Upcoming MSCI inclusions: What to own; Tencent to CL-Buy

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1 Equity Research Upcoming MSCI inclusions: What to own; Tencent to CL-Buy 2016 outlook: MSCI inclusions and buybacks to crystalize value China s major Internet companies look well positioned post five mergers in 2015, a flurry of buybacks, and the inclusion of the Chinese ADRs to MXCN. We believe these factors will collectively lead to improved earnings and a crystallization of value at a time where the sector remains in favor (global internet P/E expanded from 20x to 28x over the course of the year) round up: Signs of rationality; investment timeframe aligns Risks from a well-funded new entrant and penetration approaching benchmarks, drove the M&A wave in the industry in Sectors active this year are transport apps, classifieds, O2O (online-to-offline), video and online travel. We believe the buybacks announced - with Baidu, Alibaba, JD, and VIPS announcing US$4 billion - encapsulate management s outlook, set a floor for the share price, and are EPS accretive. Must own stocks in China internet We estimate the inclusion of the 14 ADRs in MXCN would double the tech sector s weighting in the index to 32%, benefitting Buy-rated Alibaba (8%) and Baidu (6%) the most. Together, Tencent, Alibaba, and Baidu would account for almost a quarter of the expanded index by June 2016, compared to just Tencent (13%), the only name on the MXCN at present. Portfolio reshuffle: What to Buy, what to Sell? We make several changes to our coverage: CL-Buy Tencent: We add the stock to CL given its leadership in mobile, barriers to entry, and solid growth. Sell SOHU/CYOU: We downgrade these two stocks to Sell from Neutral as their key mobile game title continues to underperform amid a macro slowdown. Neutral on SFUN/SINA: We downgrade these stocks to Neutral from Buy on limited upside potential. We also revise our estimates, align all our TPs to a 12-month timeframe, and switch to a P/E methodology (still DCF/SOTP where applicable). We reiterate Buy on Alibaba and Baidu as the biggest beneficiaries from the MXCN inclusions, JD and VIPS on e-commerce growth, NTES on mobile gaming growth, CTRP on travel consolidation and margin expansion, Weibo on accelerating revenue/scale, and TAL and Tarena on broad exposure to rising spending on education. A QUICK LOOK AT CHINA INTERNET VERTICALS E-commerce: Already the world s largest online retail market in We forecast China s online retail GMV to grow at a 24% CAGR to Rmb10tn (US$1.5tn) over Buy JD and BABA Online gaming: Double market size to US$50bn in 2020E from US$25bn in 2016 driven by increasing gamers and ARPU. Mobile is the focus (37% contribution in 2020E). Buy Tencent (CL) and NTES Online travel: Underpenetrated in China, vast market opportunity ahead (US$200bn online transactions by 2020E). Consolidation leads Ctrip to multi-year market share gains/ margin expansion. Buy CTRP Education: 3-19% of China s household income. Private education market to nearly double to US$154bn in 2020E. Ongoing industry consolidation is favorable to national leaders. Buy TAL SUMMARY OF OUR BUY AND SELL-RATED STOCKS GS ticker Company name RATING TP +/- side 0700.HK Tencent Holdings Buy* % BABA Alibaba Group Holding Buy % CTRP Ctrip.com Int'l Buy % JD JD.com Buy % BIDU Baidu.com Inc. Buy % VIPS Vipshop Buy % XRS TAL Education Group Buy % WB Weibo Buy % TEDU Tarena Buy % NTES NetEase Buy % SOHU Sohu.com Sell % CYOU Changyou.com Sell % Note: All pricing currencies are US$ except for Tencent (HK$). Prices are as of November 26, 2015 close. *denotes on our regional Conviction List.TP timeframe is 12-month. Source: Datastream, Goldman Sachs Global Investment Research. Piyush Mubayi Goldman Sachs does and seeks to do business with piyush.mubayi@gs.com Goldman Sachs (Asia) L.L.C. George Meng, CFA george.meng@gs.com Goldman Sachs (Asia) L.L.C. David Jin, CFA david.jin@gs.com Goldman Sachs (Asia) L.L.C. Fan Liu, CFA +86(10) fan.liu@ghsl.cn Beijing Gao Hua Securities Company Limited companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research

2 Table of contents Upcoming MSCI inclusions: Liquidity boost; positive for the sector 3 Valuation: Switching to P/E as our main target price methodology 7 Tencent (0700.HK): Top pick within the space; add to CL, Buy 17 Alibaba Group Holding (BABA): Bullish stance intact, reiterate Buy 20 Baidu (BIDU): Robust core search, O2O on track; reiterate Buy 23 Ctrip (CTRP): China s Priceline consolidating online travel; Buy 26 JD.com (JD): More than a Jumbo Distributor; reiterate Buy 28 NetEase (NTES): Only real contender of Tencent in games; Buy 30 TAL (XRS): Record high enrollment growth in 2QFY16; Buy 32 Vipshop (VIPS): Recovering investor confidence post earnings, Buy 34 Jumei (JMEI): Maintain Neutral after a loss-making 3Q15 36 SouFun (SFUN): Down to Neutral; more time needed for transition com (WUBA): Factoring in Ganji & new initiatives; stay Neutral 40 SINA Corp: Down to Neutral; Weibo/vertical strategy remains key 42 Sohu (SOHU): Down to Sell; Game continues to drag performance 44 Changyou (CYOU): Downgrade to Sell; no signs of recovery yet 46 Disclosure Appendix 49 Prices in the body of this report are as of the market close of November 26, 2015, unless otherwise stated. Exhibit 1: Ratings/TP summary for China Internet & Education coverage Company name GS ticker TP fx M.Cap (US$mn) * denotes stock is on our regional Conviction List; target prices are based on a 12-month timeframe. Prices are as of November 26, 2015 close. Source: Datastream, Goldman Sachs Global Investment Research. Last price RATING TP TP +/- side TP based on change old new old new new New 1 Tencent Holdings 0700.HK HK$ 188, Buy Buy* % 30% 28x CY17 PE 2 Alibaba Group Holding BABA US$ 211, Buy Buy % 25% 25x CY17 PE 3 Ctrip.com Int'l CTRP US$ 19, Buy Buy % SOTP 4 JD.com JD US$ 41, Buy Buy % DCF 5 Baidu.com Inc. BIDU US$ 72, Buy Buy % SOTP 6 Qunar.com QUNR US$ 5, Neutral Neutral % DCF 7 Vipshop VIPS US$ 10, Buy Buy % 21% 22x CY17 PE 8 TAL Education Group XRS US$ 3, Buy Buy % 20% 25x CY17 PE 9 Weibo WB US$ 4, Buy Buy % 19% 23x CY17 PE 10 China Distance Learning DL US$ Neutral Neutral % 15x CY17 PE 11 Jumei JMEI US$ 1, Neutral Neutral % 17% 16x CY17 PE 12 Autohome Inc. ATHM US$ 3, Neutral Neutral % 15% 16x CY17 PE 13 Tarena TEDU US$ Buy Buy % 15x CY17 PE 14 NetEase NTES US$ 22, Buy Buy % 15x CY17 PE 15 SouFun Holdings SFUN US$ 3, Buy Neutral % 10% 20x CY17 PE 16 Tuniu TOUR US$ 1, Neutral Neutral % DCF com Inc. WUBA US$ 6, Neutral Neutral % 1% 35x CY17 PE 18 Qihoo 360 Technology Co. QIHU US$ 9, Neutral Neutral % 0% 14x CY17 PE 19 SINA Corp. SINA US$ 3, Buy Neutral % SOTP, 50% disc. 20 Sohu.com SOHU US$ 2, Neutral Sell % -9% SOTP 21 New Oriental Education & Tech. EDU US$ 4, Neutral Neutral % 15x CY17 PE 22 Changyou.com CYOU US$ 1, Neutral Sell % -16% 8x CY17 PE 23 Youku Tudou Inc. YOKU US$ 5, Not Rated Not Rated MEAN (Sum for M.Cap) 623,215 12% MEDIAN 16% Market cap weighted upside 24% Goldman Sachs Global Investment Research 2

3 Upcoming MSCI inclusions: Liquidity boost; positive for the sector On November 12, MSCI confirmed the inclusion of 14 US-listed Chinese internet companies in the MSCI China index (MXCN). MCXN is the benchmark for an estimated US$1.5tn to US$1.7tn in actively and passively managed funds according to our China strategists. According to MSCI, this is in response to the changes in the Chinese economy and it will implement a gradual transformation of the index. In an unprecedented move, the 14 Chinese ADRs with a combined market cap of US$419bn (free float of US$221bn, per our estimates) will be added to the MXCN over two stages. MSCI indices were first constructed to provide a benchmark of the opportunities available to the institutional investor, creating a practical investment opportunity. The benchmark deviates from most other indices as it adjusts for: 1) investability, and therefore liquidity, by factoring in the free float of each stock; 2) cross holdings, and 3) a 60% target inclusion of each industry, to lower tracking error or the relative volatility of a fund. Tencent is currently the only large cap new economy stock in the MXCN, and accounts for around 12.9% of the index. The 14 stocks to be included are BABA, Baidu, Ctrip, NetEase, JD, Qihoo, New Oriental, Qunar, Soufun, VIPS, Youku Tudou, YY, 58.com, and TAL Education. Given the magnitude of the inclusion, it will be implemented in two similar steps with the first starting from December , with the second set for mid Estimating the MXCN inclusion factor To ascertain the potential MXCN inclusion factor, for illustrative purposes, we estimate the free float market cap for the 23 China ADRs we cover (14 of which MSCI has confirmed will be included in the MXCN), based on shareholding ownership of the owner/manager and strategic shareholders. They range from a low of 9% to a high in the 80s. We recognize a range of outcomes exist outside the scenario we present. Exhibit 2: Management ownership and strategic investor profile for companies under our coverage Stock price Mkt cap US$mn VIE? Management with material shareholds Mgmt ownership Source: Based on company annual report adjusted for subsequent corporate actions, as of November 26, Mgmt voting power Strategic investor (SI) Mgmt + Strategic shareholder ownership Company Ticker 1 58.com WUBA ,852 Yes Jinbo Yao 14% 44% Tencent 41% 2 Alibaba BABA ,465 Yes Jack Ma, Joe Tsai 13% 51% Softbank, Yahoo 59% 3 Autohome ATHM ,670 Yes James Zhi Qin 7% 7% Telstra 62% 4 Baidu BIDU ,434 Yes Robin Yanhong Li 16% 54% 18% 5 Changyou CYOU ,189 Yes Charles Zhang nm nm Sohu 68% 6 Ctrip CTRP ,528 Yes Min Fan, Jane Sun, James Liang 6% 6% Baidu, Priceline 45% 7 China Distance E DL Yes Zhengdong Zhu, Baohong Yin, Xiaoshu Chen 47% 47% 47% 8 JD JD ,207 Yes Richard Qiangdong Liu 20% 83% Tencent 38% 9 Jumei JMEI ,290 Yes Leo Ou Chen, Yusen Dai 41% 87% 41% 10 Netease NTES ,410 Yes William Ding 45% 45% 45% 11 New Oriental EDU ,811 Yes Minhong Yu 16% 16% 16% 12 Qihoo QIHU ,474 Yes Hongyi Zhou, Xiangdong Qi, Shu Cao, Nanpeng Shen 31% 64% 32% 13 Qunar QUNR ,415 Yes ChenChao Zhuang 12% 15% Ctrip 61% 14 Sina SINA ,008 Yes Charles Chao 18% 18% 18% 15 Soufun SFUN ,202 Yes Vincent Mo 49% 91% 49% 16 Sohu SOHU ,048 Yes Charles Zhang 22% 22% 22% 17 TAL Education XRS ,593 Yes Bangxin Zhang 45% 89% 45% 18 Tarena TEDU No Shaoyun Han 27% 33% 27% 19 Tencent 0700.HK ,773 Yes Huateng Ma, Chi Ping Lau 10% 10% Naspers 44% 20 Tuniu TOUR ,983 Yes Dunde Yu, Haifeng Yan 8% 10% HNA, JD, Ctrip 56% 21 VIPShop VIPS ,205 Yes Eric Ya Shen 30% 69% 31% 22 Weibo WB ,157 Yes Charles Chao 3% 2% SINA, Alibaba 91% 23 Youku Tudou YOKU ,387 Yes Victor Wing Cheung Koo 20% 47% Alibaba 44% For the three largest stocks, Baidu, Alibaba, and Tencent, the free float is 82%, 41%, 56% respectively, 80%, 40%, 55% if rounded off to the nearest 5% based on the common MSCI practice. For the purpose of index weighting estimation, Alibaba s inclusion factor would be 40% after excluding Yahoo s 384mn shares in the free float. Goldman Sachs Global Investment Research 3

4 Exhibit 3: Illustrative pro-forma stock weightings after including the 14 stocks in the MXCN Free float inclusion factor driving the pro-forma weightings are our estimates FF Adj. Mkt. Cap (2 In US$ millions FF Incl. stage: 12/15, 6/16) MXCN weight 60 day P r e Ticker Name Mkt. Cap. Factor Pre ATV HK Tencent 188,773 55% 103, % 10.1% HK Alibaba Health Infotech 6,517 30% 1, % 0.2% HK Kingsoft 3,406 55% 1, % 0.2% HK Alibaba Pictures 6,438 25% 1, % 0.2% 21 A d d i t i o n s 1 WUBA 58.com 6,852 55% 3, % 60 2 BABA Alibaba Group 211,465 40% 84, % 1,403 3 SFUN Soufun 3,202 50% 1, % 29 4 BIDU Baidu, Inc 72,434 80% 57, % CTRP Ctrip.com 19,528 55% 10, % JD JD.com 41,207 60% 24, % XRS TAL Education 3,593 55% 1, % 20 8 NTES NetEase 22,410 55% 12, % EDU New Oriental 4,811 80% 3, % QIHU Qihoo 360 9,474 65% 6, % QUNR Qunar 5,415 35% 1, % VIPS Vipshop 10,205 65% 6, % YOKU Youku 5,387 55% 2, % YY YY 3,174 50% 1, % 32 Internet, prior 205, , % 10.6% 368 Internet, addition 419, , % 3,440 Internet, total 624, , % 32.1% 3,808 Total 2,023,068 1,025,331 7,303 Internet as % of change 26% 27% 89% Internet as % of total 31% 32% 52% Note: We do not cover Kingsoft, Alibaba Health Infotech, and Alibaba Pictures Source: MSCI, Goldman Sachs Global Investment Research. Based on our illustrative bottom-up analysis, the internet sector s weighting in the China market would rise from the current 14%, principally Tencent, to 32% after the inclusion of the 14 ADRs. Additionally, the internet sector would account for 52% of the expanded MXCN s ADTV. Exhibit 4: Illustrative pro-forma sector weighting after including the 14 stocks in the MXCN Adjusted market cap and free float inclusion factor for internet driving the pro-forma weightings are our estimates FF Adj. Mkt. Cap (2 MXCN weight FF Incl. stage: 12/15, 6/16) 60 day Sectors Mkt. Cap. Factor Pre ATV IT, Internet 624,292 48% 329, % 32.1% 3,808 TOTAL 2,023, % 1,025, % 100.0% 7,303 Addition 419,157 45% 220, % 21.8% 23.9% Current 1,592,068 50% 801, % 78% 3,864 % change 27.1% 27.9% 89.0% Source: MSCI, Goldman Sachs Global Investment Research. Analyzing the impact of MSCI inclusions on our coverage The upcoming MSCI inclusions would lead to: 1. Higher liquidity: MXCN would be significantly more liquid, adding to its broader appeal. The ADRs being included have an ADTV of US$3.4bn, which raise MXCN s volume by 89% to US$7.3bn, all else being equal. The internet sector would then account for half the liquidity of the expanded index. 2. Highest IT exposure: Following these changes, China s IT industry would account for 32% of MXCN, ahead of both India and the US. MXCN would then be the most IT-heavy market index globally. Goldman Sachs Global Investment Research 4

5 3. Higher proportion of non-soes: The index has been gradually transformed from an SOE heavy one to one that is a better representation of the gradual transformation in China in the past decade. The SOE weight in the index would decline from 74% to 60%. A higher owner-manager-shareholder alignment generally leads to higher valuation. 4. Higher EPS growth: The earnings growth profile for MXCN would improve significantly on the inclusion of the ADRs in the index. Specifically, for 2015 and 2016 we estimate net income growth to be 25% and 36% respectively for our China internet coverage, resulting in a 2-year CAGR in net income in the mid 30s. This is in contrast to the Bloomberg consensus of 0% EPS growth in 2015 and 9% in 2016 for MXCN (ex-banks). Hence, we see the following impact on our coverage: 1. Minimal impact on existing internet stocks in the index: While the MXCN is larger, a key consideration for companies on the index, the existing internet stocks such as Tencent may not see a direct negative impact through the decline in weighting, as the weighting for China in MSCI Emerging Markets Index would also increase after the inclusions. 2. Lower share price volatility: The upcoming ADR inclusions would see increased allocation by passive and benchmarked funds as they rebalance their portfolios. In contrast to active investors, the new group of shareholders would result in less share price volatility, in our view. To illustrate, the average 30-day volatility for the 14 ADRs is 50.9 vs. Tencent s Higher valuation multiples: We believe the trading multiples of the 14 ADRs would rise on sector-wide consolidation, aggressive buybacks, and risk-reward skewed to the upside. Our China Internet coverage trades at 24x 2016E P/E, a 22% discount to the global large caps average of 31x. These multiples may appear demanding compared with MXCN s current one-year forward P/E of 9.3x, or 12.5x ex-financials, which is 0.2 s.d. below its 10-year average. There were only three occasions in the past decade where the multiple exceeded 15x, or ~1 s.d. Exhibit 5: Illustrative pro-forma impact of the ADR inclusions on MXCN MXCN IT Post % change 1 Market cap (US$ bn) 1, ,026 26% 2 ADTV (US$ bn) 3,864 3,440 7,303 89% 3 China in EM 25% 29% 4% 4 Private sector 26% 100% 40% 14% 5 IT weight 14% 32% 19% 6 EPS growth (16E) 5% 36% 7% 2% 7 PER (16E) 9x 24x 11x 16% Note: EPS growth and P/E ratios for the index are based on our Strategy team s forecasts Source: MSCI, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 5

6 Exhibit 6: MSCI has announced 18 names in its Small Cap Index; five of which are in our China internet coverage Ticker Name Mkt Cap FF Mkt Cap 1 VNET 21 Vianet 1,734 1,209 2 WBAI 500.com JOBS 51 Jobs 1,867 1,391 4 BITA BitAuto 1,711 1,026 5 CYOU Changyou 1, CMCM Cheetah 2,782 1,113 7 DANG Dang Dang EHIC ehi Car Services DSKY idreamsky JMEI Jumei 1, KZ Kongzhong MOMO MOMO 2,554 1, NQ NQ Mobile RENN Renren SINA Sina 3,008 2, SOHU Sohu 2,048 1, TEDU Tarena XUE XueDa Total 23,445 14,196 Note: We estimate the free float market cap based on MSCI released FIF assumptions in May 2015 for illustrative purposes. We do not cover 21 Vianet, 500.com, 51 Jobs, BitAuto, Cheetah, idreamsky, Kongzhong, MOMO, NQ Mobile, Renren, XueDa. Source: MSCI, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 6

7 Valuation: Switching to P/E as our main target price methodology China Internet has lagged the US in 2015 With the exception of Tencent, China Internet stocks performed poorly in 1H. However, the losses were offset by the rebound in share prices of both Alibaba and Baidu in 4Q. The sector is trading 26% higher from its lows, a nominal 1% outperformance YTD. Even though the losses have been reversed, the internet sector in China underperformed the US by 43%, suggesting that the underperformance has been China-specific. Exhibit 7: Stock price performance for China/US internet sector and select large cap stocks (US$ bn) CHINA ALIBABA GRP BAIDU INC TENCENT MSCI CHINA F/d US AMAZON COM ALPHABET INC FACEBOOK INC PRICELINE GRP NETFLIX INC S&P 500 INDEX/d 5D 1M QTD 3M YTD 1M QTD 3M YTD (2.2) % 26.3% 11.0% 0.9% (2) (65) 7.2% 32.1% 6.5% 25.1% (7) 34.3% 51.2% 27.6% 8.8% (2) % 18.4% 9.7% 36.1% 2.8% 8.4% 2.2% 6.2% % 20.7% 12.6% 44.3% % 29.2% 24.1% 113.1% % 19.0% 9.5% 43.2% % 18.2% 11.5% 36.2% (1) (5) 2 (0) 7 6.6% 3.9% 0.5% 12.7% (0) 8 7 (1) % 16.4% 1.5% 146.3% 2.3% 8.4% 0.1% 1.1% US + China % 22.4% 12.1% 27.2% Source: Reuters. US outperformed: The outperformance in the large cap internet stocks globally has led sector multiples to expand from 22x on January 1, 2015 to 28x currently (see Exhibit 9). The stock prices moved in tandem with the acceleration in growth during the year, coupled with an increased focus on capital management to more explicitly align the interests of shareholders with owner/managers. For instance, Amazon s market cap has more than double as the stock benefitted from the above factor and as its growth accelerated, driving consolidated revenue growth. At Alphabet/Google, we believe the focus on capital management post the restructuring that has led its market cap to rise by 43%. At Facebook, the juggernaut of social mobile advertising, market share gains continued in Netflix entered the US$50bn market cap club this year on growth at a time when evidence of binge watching and cord-cutting became apparent. Goldman Sachs Global Investment Research 7

8 Exhibit 8: Internet sector rerated globally in 2015 (US$) -2 SD: 16x -1 SD: 19x Median: 23x +1 SD: 27x +2 SD: 30x Price 600 Exhibit 9: as 1-year forward P/E expands to 28x Global internet PE multiple expansion (X) Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Jan-15 Jan-15 Jan-15 Feb-15 Feb-15 Mar-15 Mar-15 Apr-15 Apr-15 May-15 May-15 Jun-15 Jun-15 Jul-15 Jul-15 Aug-15 Aug-15 Aug-15 Sep-15 Sep-15 Oct-15 Oct-15 Nov-15 Nov-15 Source: Bloomberg. Source: Bloomberg. Exhibit 10: China s internet sector had a volatile year in 2015 (US$) -2 SD: 19x -1 SD: 22x Median: 26x +1 SD: 29x +2 SD: 33x Price 140 Exhibit 11: with 1-year fwd P/E now standing at 27x China internet PE multiple (X) Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Jan-15 Jan-15 Jan-15 Feb-15 Feb-15 Mar-15 Mar-15 Apr-15 Apr-15 May-15 May-15 Jun-15 Jun-15 Jul-15 Jul-15 Aug-15 Aug-15 Aug-15 Sep-15 Sep-15 Oct-15 Oct-15 Nov-15 Nov-15 Source: Bloomberg. Source: Bloomberg. China s 3Q results surprised: All three companies - Alibaba, Baidu and Tencent - surprised on the upside for 3Q EPS, as did management s guidance on growth outlook for 4Q. These are due to a low base for monetization rate at Alibaba, depressed margins at Baidu, and strong advertising/mobile gaming at a higher margin at Tencent, consolidation across verticals, and a focus of returning cash to shareholders, which aligns the time frame of investors to those of owners/managers. We are confident that there is an increased focus on earnings by management, and are therefore optimistic about the outlook for both earnings and the share prices for our coverage. Goldman Sachs Global Investment Research 8

9 The impact of buybacks unilaterally positive for China ADRs We believe the sentiment boost from the announcement of buybacks by Alibaba and Baidu this results season is one of the highlights of the year for the sector. The advantages of a buyback are well documented and include: 1) Buybacks are usually a lead indicator of management s view on the company: This is particularly true when the manager is also a significant shareholder, which then aligns the interests of the manager/owner with the shareholders. 2) Buybacks can be a support for a share price when it is weak: The buyback may provide a floor for the share price. 3) Buybacks reduce the number of shares, and therefore are EPS accretive. Exhibit 12: Buybacks can send a positive signal to the market 14 of 23 companies in our coverage universe have announced buybacks in Company Market Cap (US million) Annoucement date Amount Time frame 1 Alibaba BABA 211,465 8/12/2015 US$ 4 bn Over next 2yrs, repurchased US$2.74bn Sep Baidu BIDU 72,434 10/29/2015 US$ 2 bn Over the next 2yrs Baidu BIDU 72,434 7/30/2015 US$ 1 bn Completed by 3Q15 3 Ctrip CTRP 19,528 4/3/2014 US$ 600 mn From time to time 4 China Distance Education DL /11/2015 US$ 10 mn Over the next year China Distance Education DL 488 8/18/2015 US$ 10 mn Over the next year 5 JD JD 41,207 9/8/2015 US$ 1 bn Over the next 2yrs 6 Jumei JMEI 1,290 12/15/2014 US$ 100 mn Over the next year 7 NetEase NTES 22,410 9/1/2015 US$ 500 mn Over the next year 8 New Oriental Education EDU 4,811 7/22/2014 US$ 120 mn 7/28/2014 to 3/31/ Qihoo QIHU 9,474 10/1/2014 US$ 200 mn Completed on 2/27/ SINA SINA 3,008 4/11/2014 US$ 500 mn From time to time 11 Tarena TEDU 625 8/20/2015 US$ 20 mn Over the next year 12 Tencent 0700.HK 188,773 4/7/ ,000 shares No pre-announcement 13 Vipshop VIPS 10,205 11/17/2015 US$ 300mn Over the next 24 months 14 Youku YOKU 5,387 8/27/2014 US$ 300 mn From time to time Source: Company filings Our preferred valuation methodology now P/E where applicable The most important drivers of our forecasts for China internet are: 1) verticals, 2) management execution, and 3) the ability to leverage/monetize a given customer base. We recognize that strategies can change, and therefore prefer companies with a track record of executing well, a deep bench and talent, are in a segment where there is sufficient upside to our estimates of TAM, where consolidation is a tangible option, and the barriers to entry are proven to be established, or the traffic acquired can be monetized in other methods (such as O2O traffic). Hence, our preferred valuation metric for the sector is now price to non-gaap EPS, 2 years out, to adjust for the growth rate in the sector. The number of shares we use in the calculation factors in stock-based compensation, and therefore the dilution. We then cross check the valuation methodology with DCF, EV/EBITDA, EV/EBITDA growth, PEG, adjusted for our long-term industry view. For companies still in a loss-making stage, we use a DCF methodology, applying a discount rate of ~12% (a sector-wide WACC assumption assuming long-term debt-to-equity ratio of 0%) which we then adjusted for the different betas for the companies, which is then cross checked with a normalized margin methodology. For the conglomerate-like companies, we use a SOTP, though constituents are valued on one of the above approaches. The regression analysis we run suggests: Price to sales correlations are lower, implying that though the market is focused on the long-term sales growth potential, it recognized the differences in the booking of revenue by different companies. Goldman Sachs Global Investment Research 9

10 Our concern with EBITDA margins and therefore earnings is that cost often is at the discretion of management, depending on: a) the aggressive build up in a new business; b) competitive intensity in the market which leads to aggressive levels of couponing, which may even exceed the revenue realized. Share price correlation is higher with EV/EBITDA vs. EBITDA CAGR and non-gaap based methodologies. GAAP-based PEG ratios do not yield a meaningfully different valuation in most instances in Asia. Exhibit 13: Global large cap, P/Rev. vs. Revenue CAGR Market cap (>US$50bn); R-square 0.29 Exhibit 14: Global large cap., EV/EBITDA vs. EBITDA CAGR Market cap (>US$50bn); R-square = x Facebook 25x 2016E P/S 12x 10x 8x 6x 4x 2x Yahoo Japan Rakuten ebay Google Priceline Alibaba Tencent Baidu Netflix Amazon 2016E EV/EBITDA 20x 15x 10x 5x Yahoo Japan Facebook Amazon Alibaba Tencent Priceline Baidu Rakuten Google ebay 0x 0% 5% 10% 15% 20% 25% E Revenue CAGR Source: Goldman Sachs Global Investment Research 0x 0% 5% 10% 15% 20% 25% 30% E EBITDA CAGR Source: Goldman Sachs Global Investment Research Exhibit 15: Global large cap, P/E vs. EPS CAGR Market cap (>US$50bn); R-square = E P/E 55x 50x 45x 40x 35x 30x 25x 20x 15x 10x 5x Facebook Alibaba Rakuten Tencent Yahoo Japan Google Priceline ebay 0x 0% 10% 20% 30% 40% E EPS CAGR Source: Goldman Sachs Global Investment Research Baidu Exhibit 16: Global large cap EV/GCI vs. CROCI/WACC Market cap (>US$50bn); R-square = E EV/GCI 12x 10x 8x 6x 4x 2x Amazon Facebook Priceline Baidu Google Alibaba ebay Rakuten Yahoo Japan 0x 0x 1x 2x 3x 4x 5x 2016E CROCI/WACC Source: Goldman Sachs Global Investment Research Tencent Goldman Sachs Global Investment Research 10

11 Exhibit 17: Asia Internet, P/Rev. vs. Revenue CAGR R-square = 0.17 Exhibit 18: Asia Internet, EV/EBITDA CAGR R-square = E P/S 14x 12x 10x 8x 6x 4x 2x Changyou China Distance Education New Oriental Sina Sohu SouFun Alibaba Tencent Autohome Baidu VIPShop Jumei Source: Goldman Sachs Global Investment Research y = 15.83x R² = com 0x 0% 10% 20% 30% 40% TAL Ctrip Qihoo E Revenue CAGR Weibo Qunar 2016E EV/EBITDA 50x 45x 40x 35x 30x 25x 20x 15x 10x 5x EDU CYOU 0700.HK SFUN JMEI QIHU BABA VIPS ATHM XRS SOHU BIDU Source: Goldman Sachs Global Investment Research WB y = x R² = x 0% 20% 40% 60% 80% 100% SINA E EBITDA CAGR CTRP WUBA Goldman Sachs Global Investment Research 11

12 Goldman Sachs Global Investment Research 12 Our revised target prices We switch our valuation methodology from PEG to a P/E based approach, and continue to use DCF or SOTP for loss-making companies or conglomerates. Exhibit 19: Summary of changes of ratings and target prices to our China Internet and Education coverage Company name GS ticker TP fx M.Cap (US$mn) * denotes stock is on our regional Conviction List; target prices are 12-month. Note: Prices are as of November 26, 2015 close. Source: Datastream, Goldman Sachs Global Investment Research. Last price Current P/E RATING TP TP +/- side TP period TP based on Action new change old new old new old new 2016E 2017E Old New Old New 1 Tencent Holdings 0700.HK HK$ 188, Buy Buy* % 13% 30% CL ADD 27.9x 21.5x 12 months 12 months 1.2x PEG 28x CY17 PE 2 Alibaba Group Holding BABA US$ 211, Buy Buy % 20% 25% TP raise 25.2x 19.8x 12 months 12 months 1.2x PEG 25x CY17 PE 3 Ctrip.com Int'l CTRP US$ 19, Buy Buy % 24% 73.8x 27.9x 12 months 12 months SOTP SOTP 4 JD.com JD US$ 41, Buy Buy % 23% NM 54.4x 12 months 12 months DCF DCF 5 Baidu.com Inc. BIDU US$ 72, Buy Buy % 23% 27.3x 19.9x 12 months 12 months SOTP SOTP 6 Qunar.com QUNR US$ 5, Neutral Neutral % 22% NM 37.0x 12 months 12 months DCF DCF 7 Vipshop VIPS US$ 10, Buy Buy % 9% 21% TP raise 23.7x 18.4x 12 months 12 months CY17 PE 22x CY17 PE 8 TAL Education Group XRS US$ 3, Buy Buy % 11% 20% TP raise 28.0x 20.8x 12 months 12 months CY17 PE 25x CY17 PE 9 Weibo WB US$ 4, Buy Buy % 11% 19% TP raise 33.0x 19.5x 18 months 12 months 1x PEG 23x CY17 PE 10 China Distance Learning DL US$ Neutral Neutral % 18% 14.6x 12.5x 12 months 12 months CY17 PE 15x CY17 PE 11 Jumei JMEI US$ 1, Neutral Neutral % 41% 17% TP cut 22.3x 13.6x 12 months 12 months 18x CY17 PE 16x CY17 PE 12 Autohome Inc. ATHM US$ 3, Neutral Neutral % 25% 15% TP cut 18.3x 13.9x 18 months 12 months 0.9x PEG 16x CY17 PE 13 Tarena TEDU US$ Buy Buy % 14% 16.2x 12.8x 12 months 12 months 15x CY17 PE 14 NetEase NTES US$ 22, Buy Buy % 16.5x 13.4x 12 months NA 15x CY17 PE 15 SouFun Holdings SFUN US$ 3, Buy Neutral % 92% 10% Rating D/G NM 18.3x 18 months 12 months 0.75x PEG 20x CY17 PE 16 Tuniu TOUR US$ 1, Neutral Neutral % 8% NM NM 12 months 12 months DCF DCF com Inc. WUBA US$ 6, Neutral Neutral % -35% 1% TP raise NM 34.6x 18 months 12 months 0.9X PEG 35x CY17 PE 18 Qihoo 360 Technology Co. QIHU US$ 9, Neutral Neutral % 43% 0% TP cut 15.8x 13.4x 18 months 12 months 1x PEG 14x CY17 PE 19 SINA Corp. SINA US$ 3, Buy Neutral % -2% Rating D/G 31.5x 23.9x 18 months 12 months SOTP SOTP, 50% disc. 20 Sohu.com SOHU US$ 2, Neutral Sell % -8% -9% Rating D/G 135.5x 23.3x 18 months 12 months SOTP SOTP 21 New Oriental Education & Tech. EDU US$ 4, Neutral Neutral % -14% 20.4x 17.6x 12 months 12 months CY17 PE 15x CY17 PE 22 Changyou.com CYOU US$ 1, Neutral Sell % -7% -16% Rating D/G 10.6x 9.8x 18 months 12 months 0.5x PEG 8x CY17 PE 23 Youku Tudou Inc. YOKU US$ 5, Not Rated Not Rated MEAN (Sum for M.Cap) 623,215 16% 12% 31.8x 21.2x MEDIAN 14% 16% 23.7x 19.5x Market cap weighted upside 17% 24% Rating summary (new) # of % of all stocks stocks Ave. +/- side CL-BUY 1 4% 30% BUY 9 39% 20% SELL 2 9% -12% Neutral 10 43% 7% NR 1 4% TOTAL % 12% November 30, 2015

13 Exhibit 20: Global Internet valuation methodologies Upside Mkt cap PER EV/EBITDA TP Company Rating Spot TP to TP US$ mn 2016E 2017E 2016E 2017E 2017E Valuation methodology 1 NCSOFT Neutral 218, ,000 15% 4, x 14.4x 9.5x 9.6x 16.6x 10.5X 2020 EV/EBITDA (11.8X 16E EV/EBITDA) 2 Nintendo Neutral 19,435 17,000-13% 19, x 29.0x 25.2x 16.9x 25.4x Correlation between FY3/16E P/B and FY3/17E ROE 3 Rakuten Neutral 1,606 2,200 37% 19, x 18.4x 11.2x 9.4x 25.2x 9X EV/EBITDA 2020 (14.7X 16E EV/EBITDA) 4 Softbank Buy 6,588 8,600 31% 63, x 11.2x 5.8x 0.0x 14.6x SOTP: 1). CORE: Yahoo Japan 41% 21.8X PE; Fixed line: 100% 11X PE; Wireless: 100% 13X PE; 2) CONS. ENTITIES: SuperCell 73% 9.9X PE; Sprint 80% TP:US$4.00; 3) INVESTMENTS: Alibaba 32% mkt price; Gungho 26% mkt price; RenRen 34% mkt. price 5 Yahoo Japan Buy % 23, x 18.7x 10.0x 9.5x 21.1x 9X 2020 EV/EBITDA (11.9X 16E EV/EBITDA) 6 Amazon Buy* % 320, x 51.4x 22.4x 17.8x 57.9x SOTP: N. Am. 26X 16E EV/EBITDA; Int'l 30X 16E EV/EBITDA; AWS 12X EV/Sales; 7 ebay Buy % 35, x 13.9x 8.7x 8.0x 15.8x 85%/15% blend: 9X 16E EV/EBITDA and 11X EV/EBITDA M&A 8 Expedia Neutral % 16, x 17.6x 10.8x 9.4x 19.2x 12X 16E EV/EBITDA 9 Facebook Buy % 300, x 29.8x 20.0x 15.5x 35.3x DCF (7% disc. rate, 16X terminal FCF), 23X CY16E EV/EBITDA, and 50X CY16E EV/FCF 10 Alphabet Buy* % 534, x 18.2x 12.8x 10.5x 20.1x DCF (7% disc. rate, 13x terminal), 24X CY16E EV/EBITDA, and 24X CY16E PE 11 Groupon Neutral % 1,927 NM 57.0x 9.8x 5.4x 78.8x 8X 16E EV/EBITDA 12 LinkedIn Buy* % 32, x 37.6x 28.6x 19.7x 42.8x 30X 16E EV/EBITDA 13 Naspers Buy 2,200 2,690 22% 62, x 26.2x 79.8x 53.7x 32.0x SOTP: 1) CORE a). PayTV 85.0% 9.0X EV/EBITDA; b) Print 85.0% 4.0X EV/EBITDA; c). E-tail: Romania 70.0% 2.0X EV/Sales; India 15.8% 4.1X; d). Transaction; Middle East 48.0% 2.0X EV/Sales; Turkey 100.0% 2.0X EV/Sales; Nigeria 50.9% 2.0X EV/Sales; e) Classified: Brazil 50.0%; Indon 63.4%; Phils 98.3%; India 97.8%; Poland 97.8%; Russia 68.0%; (Above full potential); Other countries 60.0% - blended zero full potential; Online Marketplaces and other: Poland 96.7% 12.0X EV/EBITDA; India 95.4% 4.0X EV/Sales; Brazil 96.7% 4.0X EV/Sales; PayU 80.1% 4.0X EV/Sls; Other 50.0% 3.0X EV/Sls; 2) ASSOCIATES: Abril 30.0% 4X 2016E EV/EBITDA; Beijing Media Corp 9.9% mkt. (HK$5.01); 14 Netflix Buy % 54,264 NM 66.8x 76.7x 35.2x 75.4x 85X 16E EV/EBITDA 15 Priceline Buy 1,246 1,500 20% 64, x 14.1x 14.5x 12.1x 17.0x 16X 16E EV/EBITDA 16 Schibsted Buy % 8,391 NM NM 27.7x 18.9x SOTP: Finn 90% Blended 12.5X EV/EBITDA & Full potential, Blocket 100% Blended 12.5X full potential; Established: Leboncoin 100%; Spain 90%; Italy 100%; International 100%; Above use blended full monetization; New ventures: Brazil 25%; Indonesia 12%; Other 100%. (Above use blended DCF and Full monetization); PUBLISHING: Norway 100% 4.5X 2016E EBITDA; Sweden 100% 5.5X EBITDA 2016E; Polaris Media ASA mkt. 17 TripAdvisor Neutral % 12, x 28.9x 20.3x 16.9x 23.8x 17X 2016E EV/EBITDA 18 Twitter Buy % 18, x 24.3x 21.5x 14.3x 37.4x 85%/15% blend: 32X 16E EV/EBITDA and 10X 16E EV/Sales M&A * denotes stock is on our regional Conviction List; target prices are 12-month. Source: Bloomberg, Goldman Sachs Global Investment Research Exhibit 21: Changes to our numbers, and vs. consensus Company name GS ticker Last price % change old new 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 1 58.com Inc. WUBA % (2.04) (0.94) 1.66 (1.96) % -185% -27% (2.31) (0.77) % -22% -13% 2 Alibaba Group Holding BABA % % 1% 2% % 4% 9% 3 Autohome Inc. ATHM % % -8% -8% % 0% 2% 4 Baidu.com Inc. BIDU % 0% 0% % 5% 4% 5 Changyou.com CYOU % % -34% -37% % -23% -24% 6 China Distance Learning DL % 0% 0% % 7% 7% 7 Ctrip.com Int'l CTRP % 0% 0% % -3% 23% 8 JD.com JD (0.02) (0.02) % 0% 0% (0.07) % 2% 10% 9 Jumei JMEI % % -30% -6% % -30% -20% 10 NetEase NTES % 0% 0% % 2% 6% 11 New Oriental Education & Tech. EDU % 0% 0% % -10% -11% 12 Qihoo 360 Technology Co. QIHU % % 3% -6% % -3% -11% 13 Qunar.com QUNR (2.79) (0.23) 1.10 (2.79) (0.23) % 0% 0% (2.80) (0.52) % 55% -16% 14 SINA Corp. SINA % -24% -39% % 4% -5% 15 Sohu.com SOHU % (0.34) (2.10) % -81% -31% (0.67) % -48% -23% 16 SouFun Holdings SFUN % (0.09) (0.03) NA -114% -103% NA % -129% 19% 17 TAL Education Group XRS % % 0% 0% % 0% 4% 18 Tarena TEDU % 0% 0% % -11% -11% 19 Tencent Holdings* 0700.HK % % 0% 0% % 8% 10% 20 Tuniu TOUR (2.12) (2.46) (2.18) (2.12) (2.46) (2.18) 0% 0% 0% (2.06) (1.81) (1.69) -3% -36% -29% 21 Vipshop VIPS % % 0% 0% % -7% -10% 22 Weibo WB % % 2% 4% % 5% -1% 23 Youku Tudou Inc. YOKU (0.97) (0.57) (0.22) (0.97) (0.57) (0.22) 0% 0% 0% (1.03) (0.71) (0.26) 5% 19% 14% Note: Target prices are 12-month. *Tencent s EPS in HK$. Alibaba, Baidu, China Distance Learning, JD.com, Quanr, Vipshop and Tal Education s EPS are based on calendar year. Source: Bloomberg, Goldman Sachs Global Investment Research TP EPS (USD) new EPS (USD) old EPS revision % EPS (USD) Consensus Diff vs. Consensus % Goldman Sachs Global Investment Research 13

14 Key changes that we are making to our coverage: We align all target prices to a 12-month timeframe, as we now base our valuation on 2016E using 1-year forward P/E (2017 P/E) where applicable. We make no changes to the SOTP discounts and DCF WACC assumptions for stocks where we apply SOTP/DCF; for all stocks that we apply a P/E multiple, we set the multiple based on its trading history and the growth profile for forward-looking years. Tencent: We raise our 12-month target price from HK$176 to HK$202, which implies 30% upside potential; we make no changes to our estimates. Our valuation is now based on 28x CY17E P/E, in line with Global Internet peers vs. PEG (1.2x PEG ratio) prior. We reiterate Buy on Tencent, and add the stock to Conviction List. Alibaba: We raise our 12-month target price from US$98 to US$102, which implies 28% upside potential; we slightly fine tune our estimates on recent business updates. Our valuation is now based on 25X CY17E P/E, which implies a discount to Global Internet peers due to higher volatility around the business vs. PEG (1.2X PEG ratio) prior. We reiterate Buy on Alibaba. TAL Education: We raise our 12-month target price by 8% to US$52 (from US$48), on 25x CY17E PE which is in line with the historical median of 1-yr forward PE for Chinese education ADRs since This is higher than the previous 23x due to our higher conviction on the execution capability of the company post the record high enrollment growth in 2QFY16. We reiterate Buy on TAL. Weibo: We raise our 2015/16/17E EPADS forecasts for Weibo by 17%/2%/4% to reflect the changes post 3Q15 earnings. We switch from an 18-month, PEG methodology (1x) to a 12-month, P/E-based one (23x 2017E based on trading history). Our 12-month target price is now US$22, which implies 23% upside potential. We maintain Buy on Weibo. Key risks are advertising growth slowdown, uncertainty over the renewal of Alibaba cooperation contract. SINA: We downgrade SINA to Neutral from Buy, with our 12-month SOTP-based target price still at US$50.00 (18-month prior) which implies limited upside. We cut our EPADS due to lower assumptions on Portal businesses. Soufun: We downgrade Soufun to Neutral from Buy, with our 12-month SOTPbased target price of US$7.7 offering 15% upside potential. We switch from an 18- month, PEG methodology (0.75x) to a 12-month, P/E-based one (20x 2017E based on trading history). We also cut EPADS due to margin pressure and increased competition. Jumei: We lower our 12-month target price by 17% to US$10.0 post 3Q earnings, on a lower multiple of 16X 2017E P/E (from 18X before, due to slower growth). We also cut non-gaap EPADS on higher fulfillment and marketing costs. We remain Neutral on the stock. Vipshop: We raise our 12-month target price by 11% to US$20.0 from US$18.0 previously, on a higher multiple of 22X 2017E P/E (from 20X before, due to share buyback and recovery of investor confidence). We keep our estimates unchanged. Maintain Buy. Autohome: We cut our earnings to factor in margin headwinds. In addition, we switch from an 18-month, PEG methodology (0.9x) to a 12-month, P/E-based one (16x 2017E based on trading history). As a result, our 12-month target price is US$36.0 vs. US$39.0 (18-month) previously. We maintain Neutral. Key risks are automobile demand, execution on transaction. 58.com: We switch from an 18-month, PEG methodology (0.9x) to a 12-month, P/Ebased one (35x 2017E based on trading history). We also factor in our estimates the completed Ganji transaction, and new initiatives, but we cut non GAAP Goldman Sachs Global Investment Research 14

15 EPADS due to higher costs to new initiatives. Our new 12-month target price is US$58.00 vs. US$37.00, 18-month previously. We maintain Neutral. Qihoo: In June, Qihoo announced that it has received a preliminary non-binding proposal from its CEO and a group of investors. For details, see Commentary: Key takeaways from Qihoo's preliminary privatization proposal, June 18, Our new target price of US$67.8 is based on 14X 2017E P/E, which is a 40% discount to the sector s median TP-implied P/E, in line with its trading history. The target price implies a 12% discount to the US$77 non-binding privatization price as disclosed by the company. We also align our target price period to 12-month from 18-month before with the rest of our coverage. As a result, our 12-month target price is US$67.8, vs. US$97.0 (18-month) prior. We maintain our Neutral rating given limited up/downside potential. Key risks are execution and competition. Sohu/CYOU: We downgrade both SOHU and CYOU to Sell from Neutral on lower earnings assumptions, with our 12-month target price of US$48.0/US$19.0 implying 10%/14% downside potential. Our SOTP valuation method for SOHU remains unchanged; for CYOU, we switch to 8x 2017E P/E from 0.5X PEG previously based on trading history. We move to a 12-month timeframe from a 18- month one for both. NetEase: We initiated on the stock with a Buy rating and 12-month target price of US$190. NetEase is the only real contender to Tencent in online games, the 4th largest China ADR and the only name among the coverage that has a quarterly dividend policy (~25% payout ratio). We are more bullish on its mobile games revenue growth than consensus. Its cross-border e-commerce also adds option value. For more details, see NetEase Inc. (NTES) Buy: Games leader and new growth seeker; initiate at Buy, Nov 25, Our EPS estimates are unchanged for China Distance Learning, Ctrip, JD, New Oriental, Qunar, TAL, Tencent, Tuniu and Youku Tudou. We maintain our target prices for Qunar, China Distance Learning, Tuniu, and New Oriental with no changes to our methodologies. Key risks for these stocks/sector are macro slowdown in China, execution and competition. Under our bull/bear case scenarios as listed below, we make no changes to earnings but simply test the implied valuation using the multiples that we believe are good proxies if we take a more bullish/bearish view on those stocks than base case. We see a favorable riskreward profile across our China Internet and Education coverage overall, with Buy-rated names having more attractive risk-reward profiles. Goldman Sachs Global Investment Research 15

16 Exhibit 22: Valuation sensitivity Bull/bear case scenarios yield a +45%/-19% spread for China internet and +21%/-12% for China education Valuation /share Upside/ downside Bull case scenario Based on Valuation /share Bear case valuation Upside/ Based on downside China Internet WUBA % 53x CY17, inline with Schibstead % 20x CY17 BABA % 28x CY17, global average % 20x CY17 ATHM % 20x CY17 EPS % 12x CY17 EPS BIDU % 18X search, 0% holdco discount % Google's multiple CYOU % 12x CY17 EPS % 6x CY17 EPS CTRP % 35x CY17 core earnings in SOTP % 20x CY17 EPS, Priceline (17x) JD % 55x CY18 discounted (AMZN TP 58X CY17) % 25x CY18 discounted JMEI % 20x CY17 EPS % 12x CY17 EPS NTES % 20x CY17 EPS % 12x CY17 EPS QIHU % 15x CY17 EPS % 10x CY17 EPS QUNR % 50x CY17 EPS % 20x CY17 EPS, Priceline (17x) SINA % 0% holdco discount % 40% holdco discount SOHU % 20% holdco discount % 60% holdco discount SFUN % 25x CY17 EPS % 15x CY17 EPS Tencent % 30x CY17 EPS % 20x CY17 EPS TOUR % 25% T/O premium % 20% discount, bidding war unlikely VIPS % 30x CY17 EPS % 15x CY17 EPS WB % Twitter's multiple of 37x CY17 EPS % 15x CY17 EPS YOUKU N/A N/A N/A na na Median 44% -20% China Education TAL % 30x CY17 EPS % 19x CY17 EPS Tarena % 20x CY17 EPS % 12x CY17 EPS EDU % 20x CY17 EPS % 12x CY17 DL % 16x CY17 EPS % 10x CY17 Median 24% -24% Source: Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 16

17 Tencent (0700.HK): Top pick within the space; add to CL, Buy Source of opportunity We reiterate our Buy rating on Tencent and add it to our Conviction List as we believe Tencent is the best positioned China internet company, given its dominance in two verticals: social and gaming. Tencent s Weixin social-messaging platform has emerged as the world s first super-app, while the company s dominance in gaming, both PC and mobile, should lead to a sustained period of outperformance. Our new 12-month HK$202 target price offers 30% upside potential. Catalysts 1) New PC games to drive dominance: Tencent continues to dominate in the broad category of online (PC and mobile) games in China. We expect new game IPs to drive revenue growth as new genres target existing PC gamers and improve the game mix towards mid-core genres for superior yields. Hence, we anticipate PC games revenue growth will continue from rising ARPU, and new games to show stabilizing average concurrent users (ACU). Revenues from gaming accelerated 27% yoy during the last quarter, (mobile +60% yoy, PC +12% yoy vs. 8% yoy in 2Q). 2) in online advertising revenues: Online ads revenues were up 102% yoy due to brand ads (+67% yoy to Rmb2.6bn) on Tencent s strong video and news app; P4P ads (+160% yoy to Rmb2.4bn) boosted by Mobile Qzone, Weixin Moments and Official Accounts, which now have over 10k advertisers in total. Weixin Moments user experience remains the focus and ad loads are at 0.5/day, vs. Qzone s 1/day with 50% coverage. According to Tencent, scarcity is forcing advertisers to be creative therefore intend to gain better user experience. 3) O2O strategy bearing fruit: Post the O2O integration, Tencent has emerged as the partner in O2O strategy, a vertical with high frequency of usage, which helps promote its payment services (>200mn Weixin Pay/QQ Wallet accounts linked to bank cards by end of September). 4) in high-margin segments: Tencent is one of the very few large caps with revenues growing in higher margin segments, and hence we see multi-year operating margin expansion potential. In the short term, we recognize there are some margin pressures due to platform mix on gaming (higher contribution from third-party games), higher content cost, and bank handling fees. Investment Profile Low Percentile 20th 40th 60th 80th 100th Tencent Holdings (0700.HK) Asia Pacific Media and Entertainment Peer Group Average High * Returns = Return on Capital For a complete description of the investment profile measures please refer to the disclosure section of this document. Key data Current Price (HK$) month price target (HK$) Market cap (HK$ mn / US$ mn) 1,463,113.4 / 188,773.0 Foreign ownership (%) -- 12/14 12/15E 12/16E 12/17E EPS (HK$) New EPS revision (%) EPS growth (%) EPS (dil) (Rmb) New P/E (X) P/B (X) EV/EBITDA (X) Dividend yield (%) ROE (%) CROCI (%) Price performance chart Nov-14 Mar-15 Jun-15 Sep-15 Tencent Holdings (L) MSCI China (R) Share price performance (%) 3 month 6 month 12 month Absolute 21.1 (2.0) 23.9 Rel. to MSCI China Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 11/26/2015 close. Valuation We switch from a PEG to a P/E-based methodology, in-line with our overall China ADR coverage. We base our target 2017 P/E multiple on the current global large cap internet names at 28x. As a result, we raise our 12-month target price to HK$202.0 from HK$ Our EPS estimates are unchanged. Key risks Worse-than-expected macro slowdown, higher-than-expected competition from the Alibaba Group. Goldman Sachs Global Investment Research 17