fee for V IP priv ileges (RMB20) or item sales; Time- Combined ACU of 1.7m (3Q14)
based (See Table 3)
Mobile Games Monthly subscription fee for V IP priv ileges (RMB10) or item sales Not disclosed
O nline A dv ert ising:

Brand display Inv entories on QQ.com and v erticals; regional portals; online v ideo Ov er 1,000 brand display adv ertisers as
platform; QQ IM; Tencent News app, etc. of 3Q14
Pricing mainly by CPT or CPD.
Performance display Inv entories mainly on social networks: Qzone, QQ IM, Weixin Official
Accounts, and Microblog, etc.
Pricing mainly by CPC or CPA through bidding sy stem.
Note: MAU - Monthly active users; PCU - Peaking concurrent users; ACU - Average concurrent users; ACGs - Advanced Casual Games; MMOGs
Massively Multiplayer Online Games; CPT - Cost per time; CPD - Cost per day; CPC - Cost per click; CPA - Cost per action.
Source: Company
Page 68
Industry Focus
Tencents Advanced Casual Games (ACGs)
G ame T it le Commerc ial Dev eloper G enre Charging M odel PCU M ilest one
L aunc h
Commerc ializ ed:
QQ Tang 1Q05 In-house Casual sty le combat F ree; monthly subscription fee for V IP N/A
QQ priv ileges (RMB10); or item sales
R2beat 3Q06 Licensed Roller-blade racing F ree; monthly subscription fee for V IP N/A
QQ Speed 1Q08 In-house Car racing F ree; monthly subscription fee for V IP 3m as of 3Q12
QQ Dancer 2Q08 In-house Music and dancing F ree; monthly subscription fee for V IP 3m as of 4Q12
Crossfire 3Q08 Licensed F PS F ree; monthly subscription fee for V IP 4m as of 3Q12
priv ileges (RMB30); or item sales
A.V .A. (Alliance of 1Q10 Licensed High-end F PS F ree; monthly subscription fee for V IP N/A
V alient Arms) priv ileges (RMB30); or item sales

League of Legends 3Q11 In-house MOBA F ree; item-based 8m as of 1Q14
(Riot Games) globally
Assault F ire 3Q12 In-house F PS F ree; item-based N/A
Warface 1Q13 Cry tek F PS F ree; item-based N/A

QQ Dancer 2 1Q13 In-house Music and dancing F ree; monthly subscription fee for V IP N/A
QQ 2 priv ileges (RMB10); or item sales
NBA2K online 2Q13 Co-dev eloped Sports F ree; item-based N/A
with Take-Two
War of Zombie 2Q13 Licensed Zombie theme F PS F ree; item-based N/A

F reesty le F ootball 2Q14 Licensed Sports TBC N/A

F IF A Online 3 2Q14 Licensed Sports TBC N/A

Age of Gunslinger 3Q14 In-house Third-person Shooter TBC N/A

Pipeline:
Call of Duty Online TBC Licensed High-end F PS TBC N/A
Online
Core F ight TBC In-house 2D side-scrolling TBC N/A
fighting game
Metro Conflict: Presto TBC Licensed Science fiction theme TBC N/A
F PS
Three Kingdoms TBC In-house RTS TBC N/A
Online
SMITE TBC Licensed 3D MOBA TBC N/A

Note: ACG - Advanced Casual Games; PCU - Peaking concurrent users; FPS - First-person Shooter; MOBA - Multiplayer Online Battle Arena; RTS -
Real-time Strategy.
Source: Company
Page 69
Industry Focus
Tencents Massively Multiplayer Online Games (MMOGs)

G ame T it le Commerc ial Dev eloper Desc ript ion Charging M odel PCU
L aunc h M ilest one
Commerc ializ ed:
QQ F antasy 4Q05 In-house 2D Chinese my thology cartoon- Time-based; Item-based N/A
QQ sty le
QQ SanGuo 3Q07 In-house 2D light MMORPG, ancient F ree; item-based N/A
QQ Chinese history story line
QQ Huaxia 3Q07 In-house 2D hard-core fighting MMORPG F ree; item-based N/A
QQ
Dungeon & F ighter 2Q08 Licensed 2D side-scrolling action F ree; monthly subscription fee for V IP 3m as of
priv ileges (RMB20); or item sales 3Q12
J ourney to the F airy land 4Q08 Licensed 3D Chinese my thology water- F ree; monthly subscription fee for V IP N/A
colour painting sty le MMORPG priv ileges (RMB20); or item sales
Hero Island 3Q09 In-house 2D fighting cartoon sty le F ree; item-based N/A
MMORPG
Dragon Power 2Q10 Licensed 2D hard-core fighting Chinese-sty le F ree; item-based N/A
MMORPG
World of F antasy 2Q10 In-house 2D community -based Chinese F ree; item-based N/A
fantasy story line cartoon-sty le
MMORPG
World of West 1Q11 Licensed 3D Chinese fantasy story line F ree; item-based N/A
QQ cartoon-sty le MMORPG, based on
"J ourney to the West"
QQ Xian Xia Zhuan 3Q11 In-house 3D community -based ancient F ree; item-based N/A
QQ Chinese fantasy MMORPG
Lineage 1 1Q12 Licensed 2D hard-core fighting MMORPG F ree; item-based N/A
1
Continent of the Ninth 2Q12 Licensed 3D action, high-end v isual and F ree; item-based N/A
console sty le MMORPG
Legend of Yulong 3Q12 In-house 3D fighting MMORPG, based on F ree; item-based 800,000 as of
ancient Chinese history culture of 3Q13
the Warring States period
Legend of Xuany uan 4Q12 In-house 3D fighting MMORPG, based on F ree; item-based N/A
ancient Chinese my thology
Lineage II 2Q13 Licensed 3D fighting MMOG F ree; item-based N/A
2
QQ F airy 1Q13 In-house 3D Turn-based ( ) casual- F ree; item-based N/A
QQ ty pe MMOG
Asura 3Q13 In-house 2.5D action MMORPG, based on F ree; item-based 600,000 as of
ancient Chinese my thology 4Q13
Game of Gods 3Q13 In-house 2D side-scrolling action MMOG F ree; item-based N/A
QQ
Blade & Sword II 4Q13 Licensed 3D fighting MMOG F ree; item-based N/A
2
Blade & Soul 4Q13 Licensed 3D fantasy martial arts sty le F ree; monthly subscription fee for V IP 1.5m as of
fighting MMOG priv ileges (RMB9.8); or item sales 1Q14
Pipeline:
ArcheAge TBC Licensed 3D fighting MMORPG TBC N/A

Kritika TBC Licensed 3D cartoon sty le fighting action TBC N/A

Monster Hunter Online TBC Licensed 3D fighting MMORPG TBC N/A
OL
Moonlight Blade TBC In-house 3D martial arts sty le MMORPG TBC N/A

My stic F ighter TBC Licensed 2D arcade game sty le action TBC N/A
MMOG
Sura TBC Licensed 3D next-generation high-end TBC N/A
fighting MMOG
Note: MMOG - Massively Multiplayer Online Games; MMORPG - Massively Multiplayer Online Role-playing Games.
Source: Company
Page 70
Industry Focus
Tencents mobile games on Mobile QQ / Weixin Game Centres
Commerc ial
Game T it le L aunc h Dev eloper G enre Charging M odel M ilest one
Commerc ializ ed:
Timi Match Ev ery day 3Q13 In-house Puzzle F ree; item-based Registered user accounts ov er
40m as of Aug 2013;
Timi Link Ev ery day 3Q13 In-house Puzzle F ree; item-based N/A
Rhy thm Master 3Q13 In-house Music F ree; item-based N/A
Timi Run Ev ery day 3Q13 In-house Action F ree; item-based N/A
F ight the Landlord 4Q13 In-house Traditional board F ree; item-based N/A
& card
Plants V s Zombie 2 2 4Q13 Licensed Tower defense F ree; item-based N/A
We Heroes 4Q13 Licensed Card F ree; item-based N/A
Timi Speed Ev ery day 4Q13 In-house Action F ree; item-based N/A
We F ly 1Q14 In-house Shooter F ree; item-based Registered user accounts ov er
100m as of Mar 2014
Mahjong 1Q14 In-house Traditional board F ree; item-based N/A
& card
We Poker 1Q14 In-house Card F ree; item-based N/A
Tower of Sav iors 1Q14 In-house Puzzle & card F ree; item-based N/A
Thunder F ighter 1Q14 Licensed Shooter F ree; item-based Registered user accounts nearly
40m as of Apr 2014
We Dance 2Q14 In-house Music F ree; item-based N/A
Ev ery body PongPongPong 2Q14 Licensed Mini game F ree; item-based N/A
We Town 2Q14 In-house Simulation F ree; item-based N/A
We F ight 2Q14 In-house Action F ree; item-based N/A
Castle Clash 2Q14 Licensed Strategy F ree; item-based N/A
Taming Monster 2Q14 Licensed Action & card F ree; item-based N/A
All Men are Brothers 2Q14 In-house Card F ree; item-based N/A
My Elf 2Q14 In-house Simulation F ree; item-based N/A
J oy ful West 3Q14 In-house Card F ree; item-based N/A
QF arm 3Q14 In-house Simulation F ree; item-based N/A
Mini Empire 3Q14 Licensed Strategy F ree; item-based N/A
Candy Crush Saga 3Q14 Licensed Puzzle TBC N/A
MoDoo Marble 3Q14 Licensed Simulation F ree; item-based N/A
Pipeline:
Battle Of Sango TBC Licensed Card TBC N/A
F ruit Ninja TBC Licensed Action TBC N/A
Source: Company
Page 71
Industry Focus
Tencents other platforms
Desc ript ion Charging M odel PCU

Mini Casual Games Board, chess and card games, etc.; 130 mini casual F ree; RMB10, 15 and 50 per month for N/A
games as of 2Q14 V IP priv ileges or item sales
Web Games In-house & third-party web games; 75 web games as F ree; item-based N/A
of 2Q14
Commerc ial
G ame T it le L aunc h Dev eloper Desc ript ion Charging M odel PCU
Roco Kingdom 3Q10 In-house Community , targeting F ree; RMB10 per month for V IP priv ileges PCU ov er 1m
children (1Q13)
Plat f orm O pen dat e Remark

Qzone / Pengy ou 3Q10 c.400,000 registered apps; c.850,000
registered dev elopers (as of Apr 2013)
TenPay 3Q10 N/A
Tencent Microblog 4Q10 N/A
Discuz 2Q11 N/A
QQ Game Platform 3Q11 75 web games (2Q14); ranks No.1 in client
game / web game / mobile game in 2Q14
Tencent V ideo 2011 Ranked No.2 in Monthly Unique V isitors
(MUV ) in 2Q14
QQ Browser 2010 Ranked No.2 in mobile browser MAU in 2Q14
QQ.com n.a. No.1 portal in China by Page V isits (PV ) and
User V isits (UV ) for 2Q14
Source: Company
Page 72
Industry Focus
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STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
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FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
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Page 73
Industry Focus
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DBS Group Research . Equity 3 December 2014

The makings of an empire HSI: 23,654

Initiate coverage on Tencent with BUY, HK$148 TP Recommendation & valuation

Consolidations taking place 6

(A) Horizontal expansion Synergies emerging 10

(B) Vertical integration Riding on e-commerce value chain 13

Valuations & recommendations 16

Investment summary Horizontal expansion creates synergies. Cooperating closely

Decent growth in the internet sector. More and more people in

China internet sector Total revenue size

Total size (LHS) Growth y-o-y (RHS)

Source: PEdata.cn, ChinaVenture, DBS Vickers

Horizontal and vertical expansions. In our view, M&As and

Based on our analysis, Tencent has concluded >30 major M&As

Brief list: Major M&As by Tencent (since 2012)

Dat e Deal Cat egory Inv est ment siz e

Source: Companies, PEdata.cn, media websites, DBS Vickers

In e-commerce, Tencent has formed strategic cooperation with

Cross-sector expansion by Tencent

S ocial Online O nline E-

Source: Companies, DBS Vickers

That said, we believe the Tencent Family does not have

Tencent family could cover most of users needs

Ba nking / Investment J obs

Source: Companies, DBS Vickers

(A) Horizontal expansion Synergies emerging

its partners, we believe the companys horizontal expansion to

Tencents large user base to benefit its strategic partners

Note: Based on monthly active user (MAU) numbers in 3Q14.

Leju & LY.com: Mobile MAU.

Source: Companies, iResearch, DBS Vickers

Aiming to create the Super App. Mainly due to limitation on

Post-M&A synergies. To create cross-selling opportunities,

Take Weixins cooperation with LY.com () as an

Source: DBS Vickers

Case study: Weixins cooperation with LY.com

Source: DBS Vickers

More benefits emerge. Riding on its cooperation with Tencent,

Besides, the strategic partners have been promoting their

Source: Company websites

(B) Vertical integration Riding on e-commerce value

Note: In terms of gross merchandise value (GMV).

Realizing that cooperation with leading players could be a

Tencent familys e-commerce value chain

P a yment CO D / 3rd-party payment - Weixin Payment, Mobile

Logistics JD.com / China South City

Note: COD - Cash on delivery.

Source: Companies, DBS Vickers

Focusing on user experience. The ultimate goal of Tencent and

quality to e-commerce customers. In addition to synergies in e-

2nd & 3rd-

Note: In terms of user number.

Source: Enfodesk, DBS Vickers

Valuations & recommendations JD.com: 4Q14 previews. We expect JD.com to achieve

Tencent: 4Q14 & 2014 preview

RM B m 1Q14 2Q14 3Q14 4Q 14F 2014F Remark

G ro w t h ( y - o - y ) : 1Q14 2Q14 3Q14 4Q14F 2014F

Source: DBS Vickers

JD.com: 4Q14 & 2014 preview

RM B m 1Q 14 2Q 14 3Q 14 4Q14F 2014F R emark

M arg in s : 1Q 14 2Q 14 3Q 14 4Q14F 2014F