China On Demand (O2O Digitising The Service Industry) 031115

China on-demand
O2O digitising the service industry

Special report
November 2015

China internet
Elinor Leung, CFA
Contents
Head of Asia Telecom &

Internet Research
elinor.leung@clsa.com
+852 2600 8632
Executive summary ............................................................................ 3
Man Ho Lam
Digitising traditional businesses ........................................................ 9
+852 2600 8732
Investment thesis .............................................................................. 4
Proprietary consumer study ............................................................. 36

Food overview .................................................................................. 45
Dineout ............................................................................................ 51
Takeout delivery............................................................................... 59
Grocery delivery ............................................................................... 79
Travel ............................................................................................... 93
Entertainment ................................................................................ 105
Housekeeping & beauty.................................................................. 112
Healthcare ...................................................................................... 130
Watch Elinor Leung

on CLSA TV
Education ....................................................................................... 148

Company profiles ........................................................................... 155
58.com .................................. 157
JD.com ................................... 183
Alibaba ................................... 163
Qunar ..................................... 189
Baidu ...................................... 169
Tencent ................................... 195
Ctrip ....................................... 177

Covered by CLSA Americas. All prices quoted herein are as at close of business 29 October 2015, unless
otherwise stated
Connecting ideas
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
For important disclosures please refer to page 203.
3 November 2015

China internet
Executive summary
China on-demand
The internet is digitising

the service industry
The internet is digitising the service industry - Chinas new growth pillar.
Online-to-offline (O2O) will be as disruptive to services as e-commerce was to
retail and will accelerate China's transition to a service-led, consumption-driven
economy. China is a world leader in developing O2O services in industries such
as restaurants, travel and housekeeping; and we forecast O2O-service gross
merchandise value (GMV) to reach Rmb2.5tn by 2019. The market is still
nascent: we expect current leaders Meituan, Dianping and Ele.me to lose share
and we are BUYers of Baidu, Tencent and Alibaba as the ultimate winners.
Baidu is most serious and aims to be No.1. Tencent has the most extensive
partnerships, while Alibaba leads in O2O healthcare and finance.
Services are the new

growth pillar of the
Chinese economy
Services are the key growth pillar of the Chinese economy. Tertiary industry
growth remains in double digits (11% YoY in 1H15) and it contributes more
than half of total GDP (53% in 1H). Markit services PMI continues to expand
despite the contraction in manufacturing. The service industry created 17m
new jobs in 2014, offsetting the decline in manufacturing employment.
O2O services have huge

potential in China
O2O services are in great demand in China due to poor offline distribution
channels, underused capacity and a fragmented market of mostly
independent stores. Such services have tremendous potential, given the large
economies of scale and the ability to deploy a low-cost sales force to scale the
business. China has 270 cities with over 1m population (versus 10 cities in
the USA). Chinese O2O GMV has jumped with more players and investment,
growing 200% YoY for food and 50% YoY for travel in 2015.
Our proprietary consumer

study shows high demand
and adoption
Our proprietary consumer study asked 573 people about their preferences and
usage behaviour in 10 major O2O-service categories. We also compared user
experiences on leading O2O apps. We found a high adoption rate: over 70% of
respondents had booked food delivery, restaurants, hotels, movie tickets and
taxis online; about 65% had increased usage in the past six months; and over
half expect to use these services more. Over 70% of O2O users have raised their
overall consumption and half already spend more online than off. Subsidies
matter, but half say they will keep using O2O services even if subsidies drop.
Most want a one-stop O2O service platform.
Consumer service market

could be worth Rmb11tn
by 19CL . . .
We estimate the consumer service market could be worth Rmb11tn by 2019.

Restaurants are the largest segment with a 41% share, followed by travel,
healthcare and education. At 23% blended online penetration, we forecast
O2O-service GMV to reach Rmb2.5tn by 2019, with revenue of Rmb156bn
using an average 6.2% take rate (O2O service providers already have 5-15%
take rates). Current losses are due to heavy subsidies to acquire users, but
subsidies should decline as the market consolidates and matures. We believe
the long-term Ebit margin could be sustained at c.25%.
. . . with O2O services

generating Rmb2.5tn GMV
and Rmb156bn revenue
China O2O-service GMV
3,000
(Rmbbn)
2,500
2,000
49% 5Y Cagr
1,500
1,000
500
0
467
767
1,119
1,547
2,009
2,497
2014
15CL
16CL
17CL
18CL
19CL
Source: CLSA
3 November 2015
3

China internet
Investment thesis
Why invest in O2O?
O2O rides on the

booming service
industry in China
Online-to-offline (O2O) is the new big thing, riding on Chinas booming

service industry. The country leads the world in O2O development, with 60%
of movie tickets sold online (versus 20% in the USA) and 2% of restaurant
bookings online (versus 1% in the USA). O2O services in China have
expanded from restaurants and travel to healthcare, education and
housekeeping services. Its addressable market could reach Rmb11tn by 2019
and we believe O2O service GMV could exceed Rmb2.5tn. The market is likely
to consolidate in 2016 as private-equity funding dries up; and we expect the
current leaders (Meituan, Dianping and Ele.me) to lose market share. Baidu
and Tencent are likely to become the largest one-stop service distribution
platforms, while Alibaba leads in O2O healthcare and financial services.
What is O2O?
O2O is a broad
concept digitising
offline commerce
O2O is a broad concept digitising offline commerce. Offline retailers and

service providers leverage internet technologies, data and traffic to attract
consumers and improve operational efficiency. This could be a gamechanger,
particularly for the service industry. While e-commerce involves selling
physical goods online, O2O allows local services to go online. Consumers are
still served offline, but they can make reservations, order, download coupons,
pay and write reviews of the services online.
Service industry is Chinas next growth pillar
Service industry is a
critical driver of
Chinas economy
Tertiary industry
contributed 53% of
total GDP in 1H15
Services are a critical driver of Chinas economy. Tertiary industry growth is

still in double digits (11% YoY in 1H15) and it contributes more than half of
total GDP (53% in 1H). Markit services PMI continues to expand despite the
contraction in manufacturing. In addition, the industry created 17m new jobs
in 2014, offsetting the decline in manufacturing jobs.
Industry contributions to GDP
100
80
Primary
(%)
42
43
43
44
Caixin/Markit PMIs
Secondary
44
44
46
Tertiary
47
48
53
60
(%)
Caixin/Markit services PMI

Caixin/Markit manufacturing PMI
55
60
40
50
20
0
2006 2007 2008 2009 2010 2011 2012 2013 20141H15
45
2010
2011
2012
2013
2014
2015
Source: NBS, Markit, CEIC, Wind, CLSA
O2O services in great demand
O2O is a desirable
business model for
merchants and
service providers
O2O is a desirable business model for service providers, given Chinas poor
offline distribution channels; underutilised capacity across many sectors; and
a fragmented market of mostly independent service providers with weak
marketing capabilities.
The O2O business model works well in China, where O2O services have great
potential given the high economies of scale and the ability to deploy a lowcost sales force to scale the business. Chinas population is also concentrated in
cities rather than suburbs: 15 Chinese cities have over 10m people and 276 have
over 1m people, whereas 30 European cities have over 1m population and just
10 US cities have over 1m residents.
Demand for services is also strong. Chinas O2O GMV has jumped with more
players and investment, growing at 200% YoY for takeout delivery, 161% YoY
for groupbuy and 50% YoY for travel so far in 2015.
3 November 2015

China internet
Investment thesis
GMV up 200% YoY

for takeout delivery
and 161% YoY
for groupbuy
Takeout delivery GMV

10
(Rmbbn)
Groupbuy GMV
Takeout GMV
QoQ growth (RHS)
92
56
45
(%)
90
60
23
30
(29)
2
0
120
2.2
3.1
3.9
6.0
4.3
8.2
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
Source: Eguan, CLSA
(30)
(60)
90
Groupbuy GMV
YoY growth (RHS)
(Rmbbn)
80
184
(%)
161
70
60
108
50
40
30
46
20
10
0
10
1H11
1H12
14
29
77
1H13
1H14
1H15
220
200
180
160
140
120
100
80
60
40
20
0
Source: Tuan800, CLSA
Consumer service market to be Rmb11tn by 19CL
O2O services could be

an Rmb11tn
addressable market in
the next five years
Restaurant is the
largest spending
category
We estimate the consumer-service market could be worth Rmb11tn by 2019.

The restaurant segment is the largest with a 41% share, followed by travel,
healthcare and education, with the top four segments accounting for 90% of
total service spending. We believe O2O services could generate Rmb2.5tn in
GMV and Rmb156bn in revenue by 2019 with an average take rate of 6.2%.
O2O service operators already enjoy take rates of 5% for restaurants, 10%
for food delivery and 15% for hotels. They are currently lossmaking, due to
high subsidies to gain users. But subsidies will decline as the market
consolidates and matures; and we believe the long-term Ebit margin could be
sustained at c.25%.
Service spending breakdown (2014)
House keeping
Hair/beauty
1.0%
Entertainment
4.0%
0.4%
Bath/Spa 4.5%
Education
7.2%
Restaurant
41.3%
Healthcare
12.9%
Travel
28.7%
Source: Euromonitor, CLSA
Consumer service market (2014)
Online penetration by service segment

(%)
100
90
80
70
60
50
40
30
20
10
0
2014
Restaurant ex-take-out
Travel
Entertainment
15CL
16CL
Take-out
Healthcare
Others
17CL
18CL
19CL
Source: CLSA
Consumer service market (19CL)
Consumer expenditure
Rmb38tn
Rmb23tn
Consumer service
addressable by
O2O business
model
Rmb6.8tn
O2O GMV
Rmb0.5tn
Consumer service
addressable by
O2O business model
Rmb10.7tn
O2O
services
GMV
Rmb2.5tn
3 November 2015
5

China internet
Investment thesis
O2O service revenue (19CL)

Segment
Market size
(Rmbbn)
Dineout
3,897
Section 4
9% Cagr
587
Section 5
14% Cagr
5,300
Section 6
5% Cagr
Travel
Section 8
Home/beauty
Section 9
92
750
5.7
44.0
80.0
3001
12% Cagr
Education
771
Section 11
10% Cagr
Total ex
grocery
10,655
3.0
na
1,339
6.0
27
5.0
5.7
6.8
7.0
21.11
20.0
16.1
25.0
3001
Ocados
Ebitda margin
Online plus
O2O
12% hotels,
5% transport
74
Grubhub 33%
Just Eat 24%
Direct sales
20.0
Grubhub &
JustEat at 15%
40% Cagr
29
Online
Ebitda
(Rmbbn)
Yelp 2Q15
8.0
34% Cagr
8.0
340
Online plus
O2O
=
Ebitda
margin (%)
Similar with
todays rate
87% Cagr
Online
revenue
(Rmbbn)
5.0
80
Agency model
Ctrip at 23%,
Qunar at 17%
20.0
0.7
22.0
1.2
Similar with
dine-out today
60
c.2-5% today
1,522
Section 10
c.60% today
3% Cagr
Healthcare
58.0
c.70% flights &

c.30% hotels
25% Cagr
572
Take rate
(%)
47% Cagr
c.6% in
the UK today
9% Cagr
Entertainment
c.13% today
3,037
Section 7
15.0
Online GMV
(Rmbbn)
c.6% today
Takeout
Grocery1
Online
penetration
(%)
9.0
c.5-10%
c.2% today
50
10.0
29% Cagr
8.0
62
9.0
23.4
2,497
6.2
156
We exclude online grocery in our O2O GMV and revenue estimates as most O2O service providers mainly offer delivery service (not products),
which attracts users and generates scale but has low revenue. Source: CLSA
Winners and losers
Baidu, Tencent and

Alibaba to be the
winners in O2O
service distribution
O2O is still in the landgrab phase and competition is fierce. Most players are
small and the market is crowded with new entrants. Currently, Meituan and
Dianping are the leading O2O service providers as Chinas largest groupbuy
platforms. Ele.me is the second-largest in food delivery. 58 Home is growing
share in niche markets such as housecleaning, nanny, beauty, moving and
carwashing given its strong presence in classified ads. However, we believe
the current leaders will lose market share and Baidu, Tencent and Alibaba will
be the ultimate winners in O2O service distribution. We expect Baidu and
Tencent to be the largest one-stop O2O-service platforms, while Alibaba leads
in O2O healthcare and financial services.
Chinese O2O stocks under coverage

Name
Rec
29 Oct
Target
price
Mkt cap
(US$m)
15CL
16CL
EPS 3Y %
(16-18CL)
PE/G
(x)
15CL
Price
Curr
PE (x)
15CL
16CL
15CL
16CL
15CL
ROAE
(%)
15CL net cash

% of mkt cap
4.3
EV/Ebitda (x)
P/sales (%)
Alibaba
BUY
US$
82.22
100.00
203,891
34.9
30.7
31.8
1.1
39.7
30.9
17.0
13.1
27.6
Tencent
BUY
HK$
148.00
185.00
179,536
39.7
30.2
27.4
1.4
24.7
19.1
11.6
9.3
30.2
5.6
Baidu
BUY
US$
168.99
225.00
59,401
32.5
25.5
29.0
1.2
23.4
17.0
5.7
4.5
19.3
13.1
JD.com
BUY
US$
27.69
35.00
38,287
na
na
na
na
na
54.7
1.4
0.9
(6.9)
3.1
Ctrip
U-PF
US$
87.91
96.00
12,359
na
140.6
134.4
na
105.3
127.8
6.9
5.0
2.4
0.8
58.com
SELL
US$
52.31
48.00
8,874
na
na
na
na
na
na
13.5
8.7
(24.5)
(6.0)
Qunar
SELL
US$
46.27
40.00
6,059
na
na
na
na
na
na
9.9
6.1
nm
1.2
Note: Alibaba PE is non-Gaap. Source: Bloomberg, CLSA
3 November 2015

China internet
Investment thesis
Proprietary consumer study

Chinas O2O adoption
rate is extremely high
Over half of our panel

will continue to use
O2O services even if
subsidies drop
Alipay and Weixin the

preferred one-stop
O2O service platforms
We conducted an online-consumer study with 573 people in 10 major O2O

services (27 subcategories). Chinas O2O adoption rate is extremely high,
with over 70% of respondents having booked food delivery, restaurants,
movie tickets, hotels and taxis on mobile apps. About 65% had increased
usage in the past six months and over half expect to use more. Over 70% of
O2O users have increased overall consumption and half already spend more
online than off.
Subsidies matter, but over half of our panel say they will continue to use O2O
services even if subsidies drop. Each user generally downloads two O2O apps
per category for price comparison and as a backup. The overwhelming
number of O2O service apps has confused users. About 73% of respondents
want a one-stop O2O service platform with unified user interface and search.
Alipay and Weixin are the top choices. Currently, Alipay, Meituan and Weixin
are rated as the best entry points for O2O services.
% of users who will continue to use the
service without subsidies
Groupbuy
Food delivery
Movie ticketing
Transport ticketing
Doctor appt
Taxi hailing
Local activities
Hotel booking
Massage
Car care
Online pharmacy
Grocery delivery
Beauty
Car/driver hailing
Attraction
Home cleaning
64.3
60.1
57.6
56.5
55.8
53.0
52.7
50.9
49.0
48.5
46.3
44.7
41.6
20
40
60
82.2
76.2
72.9
(%)
80
If consolidated under a big platform,

which app do you prefer?
Alipay
Weixin
Taobao
Meituan
QQ
Dianping
Baidu Nuomi
Mobile Baidu
Baidu Map
58
JD
100
(%)
0
10
20
30
40
50
60
70
Source: CLSA
Food: Dineout, takeout and grocery
Restaurant is the
largest service
segment
Restaurants are the largest service segment and the main battleground among
O2O service platforms. Chinese spent around Rmb7tn on food in 2014:
Rmb3bn at restaurants (dineout and takeout) and Rmb4bn on groceries.
Restaurant groupbuy is one of the most popular O2O service formats in
China. Unlike Groupon, Chinas groupbuy platforms focus on high-frequency
services such as restaurant deals, which make up 60% of Chinas groupbuy
GMV. Takeout is 10% of the restaurant market and growth has jumped, as the
backend can be easily connected online, it is great for user acquisition and its
delivery team can support other O2O services. Chinas restaurant O2O GMV
grew 200% YoY in 2015. Online grocery is another Rmb4tn market
opportunity, although monetisation is more difficult.
Expect 47% O2O

dineout GMV Cagr to
Rmb572bn by 19CL
Dineout O2O GMV

700
Takeout delivery O2O GMV
(Rmbbn)
400
500
300
47% 5Y Cagr
200
300
150
200
87% 5Y Cagr
250
400
100
(Rmbbn)
350
600
100
83
165
248
347
451
572
2014
15CL
16CL
17CL
18CL
19CL
50
0
15
45
113
203
284
340
2014
15CL
16CL
17CL
18CL
19CL
Source: CLSA
3 November 2015
7

China internet
Investment thesis
Travel
Travel is the
second-largest
O2O subsegment
Didi-Kuaidi and Uber

dominate local travel
Expect c.34% online

travel GMV Cagr to
Rmb1.3tn by 19CL
Travel was the first and one of the biggest online services, covering hotel
bookings and flight ticketing to, most recently, car-hailing. There are two
main types of travel apps: online travel agents (OTA) and local travel. Ctrip
and Qunar dominate the OTA market with over 80% share. They hold
aggregate volume shares of 24% in hotel booking and 59% in air ticketing.
Mobile internet has accelerated online penetration to low-tier cities and the
extensive range of leisure-travel products, special promotions and speedy
service have also attracted more users.
Didi-Kuaidi and Uber dominate local travel. Didi-Kuaidi is a monopoly taxibooking app with over 1.35m taxi drivers in 360 cities nationwide, servicing
about 4m orders per day. However, it faces intense competition from Uber in
private car-hailing. Uber has partnered with Baidu and has integrated with
Baidu Map and Baidu Wallet. Private car-hailing has much larger revenue
potential than taxis.
Online travel GMV
1,500
Composition of travel industry
(Rmbbn)
1,200
Accommodation
33%
34% 5Y Cagr
900
Air
17%
621
828
1,068
1,339
455
300
308
600
2014
15CL
16CL
17CL
18CL
19CL
Local & other

transport
5%
Bus
21%
Rail
24%
Housekeeping and beauty

Consumers can book
numerous home
services online
O2O home services are popular in China. Users can book housekeeping,
nanny, hairdressing and massage services online. Service providers are
professionals from offline stores and we find service quality is comparable or
better than in the stores. Home and beauty services are individually small
O2O markets, led by small players such as Meituan, 58 Home (nanny service,
moving), eJiaJie (housecleaning), eDaixi (laundry) and Heilijia (massage), but
most are available on big O2O service platforms for traffic.
Healthcare
Healthcare sector
likely to adopt O2O
model slowly
The healthcare sector is likely to adopt the O2O model gradually, given
complex regulations, but the potential is large. The government faces growing
pressure to promote private healthcare to cope with rising demand from an
ageing population, increasing awareness and pollution. Currently, there are
two main services: online pharmacy and doctor appointments. Alibaba leads
in online pharmacy and providing cloud-based IT and payment solutions to
connect public hospitals. Alibaba, Tencent and Baidu compete on consumerend healthcare services such as doctor appointments, which could open up
opportunities in consultation, prescription drug sales and health monitoring.
Education
Online education
expanded at 19%
five-year Cagr to
Rmb100bn by 2014
Chinas online education market had expanded at a 19% five-year Cagr to

Rmb100bn by 2014, according to iResearch. Growth is strong but not
spectacular. A pure online model is difficult to implement, as individuals lack
self-discipline. An online-plus-offline business model will work better and
accelerate growth. Higher education is currently the biggest online education
segment, but demand is growing fastest for vocational training and language
studies, given the economic changes in China.
3 November 2015

China internet
Section 1: Digitising traditional businesses
Digitising traditional businesses

Internet is digitising
the business model
of service industry
The internet is digitising the service industry - Chinas new growth pillar. O2O
is the new big thing. China is a world leader in developing O2O services in
markets such as restaurants, travel and housekeeping. We estimate the
consumer service market could be worth Rmb11tn by 2019. O2O services
could generate Rmb2.5tn GMV and Rmb156bn revenue by 2019. The market
is still in its infancy. The current leaders (Meituan, Dianping, Ele.me) will lose
market share. Baidu and Tencent will likely be the largest one-stop O2O
service platforms while Alibaba leads O2O healthcare and finance services.
What is O2O?
O2O is a broad concept
digitising offline
commerce
O2O is a broad concept digitising offline commerce. Offline retailers and

service providers leverage on internet technologies, data and traffic to attract
consumers and improve operational efficiency. This could be a gamechanger,
particularly for the service industry. While e-commerce involves selling
physical goods online, O2O allows local services to go online. Consumers are
still served offline, but they can make reservations, order, download coupons,
pay and write reviews of the services online.
Service industry is Chinas next growth pillar

Service industry is a
critical driver of the
Chinese economy
Tertiary industry grew

11% YoY in 2014
and 1H15
The service industry is the fastest-growing economic sector and a critical

driver of the Chinese economy. Chinas tertiary industry continued to grow at
double digits (11% YoY nominal) in 2014 and 1H15, while overall nominal
GDP rose by 7-8%. The official services PMI remained in expansion at 53.4 in
September, despite a contraction in manufacturing PMI at 47.8.
Figure 1
Figure 2
Chinas tertiary sector growth
Industry contributions to GDP
30
25
(%)
Tertiary GDP
Overall GDP
26
18
20
18
18
13
14
11
11
42
43
43
44
44
44
46
Tertiary
47
48
53
60
20
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 1H15
0
2006 2007 2008 2009 2010 2011 2012 2013 20141H15
Figure 3
Figure 4
Official services PMI stays above 50
Caixin/Markit PMIs
60
Secondary
40
10
NBS services PMI was

53.4 in Sep 15 while
manufacturing PMI fell
to 47.8
Primary
(%)
80
19
13
15
100
(%)
Official services PMI

Official manufacturing PMI
58
60
(%)
Caixin/Markit services PMI

Caixin/Markit manufacturing PMI
55
56
54
52
50
50
48
2010
2011
2012
2013
2014
2015
45
2010
2011
2012
2013
2014
2015
Source: NBS, Markit, CEIC, Wind, CLSA
The service sector is a key growth engine for Chinas economy over the next
decade. Its contribution to Chinese GDP reached 53% in 1H15 and is
narrowing the gap with developed economies (70-80%). With increasing
weighting of the high growth tertiary industry to GDP, China believes it could
stabilise GDP growth.
3 November 2015
9

China internet
Services contribution to
GDP reached 53% in
1H15, narrowing the gap
with developed
economies
Figure 5
Figure 6
Service sector contribution to GDP
Service contribution to GDP (2014)
90
(%)
90
(%)
80
80
73
78
79
USA
UK
70
60
70
China
60
USA
Japan
UK
47
50
40
30
50
20
40
10
30
2009
2010
2011
2012
2013
2014
China
Japan
Services are also creating the most jobs. The tertiary industry added 17m net
new jobs in 2014, compared to 14m net job losses in the primary industry
and 1m net job losses in the secondary industry.
Figure 7
Tertiary industry added

17m net new jobs in 2014
Figure 8
Employment by industry
100
Primary
(%)
Net job creation by industry
Secondary
Tertiary
25
(m)
Primary
2009
2010
Secondary
Tertiary
20
80
60
34
35
28
29
36
38
41
15
10
5
30
40
20
36
30
30
30
38
37
35
34
31
30
2009
2010
2011
2012
2013
2014
0
(5)
(10)
(15)
(20)
2011
2012
2013
2014
Source: CEIC, CLSA
Saving remains high in China at a steady 40% of disposable income or 50%

of GDP, well above the developed economies 10-20%. This could change.
Chinas post-1990 generation has grown up in affluent families under the onechild policy. They are raised in a stronger and globalised China. They are
better educated than their parents, more tech-savvy and willing to spend.
China savings remain high
at 40% of disposable
income or 50% of GDP
Figure 9
Figure 10
Gross savings as % of GDP
Savings as % of disposable income
45
60
40
(%)
35
30
China
Japan
USA
UK
25
15
Japan
USA
2011
2012
UK
10
5
2010
2011
2012
Source: World Bank, CLSA
10
China
20
10
O2O is a fast growing and

lucrative market in China
given poor offline
distribution channels
40
30
20
0
2009
(%)
50
2013
2014
0
2009
2010
2013
O2O boosts growth

From a service providers perspective, O2O is a desirable business model due
to Chinas poor offline distribution channels; underutilised capacity across
many sectors; and a fragmented market of mostly independent service
providers with weak marketing capabilities. For example, over 90% of
restaurants and 70% of hotels in China operate independently, compared with
just 64% of restaurants and 43% of hotels in the USA. Competition is also
3 November 2015

China internet
intense as the hotel occupancy rate was only 53% in China in 2014. This is
why online travel agents such as Ctrip and Qunar continue to record strong
sales-volume growth (60%, versus 20% for Expedia in the USA).
Figure 11
Over 90% of restaurants

and 70% of hotels in
China are independent
Figure 12
Independent restaurants as % of total

100
90
80
70
60
50
40
30
20
10
0
(%)
98
Independent hotels as % of total

80
(%)
70
70
78
64
65
60
50
43
40
30
20
10
China
UK
USA
China
UK
USA
Chinas low labour costs

enable O2O players to
hire a large sales force
The O2O business model works well in China. The service is relatively small in
developed markets such as the USA, mostly because it requires a large sales
force to sign up offline merchants and sufficient scale to justify the cost.
However, Chinese labour costs are much lower than in developed markets.
Leading players such as Meituan, Dianping and Ele.me all have 10,00015,000 sales staff to acquire merchants and maintain relationships.
Chinas population
density generally higher
than Europe and the USA
Chinas high population density also helps to create scale. Chinas land area is
similar to the USAs and roughly 2.2 times the size of the EU. But China has a
larger population, which is concentrated in the eastern region: 45% of the
population lives on 29% of the land area in eight coastal provinces and the
three municipalities of Beijing, Shanghai and Tianjin. The population is also
concentrated in cities rather than suburbs: 15 Chinese cities have over 10m
people and 276 have over 1m people, whereas 30 European cities have over
1m population and just 10 US cities have over 1m residents.
Figure 13
Figure 14
Figure 15
Population of top Chinese cities
Population of top European cities
Population of top American cities
30
(m)
25
20
15
10
5
London
Paris
Berlin
Madrid
Barcelona
Milano
Napoli
Athina
Manchester
Roma
Bucuresti
Lisboa
Hamburg
Budapest
Warszawa
Wien
Stockholm
Mnchen
Lyon
Dublin
30
25
20
15
10
5
0
(m)
New York
Los Angeles
Chicago
Houston
Philadelphia
Phoenix
San Antonio
San Diego
Dallas
San Jose
Austin
Jacksonville
San Francisco
Indianapolis
Columbus
Fort Worth
Charlotte
Detroit
El Paso
Seattle
(m)
Chongqing
Shanghai
Beijing
Tianjin
Chengdu
Guangzhou
Baoding
Zhoukou
Shenzhen
Fuyang
Shijiazhuang
Suzhou
Wuhan
Linyi
Nanyang
Harbin
Zhengzhou
Handan
Weifang
Wenzhou
30
25
20
15
10
5
0
Source: CEIC, Eurostat, US Census, CLSA
Strong demand for local

O2O services evidenced
by rapid takeup
3 November 2015
Online services in great demand

Strong demand for local O2O services is also evidenced by rapid takeup by
consumers. Online food delivery is the poster child for Chinas rapid expansion
in O2O in 2015. Total orders and GMV almost doubled QoQ in 2Q15,
according to Eguan. In 1H15, overall online food-delivery GMV reached
Rmb12.5bn, almost equalling 2014s full year figure of Rmb15bn. This was
primarily driven by heavy promotions and significant discounts given to
encourage adoption. First-time customers can enjoy up to a 50% discount.
The average subsidy is Rmb8-12 per order or about a 33% discount.
11

China internet
Total orders and GMV

almost doubled QoQ
in 2Q15
Figure 16
Figure 17
Online food-delivery order volume
Online food-delivery GMV
(m)
400
(%)
Takeout orders
QoQ growth (RHS)
350
141
300
200
150
10
(Rmbbn)
68
200
150
18
50
60
23
30
(29)
(7)
100
50
56
45
100
40
67
79
190
176
350
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
(50)
120
92
90
99
250
(%)
Takeout GMV
QoQ growth (RHS)
0
(30)
2.2
3.1
3.9
6.0
4.3
8.2
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
(60)
Source: Eguan, CLSA
Fast growth is not limited to new O2O services. Segments with a long
operating history such as groupbuy and travel also continue to expand, with
GMV and revenue growth accelerating in 2015. Overall groupbuy GMV was up
161% YoY in 1H15 according to Tuan800, while online travel GMV could be up
50% YoY. This is driven by mobile internet, which allows consumers to make
reservations online in more scenarios, product innovation by market leaders
and geographic expansion into lower-tier cities.
Figure 18
Figure 19
Groupbuy GMV
Older O2O services

groupbuy and travel also
saw acceleration in 2015
90
(Rmbbn)
80
184
Ctrip and Qunars revenue growth

(%)
Groupbuy GMV
YoY growth (RHS)
161
70
60
108
50
40
30
46
20
10
1H11
10
1H12
14
29
77
1H13
1H14
1H15
220
200
180
160
140
120
100
80
60
40
20
0
140
(% YoY)
Qunar
Ctrip
120
100
80
60
40
20
0
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
Source: Companies, CLSA
Chinas O2O users jumped to 280m in 2014, about 20% of the total
population or about 45% of internet users. The increase was driven by
expansion of O2O services into lower-tier cities. For example Meituan and
Ele.me now cover 200-plus cities for food delivery service, while taxi-hailing
app Didi-Kuaidi has drivers in 360 cities nationwide. Currently just under half
of all O2O services are in tier-3 or lower cities.
Figure 20
Figure 21
Figure 22
Number of O2O users
O2O users by city tier
O2O user growth by city tier
450
(m)
Users
YoY growth (RHS)
400
350
250
135
40
82
2011
2012
2013
2014
Tier 1
18%
70
50
50
0
30
80
15F
25
(%)
25
27
18
20
60
185
200
100
367
280
300
150
(%)
Tier 3 &
others
44%
15
Tier 2
38%
10
30
20
Tier 1
Tier 2
Tier 3 & others
Source: Sootoo, Talking data, CLSA
12
3 November 2015

China internet
Consumer services market to be Rmb11tn by 19CL
We estimate the consumer-service market could be worth Rmb11tn by 2019.

It is a subsegment of Chinas consumer expenditure (Rmb23bn in 2014, onethird of Chinas nominal GDP). Consumer expenditure includes broader
spending on physical goods and services, food and beverage, apparel,
housing, household goods, transport, education, healthcare, communications
and others.
O2O services could be an

Rmb11tn addressable
market in five years
Figure 23
Figure 24
China consumer spending

25
(Rmbtn)
Consumer spending breakdown (2014)
YoY growth (RHS)
(%)
Education 2%
20
20
14
15
Others 12%
25
Leisure and
recreation 3%
20
Hotels and
catering 4%
15
13
11
11
10
10
F&B 29%
Communications
4%
Household
goods & services
6%
Housing
17%
Healthcare 7%
12
14
17
19
21
23
2009
2010
2011
2012
2013
2014
Transport 7%
Apparel 9%
Addressable market was

around Rmb7tn in 2014
Excluding physical products sales (eg, apparel) and certain categories that
are not addressable by O2O business models, such as housing, utilities and
financial services expenditure, we estimate the consumer-service market was
Rmb7tn in 2014 and could reach Rmb11tn by 2019.
Figure 25
Figure 26
Consumer-service market (2014)
Consumer-service market (19CL)
Rmb38tn
Rmb23tn
Consumer service
addressable by
O2O business
model
Rmb6.8tn
O2O GMV
Rmb0.5tn
Consumer service
addressable by
O2O business model
Rmb10.7tn
O2O
services
GMV
Rmb2.5tn
3 November 2015
13

China internet
The restaurant segment was the biggest at 41% of total expenditure in 2014,
followed by travel (29%), healthcare (13%) and education (7%), with the top
four segments accounting for 90% of consumer-service spending.
The restaurant segment

was the biggest
Figure 27
Figure 28
Consumer-service spending
Service spending breakdown (2014)
(Rmbtn)
12
Hair/beauty
4.0%
9.5% 5Y Cagr
10
House keeping
1.0%
Entertainment
0.4%
Bath/Spa
4.5%
Education
7.2%
6
Restaurant
41.3%
Healthcare
12.9%
4
2
Travel 28.7%
6.2
6.8
7.4
8.1
8.9
9.7
10.7
2013
2014
15CL
16CL
17CL
18CL
19CL
Source: CLSA
Dineout
Chinese spent around Rmb7tn on food and beverages in 2014: about Rmb3bn
at restaurants (dineout and takeout/delivery) and Rmb4bn on groceries (food
at home). We forecast the dineout market to see a 9% five-year Cagr to
Rmb3.9tn by 2019.
Chinese spent around

Rmb7tn on food and
beverages in 2014
Figure 29
Figure 30
Dineout GMV
Dineout online penetration
4,500
16
(Rmbbn)
4,000
12
3,000
10
2,500
2014
15CL
16CL
17CL
18CL
3,897
3,559
3,250
2,968
2,711
2,487
1,500
500
(%)
12.7
19CL
10.7
(Rmbbn)
47% 5Y Cagr
400
300
6.1
200
3.3
100
2
0
2014
600
500
8.3
2,000
O2O dineout GMV

14.7
14
9% 5Y Cagr
3,500
1,000
Figure 31
15CL
16CL
17CL
18CL
19CL
83
165
248
347
451
572
2014
15CL
16CL
17CL
18CL
19CL
Source: NBS, Euromonitor, CLSA
Restaurant services are

booming in China
Restaurant services are booming in China. Apart from business

entertainment, more people are going to restaurants, teahouses and cafes for
daily meals and gathering with friends. The frequency of eating out is also
rising as middle-class spending power grows. Dining out is an important
leisure activity over weekends and holidays. Good restaurants are important
tools for shopping malls to attract customers. Even luxury brands such as
Gucci have opened cafes to draw traffic, while LVMH acquired the Crystal Jade
restaurant chain in 2014.
Chinese groupbuy
platforms were early
providers of O2O services
Chinese groupbuy sites were early providers of O2O services and they
operate differently from Groupon in the USA. Groupon focuses on lowfrequency, high take-rate items; and merchants use the platform for brand
promotions. In contrast, Chinese groupbuy platforms sell high-frequency, low
take-rate items and merchants use them to drive sales volume. Over 60% of
Chinas groupbuy GMV today is on restaurant deals. Unlike Groupon, the
Chinese counterparts offer daily or even real-time deals. Consumers can
generally download and use discount coupons in restaurants right away.
14
3 November 2015

China internet
Groupbuy GMV growth jumped in 2H13 with rising smartphone penetration

and growing location-based services. GMV growth accelerated further in 1H15
and was up nearly 200% YoY, as groupbuy sites expanded beyond catering to
takeout delivery, home services, hotels and others. Groupbuy 1H15 GMV was
bigger than in the whole of 2014. We expect the momentum to continue,
given increased promotions from leading players.
Figure 32
Figure 33
98
120
115
186
131
240
200
160
102
120
10
12
13
16
22
24
30
46
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
40
0
Figure 34
Strong momentum should

carry into 2H15, given
increased promotions
from leading players
184
(%)
Groupbuy GMV
YoY growth (RHS)
161
120
80
46
10
200
160
108
240
14
29
77
40
0
Figure 35
Annual groupbuy GMV

200
180
160
140
120
100
80
60
40
20
0
(Rmbbn)
1H11
4Q13
3Q13
80
90
80
70
60
50
40
30
20
10
0
1H15
Groupbuy GMV
YoY growth (RHS)
1H14
(Rmbbn)
2Q13
55
50
45
40
35
30
25
20
15
10
5
0
Semi-annual groupbuy GMV

(%)
1H13
Quarterly groupbuy GMV
1Q13
Groupbuy GMV growth

accelerated further in
1H15 and was up nearly
200% YoY
1H12
Groupbuy GMV growth

jumped in 2H13 with
rising smartphone
penetration
(Rmbbn)
Groupbuy GMV breakdown
Groupbuy GMV
YoY growth (RHS)
(%)
155
108
68
21
2012
36
75
190
2013
2014
15CL
200
180
160
140
120
100
80
60
40
20
0
100
(%)
Catering
Lifestyle
Entertainment
Others
Hotel
80
60
40
20
0
50.6
56.9
55.7
61.8
63.4
1H13
2H13
1H14
2H14
1H15
Groupbuy market has

already consolidated with
leading players Meituan,
Dianping and Nuomi
The groupbuy market has already consolidated, with Meituan, Dianping and
Nuomi the leaders. Meituan is the largest player with a 50% market share,
according to Tuan800. It has strong execution capability in acquiring offline
merchants and has been fast in penetrating low-tier cities. Dianping has a
30% market share and is perceived as the Yelp of China. It has strong brand
in top-tier cities but has been relatively slow to penetrate lower-tier cities.
Figure 36
Meituan is the largest

groupbuy player
Groupbuy market share
70
(%)
Meituan
Dianping
Nuomi
Others
60
50
40
30
20
10
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
13
13
13
13
13
13
13
13
13
13
13
13
14
14
14
14
14
14
14
14
14
14
14
14
15
15
15
15
15
15
3 November 2015
15

China internet
Meituan and Dianping

announced merger
in October 2015
In October 2015, Meituan and Dianping announced a merger, which would

create Chinas largest O2O and groupbuy services platform. However, the new
company will maintain a co-CEO structure and the Meituan and Dianping
brands will operate separately, including the overlapping high-frequency
groupbuy coupons and restaurant instant-discount businesses. The
transaction accelerated industry consolidation, which is good for all players,
but the competitive landscape is unlikely to change significantly as Dianping
and Meituan will continue to operate separately.
Baidu has ramped

promotions on Nuomi
since early 2015
Nuomi was owned by Renren, but was sold to Baidu in February 2014. Baidu
has ramped promotions on Nuomi since early 2015. Replicating Alibabas
Double-11 (Bachelors Day) success, Nuomi launched promotional days to
encourage users to sign up and boost sales. Nuomi recorded Rmb73m in GMV
on its first promotional event on 7 March. Its GMV jumped to Rmb450m on 22
August (Chinese Valentines Day).
Baidu is confident of
overtaking Dianping
by end-2015
Baidu estimates Nuomis groupbuy market share increased from c.10% in

January 2015 to c.20% in July 2015. Baidus measure differs from Tuan800s
market share data, as Tuan800 can only properly track GMV on PCs and
Meituans tracked GMV includes travel deals, which are not like-for-like with
Nuomi. Baidus subsidiary Qunar offers most of the travel-related products
instead of Nuomi. Baidu is confident of overtaking Dianpings scale by end2015 and ultimately becoming No.1 in the groupbuy market.
Takeout delivery
Takeout delivery faces the fiercest competition among major O2O services.
Chinas overall takeout-delivery market was around Rmb300m in 2014, 10%
of the total restaurant market. However, it is ideal for acquiring users, as:
Takeout delivery faces the

fiercest competition
among O2O services
The backend is easily connected online.

Order sizes are small and repeat purchase frequency is high.
Each purchase requires online payment.
Gross take rate is high at 10-15%.
Delivery team can support other O2O services such as online grocery and
medicine sales.
Figure 37
Figure 38
Figure 39
Takeout-delivery GMV
Takeout-delivery online penetration
Online takeout-delivery GMV
70
350
700
(Rmbbn)
600
55.0
60
14% 5Y Cagr
500
50
400
40
300
30
200
20
100
10
(%)
299
344
395
452
515
587
2014
15CL
16CL
17CL
18CL
19CL
58.0
(Rmbbn)
300
44.8
87% 5Y Cagr
250
200
28.5
150
13.1
100
5.0
0
2014
50
15CL
16CL
17CL
18CL
19CL
15
39
78
117
152
193
2014
15CL
16CL
17CL
18CL
19CL
Online takeout-delivery
GMV is growing at a
phenomenal rate
16
Online takeout-delivery GMV is growing at a phenomenal rate. Meituan and

Ele.me are the largest players with 30-40% market shares, followed by
Baidu. Baidu only launched food-delivery services in October 2014 and it
currently covers only 100 cities, compared to over 200 cities for Meituan and
Ele.me. However, it has the largest share among white-collar workers in half
of its covered cities. Baidu Waimai just raised US$250m from private funding
for expansion. Ele.me also raised US$650m of new capital in August.
3 November 2015

China internet
Takeout orders and

GMV almost doubled
QoQ in 2Q15
Figure 40
Figure 41
Takeout-delivery orders
Takeout-delivery GMV
400
Takeout orders
QoQ growth (RHS)
(m)
350
150
99
250
100
68
200
150
50
18
(7)
100
200
(Rmbbn)
Takeout GMV
QoQ growth (RHS)
141
300
50
(%)
40
67
79
190
176
350
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
7
6
100
75
50
23
25
(29)
2
1
(50)
125
92
56
45
(%)
2.2
3.1
3.9
6.0
4.3
8.2
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
(25)
(50)
Source: Eguan, CLSA
Takeout delivery orders and GMV almost doubled QoQ in 2Q15. Food takeout
GMV reached Rmb12.5bn in 1H15 according to Eguan, almost the same as
2014 full years Rmb15bn. Heavy promotions and discounts have driven
sales. First time buyers can enjoy as much as 50% discount. Average subsidy
is Rmb8-12 per order or 33% discount.
Meituan and Ele.me lead
market share in takeoutdelivery O2O service
Figure 42
Figure 43
Takeout-delivery order share
Takeout-delivery GMV share
Others
8%
Daojia
1%
Taodiandian
3%
Daojia
2%
Taodiandian
4%
Baidu
8%
Meituan
41%
Eleme
39%
Baidu has larger share

among white-collar
workers than students
Others
13%
Meituan
35%
Baidu
13%
Eleme
33%
Figure 44
Figure 45
Takeout order share - Students
Takeout order share - White-collar
Taodiandian
3%
Others
9%
Others
6%
Taodiandian
3%
Baidu
4%
Eleme
39%
Meituan
48%
Baidu
16%
Meituan
38%
Eleme
34%
Source: Eguan, CLSA
We recruited four university students in China to try a range of O2O services.

In our takeout-delivery test, we compared the ordering and delivery process,
subsidy offered and customer-service experiences among the four popular
food-delivery mobile apps in four cities. Key findings are:
Four delivery platforms
have similar coverage
3 November 2015
Restaurant choice. The four delivery platforms have similar coverage,
covering a fair variety of chain and independent restaurants as well as

fastfood shops, cafes and snack bars. Our student in Shanghai commented
that Koubei had slightly better coverage, while the other three are similar.
17

China internet
Review. All the platforms encourage users to rate and provide feedback
on restaurants. Our diners commented that quality and quantity of reviews
are better at Koubei and Ele.me, relative to Baidu and Meituan.
Subsidies. The four platforms offer various subsidies, including first-time-
Baidu and Ele.me are

more aggressive in
providing subsidies
user discounts, coupons for orders exceeding a certain threshold, discounts

for use of certain payment channels, red packets to share with friends and
restaurant-specific discounts. Baidu and Ele.me are more aggressive in
providing subsidies, while Koubei is the least aggressive. Koubei is the only
platform that does not provide payment discounts or red packets.
Payment. Aside from Koubei, the apps provide various payment options
including Alipay, Baidu or WeChat Wallet, credit or debit card and cash on
delivery. Alipay is mandatory on Koubei.
Delivery. Half of our orders were delivered by staff of local restaurants.
Half of our orders were

delivered by staff of local
restaurants
Baidu and Meituan appeared to have a relative large inhouse delivery

team, while Ele.me and Koubei teamed up with third-party delivery
companies. Delivery was generally fast at around 40-50 minutes.
Grocery
Chinas food and grocery retail market is worth about Rmb4tn. Unlike
electronics and apparel where online penetration is relatively high at 20-25%,
grocery - especially fresh food - is difficult to sell online due to smaller value
per order, perishable products, fragile packaging and complex logistics
requirements, such as cold-chain. Currently only about 2% of fresh food is
sold online in China. The grocery online penetration rate is also low in
developed economies at 5-6%.
Chinas food and grocery

retail market is worth
about Rmb4tn
Figure 46
Figure 47
Grocery retail market size
Grocery online penetration
6,000
(Rmbbn)
5% 5Y Cagr
2014
15CL
16CL
17CL
18CL
5,330
2
5,076
2,000
4,834
4,604
3,000
4,385
4,176
4,000
19CL
Online grocery GMV

5.7
(%)
4.7
5,000
1,000
Figure 48
(Rmbbn)
300
3.8
35% 5Y Cagr
250
2.9
200
2.2
150
1.6
100
1
0
2014
350
50
15CL
16CL
17CL
18CL
19CL
67
97
135
183
238
302
2014
15CL
16CL
17CL
18CL
19CL
18
Two business models:

online supermarkets and
O2O agencies
The grocery industry currently adopts two business models for online sales:
asset-heavy online supermarkets, which require large upfront capital to build
dedicated infrastructure; and flexible O2O agencies that function like a
concierge service. Yihaodian is the largest online grocery store in China but
has struggled to make a profit. The founders sold all their shares to Wal-Mart
this year. Other key players include SF Best and Cofco Womai, which primarily
operate asset-heavy models covering key cities, while dozens of startups such
as Benlai.com and Swbj.com are competing in O2O, mostly in tier-1 and top
tier-2 cities.
Alibaba and JD.com are

trying both approaches
Alibaba and JD.com are building a hybrid central-fulfilment-centre-plus-O2O

model. Alibaba is expanding the geographical coverage of its Tmall
supermarket, which operates an asset-heavy, central fulfilment centre model
with Cainiao Logistics, while the company is also experimenting with O2O
3 November 2015

China internet
through investee companies. JD has built a cold-chain logistics chain, but it

mainly covers Beijing, Shanghai and nearby areas, offering premium fresh
fruit, imported food and beverages. It is experimenting with the O2O model
and crowdsourced delivery through JD Daojia, which is largely based on
Ubers sharing-economy concept. Its crowdsourced delivery team comprises
freelance local residents paid on a per-delivery basis.
Figure 49
Figure 50
Hypermarket market share (2014)
Top five players market share
(%)
14.0
18
13.9
Sun Art
Wal-Mart
Yonghui
(%)
16
14
10.6
CRE
Carrefour
12
10
5.3
1.9
1.7
Renrenle
2.4
Wuhan
Zhongbai
2.7
CP Lotus
Bailian
Yonghui
Wal-Mart
Carrefour
3.5
A-Best
6.4
Sun Art
18
16
14
12
10
8
6
4
2
0
CRE
JD acquired 10% stake in

Yonghui Superstores
in August
8
6
4
2
2.3
1.8
0
2009
2010
4.5
3.9
3.1
2011
2012
2013
5.3
2014
CREs figure included Tesco in 2014. Source: Euromonitor, Companies, CLSA
JD partners with supermarkets, hypermarkets and convenience stores to offer

O2O grocery services where consumers order online and JD delivers the
products to their homes. In August 2015, JD acquired a 10% stake in Yonghui
Superstores, an A-share-listed chain with 351 retail outlets across 17
provinces. The partnership is intended to secure food product supply and
leverage on Yonghuis cold-chain system. Yonghui is not Chinas largest
supermarket, but 46% of its sales are fresh food, the largest among all.
JD partners with
supermarkets,
hypermarkets and
convenience stores
Travel
Travel is another major consumer spending segment, which we estimate was
worth about Rmb2tn in 2014. We forecast a c.9% five-year Cagr to Rmb3tn
by 2019, boosted by favourable policies and strong demand for outbound
travel. Online travel was the first and most-developed O2O service. Online
migration has accelerated with mobile internet, by penetrating to lower-tier
cities and facilitating last-minute booking, which is common among Chinese
travellers. Growing leisure and outbound-travel products, special promotions
and speedy service have also attracted more users online.
Travel is another major

segment, worth about
Rmb2tn in 2014
Figure 51
Figure 52
Travel market size
Travel online penetration
3,000
1,500
20
34% 5Y Cagr
900
21.6
15.9
600
2,774
3,037
18CL
19CL
0
2014
15CL
16CL
17CL
18CL
19CL
1,339
2,533
17CL
1,068
2,313
16CL
828
2,112
15CL
300
621
1,938
2014
10
455
15
1,000
26.9
30
25
(Rmbbn)
1,200
32.7
35
2,000
1,500
38.5
40
2,500
500
44.1
45
9% 5Y Cagr
Online travel GMV
(%)
308
3,500
50
(Rmbbn)
Figure 53
2014
15CL
16CL
17CL
18CL
19CL
Domestic travel benefits

from government policies
3 November 2015
Domestic travel benefits from central-government policies. The government

has encouraged domestic travel to stimulate consumption; and in August, the
State Council issued a policy to further promote the tourism industry,
19

China internet
including encouraging 2.5-day weekends in the summer, as some employees

cannot use up their annual leave and some worry that taking holidays could
affect their careers. The statement also criticised the underdevelopment of
tourist sites and their infrastructure and encouraged more investment.
Outbound travel is still in
its infancy
Outbound travel is still in its infancy. Chinese tourists are travelling to many
destinations for the first time, while renminbi strength against Asian
currencies and the euro makes travelling and shopping overseas highly
appealing. Japan is the top destination and a shopping paradise for Chinese
visitors. Travel to Korea is recovering after Mers. Thailand is another popular
destination, but the Bangkok bombing has hurt near-term demand. Longhaul
travel to Europe and the USA saw high demand during the summer holidays.
Ctrip, eLong and Qunar dominate the online travel market. Ctrip and Qunar
account for an aggregated 24% of hotel-booking volume and 59% of airticketing volume. Airlines commission-rate cuts have squeezed out small
players and increased Ctrip and Qunars share gain. Both continue to grow
volume and commission revenue at over 50% YoY in hotel-booking and airticketing services in 2015.
Figure 54
Figure 55
Figure 56
Hotel room-nights sold
Hotel room-nights sold growth YoY
Hotel booking revenue growth YoY
(% YoY)
160
Qunar
eLong
100
50
40
20
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
Figure 57
Figure 58
Figure 59
Flight ticketing volume
Flight ticketing volume growth YoY
Flight revenue growth YoY
(m)
30
Ctrip
(% YoY)
160
Qunar
Ctrip
100
Qunar
60
80
40
60
40
20
20
4Q14
3Q14
2Q14
1Q14
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
4Q13
3Q13
10
2Q13
15
Ctrip
80
120
20
(% YoY)
100
Qunar
140
25
2Q15
(50)
2Q15
1Q15
1Q15
60
150
4Q14
10
eLong
3Q14
80
Qunar
200
100
15
Ctrip
250
120
20
(& YoY)
300
Ctrip
140
2Q14
eLong
1Q14
Qunar
4Q13
Ctrip
3Q13
25
2Q13
(m)
30
Ctrip continues to
accelerate revenue
growth and market share
Ctrip continues to accelerate revenue growth (46% YoY in 1H15) and market
share gain by:
Opening up its platform to third-party travel agents. About 60% of air
tickets come from third parties. Ctrip does not charge a commission on
these sales, but bundles third-parties cheaper air tickets with insurance or
other products, which provide an equivalent commission rate of about 4%.
20
3 November 2015

China internet
Strengthening outbound products by partnering with Priceline and Expedia,
Ctrips revenue growth is

driven by open platform,
better outbound products
and reduced couponing
setting up a local team stationed overseas to create self-organised tour

products, forming the SkySea Cruise JV with Royal Caribbean and
acquiring packaged-tour wholesaler Hytours. Outbound travel contributed
30% of flight revenue and 65% of package tour revenue in 2Q15.
Ctrip acquired a 37.6% stake in eLong (48% voting rights) to become the
largest shareholder of the company. Since the acquisition, eLong and Ctrip
have reduced couponing at high-end hotels, which account for 70% of
Ctrips revenue. Ctrip will reallocate some the couponing to grow share in
the mass leisure-travel market.
Upgraded its technology platform, which also allows Ctrip to penetrate the
mass leisure-travel market cost-effectively.
Qunar has also accelerated revenue growth by:
Qunar has accelerated

revenue growth by offline
marketing and launching
a merchant model
Aggressive offline marketing. Qunar sends teams to hotels and tourist
attractions to meet travellers, assist customers to download its mobile

app, open accounts and register their payment cards with Qunar. Users
receive discount red packets in return.
Introduction of a merchant model. The company will bear inventory risks

on vacation packages and hotels in popular destinations and during peak
seasons. We believe that while this could help Qunar gain high-end users,
it increases inventory risk in a weak macro environment.
Car hailing
Car-hailing apps are a popular O2O service in China. Instead of fighting for
taxis, users can preorder a ride easily on their smartphones. Didi-Kaudi is the
leading player, backed by Tencent and Alibaba. According to media reports,
the platform received US$3bn in new funding this summer.
Car-hailing apps are a

very popular O2O service
Uber has partnered with Baidu in China. Uber China just raised US$1.2bn in
new funding to expand its service coverage from the current 20 cities to 100
cities by yearend. Ubers CEO loves China, as users are highly adoptive of
new apps and services and the market is growing fast. Uber China has fully
integrated with Baidu Map and set Baidu Wallet as its default payment
platform.
Uber has partnered with

Baidu in China
Figure 60
Figure 61
Figure 62
China taxi market size
O2O taxi GMV
O2O private car-hailing GMV
400
350
(Rmbbn)
304
316
328
339
350
361
371
(Rmbbn)
63
60
300
200
150
20
100
2014
15CL
16CL
17CL
18CL
19CL
20CL
22
25
30
20
10
15CL
41
40
12
2014
59
50
10
50
79
60
32
30
(Rmbbn)
70
42
40
90
80
52
50
250
70
16CL
17CL
18CL
19CL
10
15CL
16CL
17CL
18CL
19CL
Source: CLSA
Tencent, Alibaba and Baidu are heavily subsidising car-hailing apps as this is
fastest way to acquire mobile-payment users. While taxi apps have low
revenue-growth potential, private car-hailing apps can be a lucrative market:
we forecast Rmb80bn in GMV and a 20% take rate by 2019.
3 November 2015
21

China internet
Entertainment
Chinas movie business saw a strong 31% sales Cagr over the past three
years, with total box-office revenue reaching Rmb30bn in 2014. We believe
the industry could sustain a 30% five-year Cagr to Rmb110bn by 2019,
driven by rising user penetration - especially in low-tier cities - better content
and promotions by online ticket sellers. Online movie-ticket sales have grown
fast: around 46% of tickets were sold online as of end-2014, but the ratio
rose to 63% by 1Q15 and we forecast it to reach 80-90% in five years,
implying c.Rmb95bn in revenue by 2019.
Online movie ticket sales

have grown fast
Around 63% of movie

tickets were sold online
in 1Q15
Figure 63
Figure 64
Entertainment market size
Entertainment online penetration
100
90
80
70
60
50
40
30
20
10
0
(Rmbbn)
90
Figure 65
(%)
80
25% 5Y Cagr
70
70
60
50
80
75
Online entertainment GMV

80
60
41
54
67
80
92
15CL
16CL
17CL
18CL
19CL
40% 5Y Cagr
60
46
50
40
30
30
30
(Rmbbn)
70
40
2014
80
20
20
10
10
0
2014
15CL
16CL
17CL
18CL
19CL
14
25
38
50
64
74
2014
15CL
16CL
17CL
18CL
19CL
Figure 66
Figure 67
Figure 68
China annual box-office revenue
Movie tickets sold per capita
Box-office revenue by channel
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
35
(Rmbbn)
35
Box-office revenue
YoY growth (RHS)
(%)
70
30
60
25
50
20
40
15
30
10
20
10
2007 2008 2009 2010 2011 2012 2013 2014
(tickets)
China
USA/Canada
(Rmbbn)
Online revenue
Offline revenue
30
25
20
15
10
5
2007 2008 2009 2010 2011 2012 2013 2014
2013
2014
1Q15
Source: CEIC, CLSA
Home and beauty fastgrowing, fiercely

competitive O2O segment
Home services are

individually small O2O
markets
Healthcare is one of the

fastest growing service
segments in China
22
Home and beauty services

Home and beauty is a fast-growing and fiercely competitive O2O segment in
China. Users can book housecleaning, nanny, hairdressing and massage
services through their smartphone. Service providers are professionals from
offline stores and we find service quality is comparable or better than in the
stores. For example, massage therapists bring the massage table and other
equipment needed to create a spa environment to the customers home.
Home services are individually small markets, led by one-stop platforms
including 58 Home and Meituan. We estimate housekeeping to be a Rmb60bn
market and beauty services a Rmb200bn segment in 2015. Small players also
exist, including eJiaJie (housecleaning), eDaixi (laundry) and Heilijia
(massage). They have their own apps, but most of these services are also
available on the big O2O platforms with broader user reach, such as Baidu,
Alipay and Weixin.
Healthcare
Healthcare is underdeveloped and one of the fastest growing service
segments in China. Consumer healthcare spending was Rmb1.6bn in 2014
according to Euromonitor, of which healthcare service spending (outpatient
and hospital excluding healthcare equipment) was Rmb900bn. We estimate
this could rise at a 12% five-year Cagr to Rmb1.5tn by 2019.
3 November 2015

China internet
Chinas healthcare system development lags economic reform. Public

hospitals still dominate the market. Although China has around 11,000
private hospitals - nearly half the countrys total of 24,000 - the private sector
only employs around 14% of medical staff and serves about 10% of patients,
targeting a niche market. Private hospitals face two big challenges: talent and
insurance coverage. China lacks medical staff and doctors traditionally only
practice in public hospitals to advance to higher levels. It is also not easy to
get public insurance to cover private hospital services as local governments
protect public hospitals.
Chinas healthcare system

development lags
economic reform
Figure 69
Figure 70
Healthcare industry size
Healthcare online penetration
1,600
3.5
(Rmbbn)
12% 5Y Cagr
1,400
2.7
2.0
800
2.9
3.1
Online healthcare GMV

3.3
15CL
16CL
17CL
18CL
1,522
1,367
1,226
1,097
979
873
2014
19CL
29% 5Y Cagr
1.6
30
20
1.0
400
(Rmbbn)
40
1.5
600
60
50
2.3
2.5
1,000
(%)
3.0
1,200
200
Figure 71
10
0.5
0.0
2014
15CL
16CL
17CL
18CL
19CL
14
22
29
35
42
50
2014
15CL
16CL
17CL
18CL
19CL
Other problems include a serious mismatch between patients and hospitals

and overprescription. Larger hospitals are packed with patients with minor
illnesses, given patient concerns over the quality of smaller hospitals and
clinics. Smaller hospitals have low utilisation rates.
China has long kept a
tight grip on drug prices
China has long kept a tight grip on drug prices to ensure medical costs
remain affordable. However, some drugmakers have sacrificed quality to keep
prices low. Hospitals are overreliant on drug sales for income, which results in
overprescription, especially for expensive drugs. Public hospitals generate
40% of their revenue from prescription-drug sales and are allowed to charge
a 15% markup on prescription drugs sold.
Government initiated an
Rmb850bn healthcarereform plan in 2009
However, given poor access to medical support - especially in rural areas rising medical costs and low insurance coverage, the government initiated an
Rmb850bn healthcare-reform plan in 2009. It aims to provide affordable
medical services to all citizens by 2020. The reforms include a complete
overhaul of the healthcare system, including building more hospitals,
expanding insurance coverage, updating IT systems and laws governing
private healthcare investment, pharmaceuticals and medical devices.
China further liberalised the healthcare industry in 2012 by lifting restrictions
on foreign investment in private hospitals. In 2014, China raised the foreign
ownership cap to 70% and allowed 100% foreign direct investment in private
hospitals the Shanghai Free Trade Zone. It also allows public hospitals to sell
franchises to private-sector operators to give patients access to a wider
services. It encourages doctors to work in multiple hospitals or locations.
Last years reform

brought private hospitals
into the public medical
insurance system
3 November 2015
The 2014 reform plan included bringing private hospitals into the countrys
public medical insurance system and encouraging a private insurance market,
allowing fully foreign-owned health insurers to operate in China. It also
encouraged insurance companies to partner with and invest in hospitals. This
year, China deepened the reform by scrapping price caps on most medicines
and the 15% markup on drug sales in hospital pharmacies, which will initially
23

China internet
end in 100 large-city hospitals and then be extended to all of China in 2017.
We believe liberalisation of the healthcare industry will continue, given rapidly
growing demand, as:
An ageing population, increasing pressure from work and pollution are
causing a rise in cancer, heart disease, diabetes and other chronic

illnesses. The 2009 reforms established and updated public hospitals,
relaxed the foreign-ownership cap and scrapped price controls and
markups on drugs in public hospitals. This will make medical services more
accessible and transparent for patients. Private insurance coverage also
eases the governments burden.
With rising incomes, improved health awareness and growing attention to
physique, Chinese consumers are pursuing health products such as

vitamins and dietary supplements to boost immunity and delay ageing.
With growing healthcare knowledge and busy lifestyles, consumers have

shifted to OTC drugs for minor illnesses such as coughs, colds and
dermatological problems.
Private healthcare spending per capita is currently US$180, 7% of total

consumer spending and well below the USA (US$5,000, 21%). The growth of
private healthcare services helps ease the governments burden.
Figure 72
Private healthcare
spending per capita is
US$180, 7% of total
consumer spending
Figure 73
Private healthcare spend/capita (2014)

5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
4,733
(US$)
16
(%)
15
14
12
10
8
6
844
307
181
World
China
3
1
2
USA
W.Europe
Figure 74
Growing private
healthcare service helps
ease government burden
Five-year Cagr (2010-14)
World
China
USA
W.Europe
Figure 75
Pub+pvt healthcare spend per capita
Five-year Cagr (2010-14)
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
18
(US$)
8,930
(%)
17
16
14
12
3,720
10
8
6
1,030
World
4
409
China
3
1
2
USA
W.Europe
World
China
USA
W.Europe
Figure 76
Figure 77
Figure 78
Private healthcare spend % of total
Govt HC spend % of total govt
Pvt insurance % of total HC spend
60
30
40
(%)
50
40
30
53
23
10
5
China
USA
W.Europe
35
23
25
15
10
(%)
35
30
20
30
World
25
25
44
20
(%)
20
15
5
10
5
China
USA
China
USA
W.Europe
24
3 November 2015

China internet
Online healthcare market

is small at Rmb10.9bn,
less than 1% of total
According to iResearch, the online healthcare segment remains small at

Rmb10.9bn in 2014 (including advertising, medical services and goods sales),
less than 1% of consumer healthcare spending. Currently, there are two main
online healthcare services: pharmacy and doctor appointments.
Figure 79
Main online healthcare

services are pharmacy
and doctor appointments
Figure 80
Online healthcare revenue

20
18
16
14
12
10
8
6
4
2
0
Online healthcare revenue mix (2014)
Online healthcare revenue (%)

YoY Growth (RHS)
(Rmbtn)
200
250
Advertising
5%
200
167
134
126
56
User valueadded
1%
150
59
100
50
11
17
2009
2010
2011
2012
2013
2014
15F
Product
sales 94%
Source: iResearch, CLSA

Figure 81
Online pharmacy,
contributed 95% of online
healthcare revenue
in 2014
Growing at a
triple-digit rate
Figure 82
Online healthcare sales

16
Online healthcare sales mix (2014)
(%)
Online healthcare product sales
YoY Growth (RHS)
(Rmbtn)
14
215
12
8
100
32
1
2009
2010
2011
2012
Sports nutrition Paediatric OTC

healthcare 4.9%
0.5%
Allergy care
0.2%
Weight
management
5.5%
OTC 9.9%
150
112
87
250
200
10
300
23
11
14
2013
2014
50
0
Vitamins and
dietary
supplements
56.9%
Herbal products
22.1%
Strong growth driven by

extensive product range,
free delivery, 24-hour
shopping
Online pharmacy has gained strong momentum, contributing 95% of online

healthcare revenue in 2014 and growing at a triple-digit rate. This growth is
driven by an extensive product range, free delivery and 24-hour shopping.
Alibaba leads in online pharmacy services. It acquired Citic 21CN, the sole
drug-tracking system in China, injected its Tmall Pharmacy into the company
and renamed it Alibaba Health. It is the only B2C platform with an online OTC
drug-sales licence. Prescription drugs cannot be sold online yet, but the
government does plan to issue online prescription-drug sales licences. In the
meantime, healthcare products such as vitamin supplements and OTC drugs
are in high demand.
Doctor appointments
another major
battleground
Doctor appointments are another major battleground among Baidu, Alibaba

and Tencent. Doctor appointments start other services, such as consultations,
prescription drug sales, checkups, rehabilitation and monitoring.
Tencent has invested in Guahao.com (a leading online doctor-appointment
platform) and Haodaifu (a leading online platform to search for physicians
and online consultations).
Baidu has launched Baidu Doctor (forming direct partnerships with over 700
hospitals and 25,000 doctors) and DuLife (an open platform connecting thirdparty wearable devices).
Alibaba has invested in Huakang Mobile Healthcare, a mobile healthcare app
developer. It was established in 2002 and focuses on patient-doctor
interaction through two mobile apps: Yike, which allows doctors to manage
patients records and look up the latest medical information, and also serves
as a networking platform for doctors to discuss difficult cases; and Jiuyibao,
which allows patients to make appointments, consult doctors online,
download test results and manage personal records.
3 November 2015
25

Online education is a
great concept but
tricky to implement
China internet
Education
Education is another Rmb500bn market according to Euromonitor, and could
continue to grow at 10% per year. Online education is great concept, but
implementation is tricky as people lack self-discipline. It is challenging for an
adult to sit in front of a computer for a six-hour course every day, let alone
kids. Online education only works for language learning, certification and
exam-based programmes.
Tarena is a China-based, Nasdaq-listed institution which provides vocational
programmes. It insists on an online-plus-offline model. While teachers
deliver lectures online, students have to take the lessons in classrooms. This
is ensures all students finish the whole programme and obtain a job
placement afterwards. O2O is better business model for the majority of
educational institutions. While taking lessons offline, students can sign up for
courses, download timetables and book and pay for lessons online.
Chinas private education

market is lucrative with
increasing competition
Chinas private-education market is lucrative with increasing competition,

driven by the rising middle class and growing applications to study overseas.
There are four main subsegments:
Private education market

has four major segments:
preschool, afterschool,
vocational and language
Preschool education - Private kindergartens are on the rise and account for
70% of the total market. Fierce competition drives parents to start early to
give their kids an advantage. The relaxation of the one-child policy since
2014 could bring an additional million babies per year.
Afterschool tutoring - Most students attend public schools for Grade 1-12
education. The stress of the National Higher Education Entrance Exam
(gaokao) creates high demand for afterschool education. This is a vast but
highly fragmented market that is entering the age of diversification with
personalised service and strong brands.
Vocational education - China faces huge challenges producing enough skilled
workers to move up the value chain. Only 21% of Chinese people have
college or above degrees. Fresh college graduates - especially those from
second-tier universities - lack relevant skillsets for new industries. The
government plans to modernise vocational training by introducing degreeand certificate-based options. It has also decentralised the approval of
online schools to provide distance education. This will fuel vocationaleducation growth, especially in business management and IT training.
Language training and study overseas - English is of great importance for

domestic tests (gaokao, the Senior High School Entrance Exam [zhongkao]
and graduate exams), studying overseas and obtaining well-paid jobs.
External courses featuring native-English-speaking teachers are in
demand. International schools are thriving in China as studying overseas
becomes fashionable.
Online education saw a

19% five-year Cagr to
Rmb90-100bn in 2014
According to iResearch, the online-education market expanded at a 19%

Cagr over the past five to Rmb90-100bn in 2014. K12 and higher education
are the biggest segments, while demand for vocational and language
programmes is growing. The structural changes in China mean more people
will have to retrain for new jobs. English skills are increasingly important to
find a well-paid job and study overseas. But most courses are online. O2O
adoption is low. Additional capital from internet leaders is likely to fuel new
growth in this segment:
Baidu has invested multiple sites, including chuanke.com ( ),

wansue.cn () and smartstudy.com (). Smartstudy was set up
in February 2014 by former senior management of New Oriental
Education.
26
3 November 2015

China internet
Alibaba has invested in TutorGroup with Temasek and Qiming Venture
Partners. TutorGroup is one of the worlds largest online English-language

learning institutions. Founded in 2014, it provides real-time interactive
language learning and has 2,000 teachers in 30 countries.
In addition, YY, Renren and NetEase have also invested in 100.com

(100 ), wanmen.org ( ) and 91waijian.com (91 )
respectively.
K12 and higher education

are the biggest onlineeducation markets
Figure 83
Figure 84
Online education GMV
Online education GMV mix
(Rmbbn)
140
120
100
19% 5Y Cagr
100
(%)
Higher education
Vocational
Others
Language
Primary/secondary
80
80
60
60
40
40
49
58
70
84
100
119
41
20
2009
2010
2011
2012
2013
14F
15F
20
0
2009
2010
2011
2012
2013
14F
15F
O2O penetration in
service industry is in
single digits
iResearch estimates local

service O2O transactions
grew 38% YoY to
Rmb237bn in 2014
Restaurants contributed
about 41% of total
transactions or Rmb98bn
GMV could reach Rmb2.5tn by 19CL
Overall O2O penetration in Chinas services industry is low (in single digits),
as the market is still in its infancy and highly fragmented. iResearch
estimated that local service O2O transactions grew 38% YoY to Rmb237bn in
2014, representing c.3% of service-related consumer spending. Nearly half of
these transactions were driven by mobile. Restaurant groupbuy O2O
contributed about 41% of total transactions or Rmb98bn, but the segments
online penetration was only c.3% in 2014.
Figure 85
Figure 86
O2O GMV transaction estimates
China O2O transactions - iResearch
(Rmbbn)
1,200
iResearch
Sootoo
600
Eguan
1,000
500
800
400
600
300
400
200
200
100
2010 2011 2012 2013 2014
15F
16F
17F
(Rmbbn)
Transactions
YoY growth (RHS)
200
5.3
5.8
4.6
100
0.5
9
1.0
21
42
350
1.8
50
400
2.5
63
98
2010 2011 2012 2013 2014
142
181
217
15F
16F
17F
50
40
172
45
75
30
20
10
2010 2011 2012 2013 2014 15F
16F
17F
Takeout delivery O2O - iResearch

7
3.5
150
(%)
60
118
Figure 88
Dineout O2O (LHS)

Online penetration
70
237
Figure 87
(Rmbbn)
80
324
250
90
498
410
Source: iResearch, Sootoo, Eguan, CLSA
Restaurant dineout O2O - iResearch
(%)
(Rmbbn)
300
200
50
10.7
15
12
9
5.9
150
100
12.4
8.4
250
(%)
Takeout O2O (LHS)

Online penetration
59
74
0.6
96
3.4
1.5
216
277
338
2010 2011 2012 2013 2014 15F
16F
17F
0.3
125
162
3 November 2015
27

China internet
iResearchs O2O
transaction-size
estimates do not
include travel
iResearchs O2O transaction-size estimates do not include all online travel

transactions, such as on Ctrip and Qunar, which are arguably not local
services. However, travel is a large spending category on Meituan (hotels) and
on Baidu (through Qunar), Chinas two largest O2O platforms.
Including online travel transactions, we estimate that overall O2O transaction
volume could be around Rmb455bn in 2014, representing 6.6% of servicerelated consumer spending. We forecast the market to expand at a 38% fiveyear Cagr to Rmb2tn by 2019, given heavy subsidies and funding from PE
and leading internet companies.
By segment, we forecast online penetration could reach 15% for restaurant
dineout, 58% for takeout delivery, 44% for travel and single digits for other
segments. Restaurants and travel are the biggest O2O markets, contributing
37% and 54% of total GMV, respectively. Online penetration in healthcare
may increase at a more gradual pace due to regulation, but the industry is
under pressure to change.
Figure 89
Figure 90
Chinas O2O-service GMV potential
Online penetration by service segment
2,500
(Rmbbn)
100
(%)
90
2,000
80
46% 5Y Cagr
Restaurant ex-takeout
Travel
Entertainment
Takeout
Healthcare
Others
70
1,500
60
50
1,000
40
30
500
0
20
467
761
1,084
1,462
1,878
2,350
2014
15CL
16CL
17CL
18CL
19CL
10
0
2014
15CL
16CL
17CL
18CL
19CL
Source: CLSA
O2O can make money
O2O revenue will reach

Rmb156bn by 19CL with
average take rate at 6.2%
Assuming an average 6.2% take rate, we forecast O2O revenue to reach

Rmb156bn by 2019. O2O service providers already charge take rates of 5%
on restaurants, 10% on food delivery 15% on hotels and 4% for air ticketing,
but are losing money because of heavy subsidies. For example, while the
food-delivery take rate is 10%, subsidies can be 30-50% of the meal value.
We expect subsidies to scale back as the market consolidates and matures
and we believe the O2O service industry is likely to consolidate in 2016 as PE
funding dries up. Baidus announcement of a Rmb20bn investment in Nuomi
is also intended to drive away funding in the O2O market.
Heavy subsidies used to

acquire consumers and
cultivate habits
The current heavy subsidies are used to acquire consumers and cultivate a
habit of booking, ordering and paying online. Once users adopt O2O services,
it is difficult for them to return to old habits even when subsidies are
withdrawn, because offline services cannot beat the online convenience,
speed, selection and ease of payment. For example, movie ticketing has the
highest O2O penetration in China. About 60% of moviegoers purchase tickets
online, of which 80% are sold at regular prices while 20% are sold with
promotions.
28
3 November 2015

China internet
O2O service platforms can

be profitable
O2O service platforms can be profitable. Operating costs are mainly for
upfront merchant acquisition and are relatively lower afterward. Most
overseas O2O operators enjoy 25% operating margins. Baidus O2O service
operating margin could be higher as it leverages on its existing sales force
infrastructure. Apart from the take rate, Baidu can also generate additional
revenue from search advertising, maps and cost-per-action (click-to-call,
click-to-register).
Figure 91
O2O service revenue (19CL)

Segment
Market size
(Rmbbn)
Dineout
3,897
Section 4
9% Cagr
Takeout
587
Section 5
14% Cagr
Grocery1
5,300
Section 6
5% Cagr
Travel
3,037
Section 7
Section 8
Section 10
92
750
771
Section 11
10% Cagr
Total ex
grocery
10,655
58.0
5.7
c.6% in
the UK today
44.0
80.0
8.0
5.0
340
3001
8.0
1,339
na
74
6.0
60
5.0
3.0
20.0
5.7
27
6.8
7.0
21.11
20.0
16.1
25.0
Grubhub 33%
Just Eat 24%
3001
Ocados
Ebitda margin
Online plus
O2O
=
80
Agency model
Ctrip at 23%,
Qunar at 17%
20.0
0.7
22.0
1.2
Similar with
dine-out today
c.2-5% today
12% hotels,
5% transport
40% Cagr
29
Online
Ebitda
(Rmbbn)
Yelp 2Q15
Direct sales
34% Cagr
Ebitda
margin (%)
Grubhub &
JustEat at 15%
Online plus
O2O
=
Online
revenue
(Rmbbn)
Similar with
todays rate
87% Cagr
c.60% today
572
Take rate
(%)
47% Cagr
c.70% flights &

c.30% hotels
12% Cagr
Education
c.13% today
3% Cagr
1,522
15.0
Online GMV
(Rmbbn)
c.6% today
25% Cagr
Home/beauty
Healthcare
9% Cagr
Entertainment
Section 9
Online
penetration
(%)
9.0
c.5-10%
c.2% today
50
10.0
29% Cagr
8.0
62
9.0
23.4
2,497
6.2
156
O2O is still in
landgrab phase
3 November 2015
Winners and losers
O2O is still in the landgrab phase and competition is fierce. Most players are
small and the market is crowded with new entrants. Currently, Meituan and
Dianping are the leading O2O service providers as Chinas largest groupbuy
platforms. Ele.me is the second-largest in food delivery. 58 Home is growing
share in niche markets such as housecleaning, nanny, beauty, moving and
carwashing given its strong presence in classified ads. However, we believe
the current leaders will lose market share to Baidu, Tencent and Alibaba,
which will become the ultimate winners in O2O service distribution. We expect
Baidu and Tencent to be the largest one-stop O2O-service platforms, while
Alibaba leads in O2O healthcare and financial services.
29

China internet
Figure 92
Overview of major O2O segments

Baidu
Alibaba
Tencent
JD.com
MeituanDianping
58.com
Others
Dineout
Nuomi
Meituan
(10-15%)
Dianping
(20%)
nm
Dianping
Meituan
na
Lashou, Wowo
Takeout
delivery
Baidu Waimai
Koubei
Ele.me
Ele.me
Meituan
Waimai
na
Daojia Meishihui
Grocery
na
Tmall
supermarket
JD.com (18%)
JD Daojia
na
na
Yihaodian, Cofco, SFBest
Travel
Ctrip (25%),
Qunar
Alitrip
Tongcheng
eLong
Tuniu (28%)
Meituan
na
Local transport
Uber
Didi-Kuaidi
Didi-Kuaidi
na
na
na
Car Inc, eDaijia, eHi
Movie ticketing
Nuomi
Taobao Movie
Weixin Movie
Nm
Maoyan
na
Gewala, MTime, Wanda
Housekeeping
eDaixi
58 Daojia
(c.10%)
58.com, eJiajie, JD Daojia

eDaixi
Maituan
Shangmen
58 Home
Ayibang, eJiajie, eDaixi
Beauty
Nuomi
nm
nm
nm
Maituan
Shangmen
58 Home
Helijia, Mocha
Healthcare
Baidu Doctor
Alibaba
Health
DXY.com,
Guahao.com
nm
nm
nm
Chunyu Doctor, Pingan

Doctor
Education
Baidu Edu
Taobao
Student,
TutorGroup
Tencent Class
nm
nm
nm
Xuexibao, Zuoyebang,
Xuebajun, Yuantiku
Auto services
XGO.com
Tmall
nm
Bitauto (25%) nm
58 Home
Autohome, Bitauto,
Yangche Diandian
Property-related
Baidu
Property
nm
Leju (16%)
JD Finance
58 Home
Soufun, Leju, iWjw,

Fangdd
nm
Current leading players

will not necessarily be the
ultimate winners
Baidu plans to be the top

O2O service platform
O2O service platforms require a large sales force to sign up and verify offline
merchants and cover a wide range of service verticals from catering to
housecleaning. It is difficult for a single platform to cover all geographies and
verticals well across China. The market will therefore be relatively
fragmented. We anticipate two types of winners: two or three big general
platforms, such as Baidu and Tencent; and many small niche and targeted
O2O service platforms. Given the low penetration and phenomenal growth in
the O2O market, the current leading players will not necessarily be the
ultimate winners.
Baidu aims to be No.1
Baidu aims to be Chinas largest one-stop O2O service platform. Among the
three big internet giants, only Baidu has a large sales force - 20,000 direct
staff from its search business and another 20,000 under Baidu Union, its
advertising-agency network. It is building an O2O ecosystem through direct
investment, direct partnerships and an open platform:
Baidu invests directly in high-frequency O2O services such as Nuomi

(groupbuy in restaurants and ticketing) and food delivery to acquire users.
It also a 25% stake in Ctrip. Catering and travel are the two largest and
most buoyant O2O segments in China.
It forms direct partnerships with merchants in healthcare, education and
finance, given its longstanding relationship with hospitals and educational

institutions in its search business. It has partnered with over 700 hospitals
(25,000 doctors) and 7,000 educational institutions (25,000 courses and
millions of registered users).
30
3 November 2015

China internet
Baidu Connect provides an open platform for independent merchants and

specialised O2O service providers. It has over 700k merchants, mostly
from its ad-agency network. Ad agencies are incentivised to recruit O2O
merchants for Baidu to stay as a member of Baidu Union. They can also
generate additional revenue from merchants by helping them manage light
apps (storefronts) on Baidu Connect.
Baidu search and Baidu map have over 600m and 300m monthly average
users (MAU) respectively, providing plenty of traffic to O2O services.
Ctrip stake has made

Baidu Chinas biggest O2O
travel platform
Baidu became Chinas largest O2O travel distribution platform after it

swapped the vast majority of its holding of Qunar into Ctrips shares on 26
October 2015. Baidu is now the largest shareholder of Ctrip with 25% voting
right and Ctrip has a 45% voting right in Qunar. Ctrip has a near-monopoly in
Chinas online travel market after acquiring a 48% voting right in eLong and
45% voting right in Qunar. Ctrip-eLong-Qunar holds over 80% revenue share
of the mainlands online travel market. Baidus investment in O2O travel
businesses has immediately turned profitable as it will recognise 25% of
Ctrips profit instead of Qunars losses.
Nuomi remains the main

strategic O2O direct
investment
Nuomi remains the main strategic O2O direct investment for Baidu. Baidu will
spend Rmb20bn on Nuomi over the next three years, mostly front-end
loaded. This will depress earnings by 30% in 2H15, but margin pressure
should ease in 2H16.
O2O is core strategy for Baidu as it is natural extension of its search business.
It has traffic, technology, capital and cost advantages. Baidu can also
promote mobile payments on its O2O service. With transaction data, Baidu
can expand into e-finance.
Tencent and Alibaba are also building extensive O2O ecosystems, but through
partnerships with leading O2O platforms such as Meituan, Dianping and
58.com. Neither company has or needs a direct sales force for its core
businesses and their ad-agency networks are also small. Baidus direct
competitors are not Tencent and Alibaba, but small players such as Meituan,
Dianping and 58.com, which have small balance sheets and funding.
The weak A-share market benefits Baidu, as PE funding is drying up and
competitors are struggling to raise money. Meituan originally planned to raise
US$1bn on a US$15bn valuation. Media reports state that it is looking for
US$2bn on a US$9bn valuation, which implies a 22% dilution. Ele.me recently
raised US$650m in fresh capital, but it will also be cautious on spending given
the uncertain funding outlook.
Tencent and Alibaba are

selective in subsidy
competition
3 November 2015
Tencent and Alibaba are selective in subsidy competition. They subsidise carhailing apps to gain mobile-payment users, but avoid direct subsidies in O2O
services such as restaurants as they do not have the same cost advantages
as Baidu. Tencent, Alibaba, Meituan and Dianping all have to hire 15,000
sales staff to sign up offline merchants to their O2O service platforms
whereas Baidu can leverage on its search businesss existing sales force.
Baidus subsidies can help it acquire users for both its O2O and payment
services, while Meituan and Dianping pay the same amount of subsidy to
acquire users for O2O services only. Tencent and Alibaba have better ways to
acquire mobile-payment users, such as red packet discount coupons.
31

China internet
Life+ a one-stop
O2O platform
To create one-stop platform, the new 6.8 version of Baidus app has a Life+
tab which centralises local services, including food delivery (Baidu Waimai),
movie ticketing (Nuomi), Travel (Qunar), Uber, messaging, laundry and doctor.
Baidu has three main

channels for merchants to
join its O2O ecosystem
In addition, Baidu has opened up all its technology and traffic resources to
merchants. Merchants can offer their O2O services through Baidu Connect, a
native app or Nuomi storefront - whichever suits them best - to be part of
Baidus O2O ecosystem:
Baidu Connect: This is an open platform for light (web-based) apps.
Baidu Connect was introduced at last years Baidu World. It has signed up
760k merchants including restaurants, travel agents, healthcare providers,
education services and retailers. Examples include @vanke (property
developer) and @YL ticketing (movie ticketing).
Baidu search had 643m

MAU as at 3Q15
Native app: Large merchants with successful native apps can now be
added to the Baidu app and Baidu Map app, leveraging on Baidu Searchs
643m MAU and Baidu Maps 326m MAU. Examples include eDaijia
(designated driver) and Uber (taxi hailing).
Nuomi storefront: Merchants can now also set up web-based storefronts

on Baidu. Examples include KFC and Zhuo Gang Kao Yu restaurant.
Figure 93
Life+ tab on new version of mobile Baidu

Life+ main menu
Main menu continued
Redirect to Nuomi
Redirect to Takeout
Source: Company, CLSA
Tencent was early and

most active in O2Oservice acquisitions
32
Tencent has the most extensive partnerships

Tencent was early and most active in O2O-service acquisitions. It has
minority stakes in Dianping (groupbuy, restaurants), Ele.me (food delivery),
58.com (home services) and eLong (travel). All these O2O services are
accessible directly on Weixin and/or mobile QQ platforms. The advantage of
the partnership strategy is to minimise investment. Tencent leverages on its
partners offline merchant coverage and infrastructure to offers O2O service
to its users. The risk of this strategy is that partners may not grow as fast as
Baidu, which invests directly and may not share 100% of its data.
3 November 2015

China internet
Figure 94
Tencent's selected O2O investments

Company
Local services
58.com
iDaixi
eJiajie
Meijiabang
Ayibang
Roseonly
Weipiao
Food-related
Dianping
Ele.me
Healthcare-related
Guahao.com
Dxy.com
Travel-related
LY.com
Didi Dache
eLong
Name
Company description
Holding (%)
Value
(US$m)
58
e
e
Date invested
Classified portal, with O2O subsidiary 58 Home

Laundry service
Housekeeping service
Online home-decorating platform
Cleaning services
O2O flower delivery
Movie channel on Weixin
26
na
na
na
na
na
na
1,301
20
22
millions
millions
millions
10+
Yelp-like review portal, to merge with Meituan

Online takeout delivery
20
20
400
200+
2014 to present
Jan, Aug 2015
Doctor-appointment app
Online healthcare community
na
na
100+
70
2014 to present
Sep 2014
Online travel agent

Taxi-hailing app, subsequently merged with Kuaidi
Online travel agent; Tencent proposed to privatise
30
20
16
800+
395
84
2012 to present
2013 to present
2011 to present
Throughout 2014
Jul 2014
2014 to present
Jun 2015
Jan 2010
Oct 2013
Jul 2014, Apr 2015
Shareholding and investment values are estimates. Source: Media reports, CLSA
Alibaba is relatively slow

and selective in O2O
service investment
Alibaba leads in O2O finance and healthcare

Compared with Baidu and Tencent, Alibaba is relatively slow and selective in
O2O service investment. It lags behind in the O2O catering and travel
segments. It has a minority stake in Meituan, but there is no direct
collaboration.
Alibaba and Ant Financial established a 50:50 joint venture called Koubei.com
(a Dianping/Yelp-like platform) to offer local O2O services this year. Each
injected Rmb3bn into the JV (c.US$1bn in total). Alibaba has transferred its
Taodiandian (online food-ordering and delivery platform) to the JV, while
Alipay will connect its offline merchants to the platform and expand it to other
local services. However, Taodiandian was only established in December 2013
and has a 5% share in food delivery; and Koubei.com has not done well since
Alibabas acquisition in 2006. Alitrip, formerly known as Taobao Travel, is
small compared to Ctrip and Qunar.
Alibaba leads in O2O

healthcare and finance
However, Alibaba leads in the O2O healthcare and financial segments. Alibaba
Health is Chinas leading online pharmacy and Alipay is its largest onlinepayment platform. The company also leads in promoting O2O models to
offline retailers through its acquisition of Intime and Suning.
Figure 95
Alibaba's selected O2O investments

Company
Name
Local services
Meituan
58 Daojia
58
Swbj.com
Dianwoba.com
Retail-related
Intime
Suning
Healthcare-related
Citic 21CN
21
XYWY.com
Huakang
Travel-related
Kuaidi Dache
AutoNavi
Qyer.com
Company description
Leading groupbuy platform, to merge with Dianping
Subsidiary of 58.com focusing on home O2O services
O2O logistics service provider in 10 cities
O2O logistics service focusing on Hangzhou and Shanghai
Local department-store operator
Leading offline electronics and appliance retailer
Drug-tracking system, rebranded as Alibaba Health
Online diagnosis, hospital/doctor search, online forum
Doctor-appointment system and online consulting service
Taxi-hailing app, subsequently merged with Didi
Digital map, navigation and location-based solutions provider
Online travel agent and forum
Holding
(%)
Value
(US$m)
Date invested
<20
10
na
na
100++
100
millions
millions
10
19.99
700+
4,600
Mar 2014
Aug 2015
54.3
na
na
119
na
32
Jan 2014
Sep 2011
Apr 2014
20
100
na
395
1,326
na
Jul 2011 to present

Oct 2015
Aug 2015
Sep 2015
2013 to present
May 2013
Jul 2014
Shareholding and investment value are estimates. Invested through Yunfeng Capital, not Alibaba Group. Source: Media reports, CLSA
3 November 2015
33

Meituan is currently
the largest O2O
service provider
Current leaders to lose market share

Meituan is currently the largest O2O service provider in China. It has
executed well and has outgrown its peers. Given its fast and efficient
expansion via offline merchant acquisition, especially in low-tier cities, it has
become the No.1 groupbuy platform in China with a 50% share. It now
covers close to 300 cities with over 15,000 sales staff and has expanded its
services from restaurants to travel and other services. However, it is still
lossmaking and relies on PE funding. It raised US$700m in December 2014
on a US$7bn valuation and is raising another US$2bn according to media
reports. The potential US$2bn in new capital translates to Rmb13bn, which is
half of Nuomi and Qunars spending.
Dianping is the No.2

O2O groupbuy platform
Dianping is the mainlands No.2 O2O groupbuy platform and is perceived as

the Yelp of China. It is the leading restaurant-review site in tier 1-2 cities, but
has lost market share to Meituan due to relatively slow expansion to low-tier
cities. It is struggling to make a profit as its restaurant take rate is low (single
digits). However, catering is a high-frequency O2O service and is important to
acquire and retain customers and traffic. Leveraging on the traffic, Dianping
expects to make a profit through advertising and expansion to low-frequency,
high-take-rate O2O services such as weddings and education.
Ele.me is the secondlargest food-delivery

O2O provider
Ele.me is the second-largest food-delivery O2O provider in China after

Meituan. It was established in 2009 and benefited from first-mover
advantage. It now covers over 260 cities with around 10,000 employees and
300k allied restaurants. It has 40m users and generates daily transactions of
Rmb60m (98% from mobile). It recently raised US$650m in funding, valuing
the company at US$3bn - comparable to Grubhub in the USA, Delivery Hero
in Germany and Just Eat in the UK. CITIC PE fund and Hualian Group led the
latest round of capital injection. Ele.mes disadvantage is it is a single-product
platform. Baidu could use food delivery as loss-leader for customer acquisition
and cross-sell other O2O services such as restaurants.
58 Homes strength is in
home services
58 Homes strength is in home services such as housecleaning, nanny service,

beauty, moving and carwashing, given its leading position in classifiedadvertising markets. However, most of these are mid-to-low-frequency
services where customer acquisition and retention are more challenging.
These markets are also relatively small and highly fragmented, with many
individual service providers.
But most are mid/lowfrequency services
Meituan-Dianping merger
to have little impact
on Baidu
Fundraising is difficult
34
China internet
Meituan-Dianping deal will not change competitive landscape

Meituan and Dianping will combine to become Chinas largest O2O service
platform, although the Meituan and Dianping brands will continue to operate
separately. The deal will accelerate industry consolidation, which is good for
all players. However, the O2O competitive landscape is unlikely to change
significantly. Baidu continues to enjoy a competitive edge in traffic,
technology, capital and cost structure, while Tencent and Alibaba are more
interested in mobile-payment investment and will invest in O2O selectively.
Fundraising is getting difficult as PE funds are now cautious on valuations.
Meituan, Dianping and Ele.me are all looking for new capital to compete and
grow scale. Meituan originally planned to raise US$1bn in new capital on a
US$15bn valuation. Media reports state that it is looking for US$2bn on a
3 November 2015

China internet
US$9bn valuation, which implies a 22% dilution. However, US$2bn

(Rmb13bn) in new capital is only half of Nuomi and Qunars annual spending.
It is still uncertain if the combined entity will find it easier to raise money. PE
funds do not like high valuations and the market is currently sceptical about
the potential of O2O.
Does 1+1 equal 2?
The merger may help reduce competition and subsidies, which would benefit
all players in the market. However, creating synergy from the combined
entity will be hard. Dianping and Meituan will maintain a co-CEO structure
and continue to operate separately, including overlapping high-frequency
groupbuy businesses. This implies that each will have to maintain 15,000
sales staff to secure merchants and users.
Limited operational
synergy
The two companies will only create operational synergy if they integrate, but
this means one management team will have to leave and the combined entity
will have to cut the sales force. Co-CEO structures seldom work: 58.com and
Ganji are still trying to figure out how to work together; and when Youku
integrated with Tudou, the latters entire management team left.
Youku/Tudou is much smaller than Youku and Tudou were separately.
Merger will reduce

subsidies in the market
The merger is intended to reduce the current high level of subsidies in the
market. Baidu will continue to have a competitive edge in terms of capital,
traffic, technology, cost advantage and mobile payments. Baidus aim to be
Chinas largest one-stop O2O service platform will not change, because O2O
services are a natural extension of its search business and enable it to expand
into e-finance. Apart from take rates, O2O services will also generate
additional search and mobile-payment revenue potential for Baidu.
Alibaba and Tencent are

more interested in
mobile payments
Mobile payments are a much more lucrative business and provide e-finance
upside. Alibaba and Tencent are more interested in promoting mobilepayment services - for example, Dianping is available on Weixin. But users
need three clicks to get to Dianping, which is under Weixin payment.
Alibaba will continue to

promote its own O2O JV
Koubei.com with Ant
Financial
Alibaba has a minority stake in Meituan, but there is no direct collaboration

between the two platforms. Alibaba will continue to promote its own O2O JV
Koubei.com with Ant Financial. Alibaba also leads in O2O healthcare through
its Alibaba Health online pharmacy service and in financial/payment services
through Alipay.
Figure 96
Chinese internet valuations

Name
Rec
Price
Curr
29 Oct
Target
price
Mkt cap
(US$m)
PE (x)
15CL
16CL
EPS 3Y %
(16-18CL)
PE/G
(x)
15CL
15CL
16CL
15CL
16CL
15CL
ROAE
(%)
EV/Ebitda (x)
P/sales (%)
15CL net cash

% of mkt cap
4.3
Alibaba
BUY
US$
82.22
100.00
203,891
34.9
30.7
31.8
1.1
39.7
30.9
17.0
13.1
27.6
Tencent
BUY
HK$
148.00
185.00
179,536
39.7
30.2
27.4
1.4
24.7
19.1
11.6
9.3
30.2
5.6
Baidu
BUY
US$
168.99
225.00
59,401
32.5
25.5
29.0
1.2
23.4
17.0
5.7
4.5
19.3
13.1
JD.com
BUY
US$
27.69
35.00
38,287
na
na
na
na
na
54.7
1.4
0.9
(6.9)
3.1
Ctrip
U-PF
US$
87.91
96.00
12,359
na
140.6
134.4
na
105.3
127.8
6.9
5.0
2.4
0.8
58.com
SELL
US$
52.31
48.00
8,874
na
na
na
na
na
na
13.5
8.7
(24.5)
(6.0)
Qunar
SELL
US$
46.27
40.00
6,059
na
na
na
na
na
na
9.9
6.1
nm
1.2
Note: Alibaba PE is non-Gaap. Source: Bloomberg, CLSA
3 November 2015
35

China internet
Section 2: Proprietary consumer study

We conducted an online
study with 527
respondents on various
O2O services
We conducted an online consumer study with 527 people on 10 main O2O

service categories (27 subcategories) to understand the popularity and usage
of O2O services. Our respondents were mostly 25-35 year-old (72%), office
workers (73%) with monthly income of Rmb4,000-12,000 (63%). Females
(54%) outnumbered males (46%) in our panel. About 83% of participants
came from tier 1 and tier 2 cities.
Key findings are:
Gender split:
54% female, 46% male
Mostly young (72% aged
25-35); 97% college
educated
Geographic split:
39% tier 1, 43% tier-2
and 17% tier 3
Monthly income of
Rmb4,000-12,000 for
63% of respondents
China O2O service adoption is very high. Over 70% of our respondents
have booked food delivery, restaurants, movie tickets, hotels and taxis on
mobile apps. About 65% of them had increased usage last six months and
over half will spend more.
The usage shift to online is fast once users sign up for the service. Over
half of O2O service users already spend more online than offline.
High-frequency O2O services (food, movie ticketing, taxis) are more

adopted online faster than low-frequency services (nanny service,
moving). Big ticket items such as education and healthcare are more
difficult to transact on mobile.
O2O service apps help stimulate overall consumption. Over 70% of users
have consumed more. The online service is generally cheaper with
comparative or better service quality than offline.
Subsidies matter, but over 50% of users will continue to use O2O services
even if subsidies drop.
Each user generally downloads two O2O apps per category for price
comparison and as a backup.
The overwhelming number of O2O service apps has confused users. About
73% of respondents want a one-stop O2O service platform with unified
user interface and search. Alipay and Weixin are the top choices by our
respondents. Baidu had yet launched life plus tab on Baidu Mobile app
when we conducted the study.
Currently, Alipay, Meituan and Weixin are rated the best entry points to
general O2O services.
Figure 97
Figure 98
Figure 99
Gender
Age
Education
>45
2%
<18
0%
35-45
15%
18-25
11%
Graduate
or above
11%
High
school
3%
Male
46%
Female
54%
25-35
72%
Undergr
aduate
86%
Source: CLSA
36
3 November 2015

China internet
Figure 100
Figure 101
City of residence
Monthly income
Tier 3
and
others
17%
Figure 102
30-50k
3%
20-30k
9%
Rural
0%
Occupation
50k+
1%
Businessmen
3%
Govt officers
5%
0-4k
10%
Teachers
7%
12-20k
14%
Tier 1
40%
Students
4%
4-8k
37%
Tier 2
43%
Others
8%
Office
workers
73%
8-12k
26%
Source: CLSA
Our study covered various

O2O subsegments
Our study covered various O2O subsegments including food & catering,
entertainment, local transport, travel, home services, education, healthcare,
housing service, auto services and personal care.
Figure 103
Consumer survey overview (as % of our panel)

Service
Food
Entertainment
Local transport
Travel
Home services
Education
Healthcare
Property
Autos
Personal care
Food delivery
Groupbuy
Grocery delivery
Movie ticketing
Local activities
Match-making
Taxi hailing
Car/driver hailing
Car rental/pooling
Transport ticketing
Hotel booking
Attraction
Moving
Housekeeping
Nanny services
School study
Vocational study
Leisure study
Doctor appointment
Online pharmacy
Room rental
Home furnishing
Home purchase
Car purchase
Car care
Beauty
Massaging
Online
penetration
(%)
80
81
29
81
41
8
72
26
23
64
54
45
14
37
8
14
20
13
39
21
25
16
12
15
32
32
25
Use mobile
more than
offline (%)
Increased
usage in past
6 months (%)
Willing to increase
usage in next 6
months (%)
82
87
37
86
61
28
70
64
43
73
66
50
37
50
36
55
56
31
63
47
56
33
48
54
57
67
64
80
81
52
74
53
35
64
55
37
55
49
40
25
46
31
47
36
31
51
41
37
29
48
38
58
60
80
59
61
31
58
41
8
43
22
20
43
31
30
10
24
8
12
14
11
27
16
11
10
7
10
23
22
59
Source: CLSA
Food, entertainment,
transport and travel have
highest online penetration
3 November 2015
Penetration is high for food, entertainment & travel
Food, entertainment and travel showed the highest online penetration. Over
70% of respondents have booked food delivery, restaurant groupbuy, movie
tickets and taxi hailing on mobile apps. Adoption of travel apps is also high as
online travel agencies promote and polish their apps. Among the emerging
segments, housecleaning, doctor appointment and carwashing were most
popular likely due to the high demand and poor offline alternatives.
37

China internet
Figure 104
Over 70% of have booked

food delivery, restaurant
groupbuy, movie tickets
and taxi hailing on apps
Penetration of O2O services by segment (as % of our panel)
90
(%)
80
70
60
50
40
30
20
Food
Entertain
Transport
Travel
Edu
Health
Housing
Auto
Beauty
Massaging
Car care
Car purchase
Home purchase
Room rental
Home furnishing
Doctor app't
Online pharmacy
Leisure study
School study
Home
Vocational study
Nanny services
Moving
Home cleaning
Attraction
Hotel booking
Transport ticketing
Car/driver hailing
Car rental/pooling
Taxi hailing
Match-making
Local activities
Movie ticketing
Group buy
Grocery delivery
Food delivery
10
Personal
care
Source: CLSA
O2O service users are

relatively sticky once they
try out the service
Users are relatively sticky
O2O service users are relatively sticky once they try out the service. Well
over half of O2O service users are now using online/mobile apps more than
traditional offline channels (such as phone calls, walk-in) to book services in
food delivery, restaurant, movie ticketing, taxi/car hailing, flight/hotel, doctor
appointments and beauty and massage. Some low-frequency services like
moving, nanny and home furnishing are not yet popular on mobile. Grocery
delivery and car rental/pooling have attracted big investment recently, but
user stickiness isnt that high yet. Over 60% of respondents who used the
O2O services still prefer offline or traditional ways.
Figure 105
% of users who use mobile apps more than offline channels
Food
Entertain
Travel
Edu
Health
Housing
Auto
Beauty
Massaging
Car care
Car purchase
Home purchase
Home furnishing
Room rental
Doctor app't
Online pharmacy
Leisure study
Vocational study
School study
Home cleaning
Home
Nanny services
Moving
Attraction
Hotel booking
Car rental/pooling
Transport
Transport ticketing
Car/driver hailing
Taxi hailing
Match-making
Local activities
Movie ticketing
Grocery delivery
(%)
Group buy
100
90
80
70
60
50
40
30
20
10
0
Food delivery
People rely more on

online than offline for
a few successful
O2O services
Personal
care
Source: CLSA
High-frequency O2O
services are gaining
popularity
38
High-frequency O2O services are gaining popularity on mobile. Food delivery,

restaurant groupbuy, movie ticketing, taxi hailing and beauty services have
seen growing usage on mobile last six months; and users expect to continue
to increase usage in next six months.
3 November 2015

China internet
Figure 106
Food delivery, groupbuy,

movie ticketing, taxi
hailing, car care and
beauty have seen
increasing adoption
% of users who increased usage in the past six months
90
(%)
80
70
60
50
40
30
20
Food
Entertain
Transport
Edu
Housing
Auto
Beauty
Massaging
Car care
Car purchase
Home purchase
Room rental
Health
Home furnishing
Doctor app't
Online pharmacy
Leisure study
School study
Home
Vocational study
Nanny services
Moving
Travel
Home cleaning
Attraction
Hotel booking
Transport ticketing
Car/driver hailing
Car rental/pooling
Taxi hailing
Match-making
Local activities
Movie ticketing
Group buy
Grocery delivery
Food delivery
10
Personal
care
Source: CLSA
Low-frequency services,
however, are likely to
face more challenges
Low-frequency services, however, have seen less usage pick-ups and will
likely face more challenges in user acquisition without premium value-adds.
Big-ticket spending like education and housing-related services are also
harder to transact on mobile apps due to the complexity.
Figure 107
% of our panel who will increase O2O usage in next six months
70
(%)
60
50
40
30
20
Food
Entertain
Transport
Travel
Home
Edu
Health
Housing
Auto
Beauty
Massaging
Car care
Car purchase
Home purchase
Room rental
Home furnishing
Doctor app't
Online pharmacy
Leisure study
Vocational study
School study
Nanny services
Home cleaning
Moving
Attraction
Hotel booking
Transport ticketing
Car/driver hailing
Car rental/pooling
Taxi hailing
Match-making
Local activities
Movie ticketing
Grocery delivery
Group buy
Food delivery
10
Personal
care
Source: CLSA
O2O service apps

stimulate consumption
due to subsidies
and convenience
3 November 2015
O2O apps stimulate consumption
O2O service apps stimulate consumption, due to subsidy and convenience.

Over 70% of users have ordered more food delivery and watched more
movies after using the apps where big platforms have heavily subsidised sales
with coupons. Attractive discounts on groupbuy platforms also encouraged
84% of O2O service users visiting more restaurants.
39

China internet
Figure 108
Over 70% of users have

ordered more food
takeaway and watched
more movies
% of users increased usage frequency of the services
(%)
90
80
70
60
50
40
30
20
Food
Entertain
Transport
Travel
Housing
Auto
Beauty
Massaging
Car care
Car purchase
Home purchase
Room rental
Health
Home furnishing
Doctor app't
Edu
Online pharmacy
Leisure study
School study
Home
Vocational study
Nanny services
Moving
Home cleaning
Attraction
Hotel booking
Transport ticketing
Car/driver hailing
Car rental/pooling
Taxi hailing
Match-making
Local activities
Movie ticketing
Group buy
Food delivery
Grocery delivery
10
Personal
care
Source: CLSA
Personal-care services such beauty and massage provide comparative service

standard as those in the stores, but the convenience of home services has
increased customers appetite for booking the services. Taxi hailing apps have
effectively eased the hassle of local transport. About 50% of O2O service
users have increased their taxi rides.
O2O services are

generally cheaper than
offline services
Online is generally cheaper than offline
O2O services are generally cheaper than offline services. Most notably, food
delivery, restaurant groupbuy, movie ticketing, local activities, hotel booking,
beauty and massaging were most mentioned for the cheaper prices online.
Within travel sector, hotel is perceived to be even cheaper than flight/train
tickets, likely resulting from the intense competition. However, home services,
education and healthcare are giving limited discounts online, likely due to the
lack of scale and coverage of O2O service providers at the moment.
Figure 109
Food delivery, restaurant

groupbuy, movie
ticketing, hotel booking,
beauty and massaging
were most mentioned
Compared with offline services, the price of O2O service is . . .
100
(%)
More expensive
Same
Cheaper
80
60
40
Food
Entertain
Travel
Edu
Health
Housing
Auto
Beauty
Massaging
Car care
Car purchase
Home purchase
Home furnishing
Room rental
Doctor app't
Online pharmacy
Leisure study
Vocational study
School study
Home cleaning
Home
Nanny services
Moving
Attraction
Hotel booking
Car rental/pooling
Transport
Transport ticketing
Car/driver hailing
Taxi hailing
Match-making
Local activities
Movie ticketing
Grocery delivery
Group buy
Food delivery
20
Personal
care
Source: CLSA
40
3 November 2015

China internet
O2O services deliver

equal or better
service quality
O2O services deliver equal or better service quality to users across the board.
Given intense online competition for users and funding, O2O service platforms
offer better service quality than offline ones. Users are the ultimate
beneficiaries of O2O services as they can enjoy the same or better services at
the same or lower prices.
Figure 110
Matchmaking is better
done offline
Compared with offline services, the quality of O2O service is . . .
100
(%)
Better
Same
Worse
80
60
40
Food
Entertain
Transport
Home
Edu
Health
Housing
Auto
Beauty
Massaging
Car care
Car purchase
Home purchase
Home furnishing
Room rental
Doctor app't
Online pharmacy
Leisure study
Vocational study
School study
Nanny services
Moving
Travel
Home cleaning
Attraction
Hotel booking
Transport ticketing
Car/driver hailing
Car rental/pooling
Taxi hailing
Match-making
Local activities
Movie ticketing
Group buy
Grocery delivery
Food delivery
20
Personal
care
Source: CLSA
Subsidies matter, but

not to the extent
many believe
Subsidies matter, but not to the extent many believe. Over 50% of users of
popular O2O services will not cut back spending even if subsidies drop. These
subsegments include food delivery, groupbuy, movie ticketing, taxi hailing,
transport ticketing, hotel booking and doctor appointment. However, users of
moving, housecleaning, nanny service, housing-related service and door-todoor beauty service are more price-sensitive and value-for-money. More O2O
service users in these subsegments could cut back O2O service spending if
subsidies are withdrawn.
Figure 111
Over 50% of users of

popular O2O services will
not cut back spending
% of O2O service users who will continue to use the service without subsidies
90
(%)
80
70
60
50
40
30
20
Food
Entertain
Transport
Travel
Home
Edu
Health
Housing
Auto
Beauty
Massaging
Car care
Car purchase
Home purchase
Room rental
Home furnishing
Online pharmacy
Doctor app't
Leisure study
Vocational study
School study
Nanny services
Home cleaning
Moving
Attraction
Hotel booking
Transport ticketing
Car rental/pooling
Car/driver hailing
Taxi hailing
Match-making
Local activities
Movie ticketing
Grocery delivery
Group buy
Food delivery
10
Personal
care
Source: CLSA
3 November 2015
41

China internet
About 35% of respondents will continue to use all the O2O services
regardless of subsidy level. Less than 15% of users will discontinue O2O
services without subsidies. Taxi app users are most sensitive to subsidy.
Figure 112
Some 35% of panel still

likely to use O2O services
without any subsidy
% of respondents (O2O and non-O2O users) who will cut back O2O usage or not
consider using O2O service without subsidies
25
(%)
20
15
10
Food
Entertain
Transport
Travel
Edu
Health
Housing
Auto
Beauty
Massaging
Car care
Car purchase
Home purchase
Room rental
Home furnishing
Doctor app't
Online pharmacy
Leisure study
School study
Home
Vocational study
Nanny services
Moving
Home cleaning
Attraction
Hotel booking
Transport ticketing
Car/driver hailing
Car rental/pooling
Taxi hailing
Match-making
Local activities
Movie ticketing
Group buy
Grocery delivery
Food delivery
Personal
care
Source: CLSA
Each O2O service user

generally downloads two
O2O apps per category
Each O2O service user generally downloads two O2O apps per category for
price comparison and as a backup. As such, it is critical for O2O service
providers to become the top two apps in each subsegment. Otherwise, O2O
service providers must rely on traffic distribution platforms such as Baidu,
Alibaba and Tencent to connect with users, which will be expensive.
Figure 113
Critical for O2O service

providers to become the
top two apps
Number of apps installed for each service segment
2.5
(%)
2.0
1.5
1.0
Food
Entertain
Transport
Travel
Edu
Health
Housing
Auto
Beauty
Massaging
Car care
Car purchase
Home purchase
Home furnishing
Room rental
Doctor app't
Online pharmacy
Leisure study
Vocational study
School study
Home cleaning
Home
Nanny services
Moving
Attraction
Hotel booking
Transport ticketing
Car/driver hailing
Car rental/pooling
Taxi hailing
Match-making
Local activities
Movie ticketing
Grocery delivery
Group buy
0.0
Food delivery
0.5
Personal
care
Source: CLSA
42
3 November 2015

China internet
The overwhelming number of O2O service apps is confusing to users. About

73% of respondents hope the O2O service apps will be consolidated under a
single platform with a unified user interface and search. Alipay Wallet and
Weixin are the top choices to be one-stop O2O service platforms. Mobile
Taobao came third in our survey, while Meituan is a distant fourth. Baidus
apps are not very popular yet, but comparable to Dianping. Baidu had yet to
launch its Life+ mobile app when we conducted the study.
73% of respondents hope

the O2O service apps will
be consolidated
Figure 114
Figure 115
Do you prefer a consolidated O2O service platform?
If consolidated, which app do you prefer?

Alipay
Separately
run for
better
service
quality
27%
Weixin
Taobao
Meituan
QQ
Dianping
Baidu Nuomi
Consolidate
under a big
platform
73%
Mobile Baidu
Baidu Map
58
(%)
JD
0
10
20
30
40
50
60
70
Source: CLSA
Currently, Alipay, Taobao, Meituan and Weixin are the top-rated O2O entry
points by respondents for general O2O services. Alipay is also rated for the
best user experience, likely due to the embedded payment function, providing
seamless experience from placing orders to finishing transactions. Meituan
offers the second best user experience and the most attractive discounts.
Baidu Nuomi is catching up by offering attractive discounts, but it needs to
improve its product and user experience.
Alipay, Taobao, Meituan

and Weixin are top-rated
O2O entry points
Figure 116
Figure 117
Figure 118
Top-3 entry apps for O2O services
Who offers best user experience?
Discount (5 = highest, 1 = lowest)
Alipay
Alipay
Taobao
Meituan
Alipay
Meituan
Taobao
Baidu Nuomi
Meituan
Weixin
Dianping
Dianping
Dianping
Weixin
Weixin
Baidu Nuomi
Baidu Nuomi
JD
QQ
Mobile Baidu
Mobile Baidu
Mobile Baidu
Baidu Map
58
58
QQ
Taobao
Baidu Map
(%)
JD
0
20
40
60
80
58
QQ
(%)
JD
0
10
20
30
40
Baidu Map
3.0
3.5
4.0
4.5
Source: CLSA
Alipay dominates
payment preference
3 November 2015
Alipay dominates the payment preference. It is consistently the most

frequently used payment method across O2O services, followed by Tenpay.
Cash-on-delivery is also popular, as some service providers prefer cash.
43

China internet
Figure 119
Alipay is the most

frequently used payment
method across O2O
services
O2O service payment (5 = mostly use, 1 = least use)
5.0
Alipay
Weixin Pay
QQ Wallet
Baidu Wallet
Cash
Bank card
Others
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Food delivery
Groupbuy
Movie ticketing
Taxi
Others
Source: CLSA
44
3 November 2015

China internet
Section 3: Food overview
Food overview
Food is the major
battleground among O2O
operators
As food-related services are the largest segment of consumer services and

the main battleground among O2O operators, we provide an overview of the
food sector in this section and discuss the dineout, takeout and grocery
segments separately in Sections 4-6.
Chinese consumers spent around Rmb7tn on food and beverage (F&B) in
2014: about Rmb3bn at restaurants (dineout or takeout delivery) and
Rmb4bn on groceries (food-at-home). Groupbuy was the first O2O service in
China, with over 60% of GMV from restaurant deals. Chinas groupbuy is
different from Groupon in the USA. Merchants use groupbuy platform to drive
sales and consumers dont have to wait and can download and use the deal
instantly.
Takeout delivery is 10% of the catering market and growth has jumped as the
backend can be easily connected online, it is great for user acquisition and its
delivery team can support other O2O services. GMV for restaurant and
takeout combined grew at c.200% YoY in 2015. Grocery is another Rmb4tn
addressable market opportunity, although monetisation is more difficult.
Chinas F&B market

Food & groceries is the
largest segment of
consumer spending
Food is the main battleground for O2O service providers. Chinas F&B market
is among the largest in the world, with total consumer expenditure on food,
beverage and catering services at c.Rmb6tn (US$1tn) in 2014, representing
one-third of total household expenditure (or half of service expenditure). Food
at-home is the major spending (c.Rmb4tn). However, wallet share of dineout
services is growing and the segment size was Rmb2.8tn in 2014, including
business and government spent.
China has three main food-related O2O services:
Three hotspots in foodrelated O2O services
Dineout: Restaurant review, reservation and groupbuy. Restaurant

is the largest O2O service segment. Chinese spent around Rmb2.8tn in
restaurants in 2014 and demand is growing. Restaurants face intense
competition and oversupply, like many other industries in China. O2O
platforms help restaurants boost traffic and improve utilisation and
margins. Online penetration is still low at 3.5% (Rmb98bn), but catering
groupbuy value is growing at 200% YoY in 2015.
Takeout delivery. Online takeout-delivery platforms connect restaurants

with hungry people. This segment was around 6% of restaurant receipts in
2014. Online penetration was higher at 5.9% (Rmb162bn), but market
growth is phenomenal at 100% QoQ in 2Q15 due to attractive subsidies
offered by O2O service providers. Given the small value, high frequency,
high take rate and ability to cross-sell online-payment services, O2O
service providers use this as a loss-leader for customer acquisition.
Fresh food and grocery delivery. This is a challenging segment as order

sizes are small, but delivery costs are high if volume is low. However,
many operators have leveraged on food-delivery logistics networks to offer
fresh food and grocery-delivery services. JD.com is developing a
crowdsourced delivery service that can further lower costs and improve
efficiency. The potential is massive, as Chinese spent around Rmb4tn on
fresh food and groceries in 2014 (Rmb1-2tn in urban areas) and online
penetration is currently around 2%.
3 November 2015
45

China internet
Many other food-related services are under development such as recipe sites,
sharing communities and chef-on-demand services. There are also several
B2B O2O services in China, especially on customer loyalty and payment
solutions for restaurants.
Many other food-related

services are under
development
Figure 120
Chinas food expenditure and key O2O applications

Restaurant
reviews
& coupons
Dineout
c.2.5tn
Consumer
expenditure on
food & beverage
c.6tn
Restaurant
& catering
2.8tn
Section
4
Meituan Dianping
Online
ordering
& delivery
platforms
Takeout
& delivery
c.250bn
Baidu
Ele.me
Nuomi
Koubei
Meituan
Section
5
Daojia
Section
6
Online
grocery
c.1tn
Yihaodian
Food at home
expenditure
c.4.2tn
Biz & govt

expenditure
on food
& beverage
Tmall
SF Best
Womai
JD Daojia
850bn
Online
recipes &
sharing
Supermarkets
Chef
On-demand
Xiachufang Haodou Douguo
iDaChu
Size of the bubble represents the market size of the segment in 2014. All amounts are in Renminbi. Source: NBS, Euromonitor, CLSA
F&B spending
F&B accounts for onethird of Chinas total

consumer spending
F&B is a lucrative market as it accounts for one-third of Chinas total

consumer spending or half of service-related consumer spending. Chinese
spent around Rmb6bn on F&B in 2014 (excluding alcohol and tobacco). The
anticorruption drive slowed market growth in 2012-13, but growth rebounded
in 2014.
Positive correlation
between income and food
expenditure
Globally, there is a strong positive correlation between consumer income and

food expenditure. As income improves, consumers spend more on food.
Today, the average Chinese person spends US$835 per year on food, which is
25% of that in Taiwan, South Korea and Japan (US$3,300 per year) and less
than 18% of that in Europe and the USA (US$4,700 per year).
Figure 121
Figure 122
China urban food expenditure per capita

7,000
World food expenditure versus GDP per capita

(%)
(Rmb/capita)
Urban expenditure on food (LHS)
As % of total consumption expenditure
6,000
45
10,000
Food & catering spend per capita

(US$, log scale)
40
5,000
35
4,000
3,000
30
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
20
2000
Source: NBS, CEIC, CLSA
Thailand
Egypt
1,000
Indonesia
Vietnam
China
Pakistan
India
25
1,000
South Korea
Saudi Arabia
Russia
Malaysia
Brazil
2,000
46
Switzerland
Norway
Hong Kong
United
Australia
Spain
Italy
France
USA
Canada
Kingdom
Japan
Israel
Germany
Netherlands
GDP per capita

(Intl $, log scale)
100
3,000
30,000
Source: World Bank, Euromonitor, CLSA
3 November 2015

China internet
Chinese people are eating out more, spending 11% of their food budget on
dining out (22% in urban areas), but this is still below other emerging Asian
countries such as Indonesia (21%) and Thailand (27%). Urbanisation,
busier lifestyles and social events will boost the dineout share of consumers
food spending.
Chinese people are eating

out more, spending 11%
of their income on dineout
Figure 123
Figure 124
China food-at-home versus dineout expenditure
World catering share of food expenditure
7,000
(Rmb/capita)
60
Urban dineout expenditure (LHS)

Urban food-at-home expenditure
6,000
Catering as % of total food & catering spend (%)
50
5,000
Spain
United
Kingdom
USA
40
4,000
3,000
Vietnam
20
2,000
Switzerland
Canada
Italy Korea
MalaysiaSouth
Australia
Thailand
Japan
Saudi
Arabia
Norway
Hong
Kong
Germany
Netherlands
France
Israel
Indonesia
Brazil
30
China
1,000
10
14CL
13CL
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Egypt
India
Pakistan
0
3,000
Russia
GDP per capita

(Intl $, log scale)
30,000
Food-at-home spending is
still dominated by
traditional food retailers
Food-at-home
Fresh food and grocery is the largest segment of Chinese food spending, but
is dominated by traditional food retailers (ie, wet markets). Food & beverage
retail sales by large enterprises were only Rmb1.7tn in 2014. Supermarket
(including hypermarket) retail sales were Rmb850bn (US$140bn). China is
ranked worlds No.5 supermarket retail market after the USA, France, the UK
and Japan.
Figure 125
Figure 126
China food, drink & tobacco retail market size
China total supermarket sales revenue
1,800
(Rmbbn)
1,600
Food
Beverages
Tobacco & alcohol
Overall growth (RHS)
(% YoY)
1,400
30
25
20
Supermarket
Hypermarket
600
500
400
800
15
600
400
10
300
200
100
200
0
(Rmbbn)
700
1,200
1,000
800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2007
2008
2009
2010
2011
2012
2013
2014
Represents retail sales of larger enterprises. Includes grocery and nongrocery sales in supermarkets. Source: NBS, CEIC, CLSA
Online is still represents

a tiny proportion
of grocery sales
3 November 2015
E-commerce still represents a tiny proportion of grocery sales. Online only

contributes 2-3% of Chinas fresh and packaged food sales (versus 5-6% in
the Japan and UK). Groceries are around 1% of Chinas total e-commerce.
47

China internet
Figure 127
Figure 128
Fresh-food distribution by outlet (2014)
Packaged-food distribution by outlet (2014)
(%)
(%)
Internet & other
nonstore retailers
Traditional grocery
retailers & other
specialists
Supermarkets &
modern grocery
retailers
Supermarkets &
modern grocery
retailers
20
UK
Spain
Germany
Italy
UK
Spain
Italy
Germany
France
USA
Australia
Japan
China
40
China
20
Traditional grocery
retailers & other
specialists
France
40
60
USA
60
Internet & other

nonstore retailers
80
Australia
80
100
Japan
100
Dining out
Chinese spending on dining out is still low. Chinese urban households spend
around 22% of their food budget on dining out (US$200 per capita per year).
The average spending on dining out nationwide is even lower at US$95 per
capita, just 10% of that in Taiwan, South Korea and Japan (about US$1,000
per year) and less than 5% of the USA and UK (over US$2,000 per year).
However, income growth, rising urbanisation and more working families will
drive Chinese catering expenditure.
Consumers generally shift

from cooking at home to
eating at restaurants
when income grows
Figure 129
Figure 130
China urban dineout expenditure per capita

1,400
World consumer expenditure on catering only

(%)
(Rmb/capita)
Urban dineout expenditure (LHS)
As % of total food expenditure
1,200
30
10,000
Catering spend per capita

(US$, log scale)
25
1,000
20
800
1,000
Brazil
15
600
10
400
14CL
13CL
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
0
2002
0
2001
2000
200
United Switzerland
Spain
USANorway
Kingdom
Australia
Italy
Hong Kong
Canada
Japan
France
Germany
Netherlands
South Korea
Israel
Saudi Arabia
Malaysia
Thailand
100
Vietnam
Indonesia
China
Egypt
Russia
India
10
3,000
GDP per capita

(Intl $, log scale)
Pakistan
30,000
Source: World Bank (GDP per capita), Euromonitor (consumer expenditure), CLSA
48
Catering industry retail

sales were Rmb2.79tn in
2014, up 9.7% YoY
China catering is a trillion-renminbi market. Catering retail sales were

Rmb2.8tn (US$450bn) in 2014, up 9.7% YoY. This includes consumer,
corporate and public spending on restaurant and catering services. The
market was hit by the anticorruption drive in 2013, but growth has
rebounded, driven by consumer demand. Annual growth accelerated to
11.6% in 7M15.
SMEs generate around

76% of industry revenue
The catering market is heavily populated by small firms with less than
Rmb2m in annual sales. Currently, SMEs generate 76% of market revenue.
Indeed, SME catering has benefited from the anticorruption campaign since
2013. Catering SMEs retail sales growth accelerated to 13% YoY in 2014,
while large enterprises sales were flattish.
3 November 2015

China internet
Figure 131
Figure 132
NBS catering-industry retail sales
NBS catering sales of large versus smaller enterprises
3,000
(Rmbbn)
(%)
Catering industry retail sales

Growth YoY (RHS)
18
2,500
16
14
2,000
1,500
1,000
2010
2011
2012
2013
2014
7M15
80
70
60
50
2
0
Catering sales from other enterprises

Catering sales from larger enterprises with Rmb2m+ revenue
(%)
90
10
2009
100
12
500
0
20
69
69
67
68
71
74
31
31
33
32
29
26
2010
2011
2012
2013
2014
15CL
40
30
20
10
0
Takeout delivery
Some 10-11% of Chinas

catering spending is on
deliveries and takeout
About 10-11% of Chinas catering spending is on food deliveries, according to

Euromonitor. There is a general global trend of less restaurant dining and
more takeout, possibly due to busier lifestyles, longer working hours and
more single-parent families. Between 2009 and 2014, 49 out of 54 countries
tracked by Euromonitor saw dineout sales share decline. China is also seeing
a growing delivery market. Food-delivery sales rose 13% YoY to Rmb299bn in
2014, faster than catering market. Its share of the catering market has
increased by 1.9ppts to 11% over the past five years.
Choice of dineout versus

takeout has no correlation
with income
There is no correlation between income and the choice of dineout versus

takeout. The choice is mostly driven by working hours, culture and taste. The
top countries globally for deliveries are all English-speaking, fastfood-eating
nations, including the USA (42% of the catering market), Canada (40%), New
Zealand (34%), South Africa (34%) and the UK (34%). The worlds top
dineout countries are Spain (92%), Indonesia (92%), China (89%), Austria
(89%) and Hong Kong (88%). Burgers, sandwiches, bagels and fries are still
favoured for takeout while tapas, spicy hotpots and dim sum are best enjoyed
in restaurants. Chinas takeout market growth depends on the changing
tastes and lifestyles of the younger generation.
Figure 133
Figure 134
Takeout versus GDP per capita
Dineout versus takeout by country
0
3,000
30,000
Emerging Asia
Developed Asia
UK
USA
Italy
Russia
Australia
GDP per capita

(Intl $, log scale)
Spain
Spain
France
Indonesia
0
Germany
Brazil
Taiwan
10
China
Singapore
India
Vietnam
20
South Korea
15
40
Japan
20
South Korea
Malaysia
Netherlands
Switzerland
Norway
Germany
Italy
Japan
Saudi Arabia
Israel
Russia
France
Hong Kong
Thailand
25
Hong Kong
30
Takeaway & drivethrough
60
Philippines
35
Delivery
80
India
Egypt
Thailand
Dineout
Malaysia
40
USA
United
Canada
Kingdom
Australia
(%)
China
45
100
Indonesia
50
Delivery, takeaway & drive-thru as % of total catering spend

(%)
The West
Source: World Bank (GDP per capita), Euromonitor (consumer expenditure), CLSA
3 November 2015
49

China internet
O2O services
The restaurant segment (dineout and takeout) is the main battlefield for O2O
service providers given its growing share of consumer spending and
increasing demand from both consumers and restaurants. Leveraging on the
takeout-delivery logistics network, O2O service providers are also penetrating
grocery delivery services. E-commerce companies offer the fresh food and
grocery O2O model to reduce inventory risk and cold-chain investment.
Restaurant review and groupbuy sites (Meituan, Dianping and Nuomi) ride on
consumer spending on restaurant dining. Takeout-delivery services (Meituan,
Ele.me and Baidu) benefit from busier lifestyles. All these services benefit
from increasing internet and mobile penetration.
Restaurants the main

battlefield among O2O
service providers
Chinas O2O catering

GMV could reach
Rmb765bn by 19CL
We estimate Chinas O2O catering GMV could reach Rmb912bn by 2019,

representing a 56% Cagr over 2015-19. With a 6.1% blended net commission
rate after subsidies, O2O catering revenue could be Rmb56bn. This is a
reasonable forecast given the gross commission rates of 10-15% for food
delivery and 5-10% for restaurants. Commission rates could be as high as
10% with no subsidies. Overseas peers such as Yelp, Groupon, Just Eat and
Grubhub currently generate 20-30% operating margins. We believe segment
Ebitda could reach Rmb12.5bn by 2019.
Online grocery sales will

be under a hybrid onlinesupermarket/O2O model
Online grocery sales will be under a hybrid online-supermarket/O2O model.

We estimate online grocery sales could reach Rmb300bn by 2019 (up from
about Rmb70bn as of 2014). As O2O grocery delivery services are relatively
new globally, take rates are unclear. Assuming that half of online grocery
sales are via the O2O model with a take rate of 6%, we calculate the O2O
grocery-delivery market will be worth another Rmb9bn by 2019.
Figure 135
O2O catering potential by 19CL

Segment
Market size
(Rmbbn)
Dineout
3,897
Section 4
9% Cagr
Takeout
587
Section 5
14% Cagr
Grocery1
5,300
Section 6
5% Cagr
Online
penetration
(%)
15.0
=
c.6% today
58.0
5.7
c.6% in
the UK today
572
Take rate
(%)
47% Cagr
=
c.13% today
Online GMV
(Rmbbn)
340
3001
Ebitda
margin (%)
Similar with
todays rate
87% Cagr
=
5.0
Online
revenue
(Rmbbn)
29
8.0
Online plus
O2O
na
Direct sales
6.8
21.11
Yelp 2Q15
=
27
Grubhub &
JustEat at 15%
20.0
Online
Ebitda
(Rmbbn)
5.7
25.0
Grubhub 33%
Just Eat 24%
3001
Online plus
O2O
7.0
Ocados
Ebitda margin
50
3 November 2015

China internet
Section 4: Dineout
Dineout
Restaurant groupbuy is one of the most popular O2O services in China. Unlike
Groupon, Chinas groupbuy platforms focus on high-frequency services such
as restaurant deals. Chinese merchants also use groupbuy to boost sales, not
just for brand promotion. Given slowing economy, anticorruption, highly
fragmented restaurant market and increasing competition, restaurants are
exploring O2O strategies to increase sales.
Restaurant groupbuy is
one of the most popular
O2O services
iResearch estimates O2O dineout GMV was Rmb83bn in 2014. We forecast

the online market GMV to expand at a 47% Cagr to Rmb572bn by 2019, with
online penetration at 15%. Assuming a net take rate of 5% at steady state,
we believe O2O dineout revenue could be Rmb29bn by 2019.
We forecast a 47% O2O
dineout GMV Cagr to
Rmb572bn by 2019
Figure 136
Figure 137
O2O dineout GMV
Dineout online penetration
700
16
(Rmbbn)
600
500
12.7
10.7
12
47% 5Y Cagr
8.3
10
400
300
200
100
14.7
(%)
14
4
83
165
248
347
451
572
2014
15CL
16CL
17CL
18CL
19CL
6.1
3.3
0
2014
15CL
16CL
17CL
18CL
19CL
Source: CLSA
Who are the leading players in China?

Groupbuy took off in China in 2010, but the industry went through irrational
competition with more than 6,000 players and the commission rate falling
below 10% in 2011 and 2012 (versus 20% for Groupon USA). More than half
of players are out of business. Lashou used to be the largest groupbuy
company with 22% share in 2011, but ran into financial troubles over
expansion of its salesforce and low commission rate.
Groupbuy took off in

China in 2010
The groupbuy sector has entered a new growth phase since 2H13, fuelled by
growing demand for location-based services on mobile. Users can redeem the
coupons immediately after their purchases on the smartphones. Industry
growth has accelerated.
Figure 138
Figure 139
Groupbuy transactions
Groupbuy market by frequency
50
(Rmbbn)
Groupbuy GMV
YoY growth (RHS)
45
(%)
220
186
200
180
40
160
35
131
120
30
102
20
(%)
156
1,200
120
100
600
40
7
10
12
13
16
22
24
30
46
20
0
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
180
160
140
1,000
800
60
10
Person-times
YoY growth (RHS)
120
97
100
80
80
15
(m)
140
115
98
25
1,400
400
45
60
32
40
200
0
20
314
456
604
1,191
1,185
2011
2012
2013
2014
1H15
3 November 2015
51

China internet
Section 4: Dineout
Why do Chinese people dine out?

The China Cuisine Associations annual survey in 2014
showed that Sichuan food and hotpots are the most
popular cuisines among Chinese consumers.
What do you prefer to eat?
Fastfood 2%
Western 3%
JapaneseKorean 5%
Southeast
Asian 1%
Sichuan 19%
O2O service adoption is still low, but is gaining traction.

About 30% of consumers book tables and order dishes
online, while 15% order takeout online. Restaurants
want to adopt the O2O model to boost sales. Some
have created their own mobile apps, but quality is poor
and only 5% of customers use such apps.
How do you reserve a table after deciding where to eat?
By phone
Beijing 3%
Guangdong
8%
Halal 3%
Creative 3%
Shandong 6%
Vegetarian 5%
BBQ 7%
Hunan 6%
Northeastern
7%
Jiangsu 6%
Hotpot 13%
Anhui 3%
Source: China Cuisine Association
31.0
27.3
Order offline and prepay
21.6
Using restaurant app
5.0
Using restaurant app to

reserve and order dishes
3.4
(%)
11.0
20
Others
3%
Don't want to
cook 8%
Meeting
friends
61%
Corporate
prepayment
9%
Cash
39%

Credit card
33%
Review and groupbuy websites are important channels

in consumers choice of restaurants, as 35% of
consumers primarily obtain restaurant information from
the sites and many are attracted by discounts offered
by the restaurants on these sites.
Where do you obtain restaurant information?
Takeout preference
Others
9%
Don't care
28%
Newspaper,
TV & other
traditional
media 9%
Friends 39%
Review
websites
35%
Third-party
platfrom to
deliver
15%
Restaurant to
deliver
57%
52
60
How do you pay the restaurant bill?
Online
payment
19%
Weibo &
WeChat
8%
40
When comes to payment, consumers still prefer cash

and credit cards, although some 19% of those surveyed
now use online payment services such as Alipay and
Tenpay. For takeout delivery, 57% prefer the
restaurant to deliver the food and only 15% prefer
using a third-party platform for delivery.
Why do you dine out?
Meeting
families
16%
Using online platform

Using online platform to
reserve and order dishes
Others
The majority of consumers reason for dining out is to

meet friends and families.
Date
6%
Business 8%
52.8
3 November 2015

China internet
Section 4: Dineout
Catering is the biggest

sector using groupbuy at
63% of total
Currently, catering is the biggest segment using groupbuy platforms,

accounting for 63% of total transactions in 1H15, followed by entertainment
(17%) lifestyle (11%) and hotels (9%). The catering share of groupbuy has
increased over time, reflecting Chinese consumers dinning out more and
restaurants using groupbuy more to draw in business. There is strong
demand in low-tier cities (60% of sales in tier-3 cities or below in 1H15),
given price-sensitive consumers and rising smartphone penetration.
Figure 140
Figure 141
Groupbuy sales by product
Groupbuy sales by tier city
100
(%)
90
80
Others
70
60
40
20
Tier 1
20%
Hotel
50
30
Tier 4 &
others
28%
Lifestyle
51
57
56
2H13
1H14
63
62
Entertainment
Tier 3
29%
Catering
Tier 2
23%
10
0
1H13
2H14
1H15
The industry has consolidated, with leaders Meituan (where Alibaba has a
minority stake), Tencent-backed Dianping and Baidu Nuomi now controlling
95% of the market. The top-three platforms GMV more than doubled in 1H15
according to Tuan800. Small platforms such as Nasdaq-listed Wowo are losing
significant market share.
Figure 142
Groupbuy industry has

consolidated with
three leaders
Groupbuy marketshare
70
(%)
Meituan
Dianping
Nuomi
Others
60
50
40
30
20
10
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
13
13
13
13
13
13
13
13
13
13
13
13
14
14
14
14
14
14
14
14
14
14
14
14
15
15
15
15
15
15
Meituan is the largest

among the three leaders
3 November 2015
Meituan is the largest groupbuy site in China with Rmb47bn GMV in 1H15, of
which around Rmb30bn was generated from catering. It has a wide lead over
Dianpings Rmb20.7bn GMV and Baidu Nuomis Rmb8.3bn GMV. Meituan has
outgrown its peers given its strong execution in recruiting merchants and
expanding to low-tier cites.
53

China internet
Section 4: Dineout
Dianping has been slow in

nationwide expansion
Dianping has been slow in nationwide expansion and has only recently caught
up with Meituans coverage. It is now leveraging on Tencent partnership to
gain user traction.
Baidu argues that its

market share has doubled
sincane January 2015
Nuomi lost market share when it was under Renren due to lack of funding and
weak execution. Baidu acquired 100% of the company in February 2014 and
its market share has gradually increased. Baidu disagrees with Tuan800s
data, arguing that its groupbuy market share had already doubled from 10%
in January 2015 to 20% in July. It is offering subsidies to gain market share.
Figure 143
Restaurant groupbuy - Top players

Meituan
Dianping
Baidu Nuomi
Key shareholder
Alibaba (10-15%),
invested in July 2011
Baidu (100%), acquired Founder & management

by Baidu in August 2013 (69%)
Founded
Headquarters
Latest round of funding
Employee count
Cities covered
GMV (1H15, Tuan800)
March 2010
Beijing
December 2014
15,000
1,100
Rmb43.8bn
+194% YoY
57%
Own mobile app
130m (annual)
900,000 (2014)
500m
Tencent (c.20%),
invested in February
2014
April 2003
Shanghai
April 2015
8,000+
1,700
Rmb20.7bn
+203% YoY
27%
Weixin
200m (monthly)
14m globally on record
90m
Market share (1H15)

Key entry point
Active users
Merchant count
Number of reviews
Wowo
June 2010
Beijing
June 2015
na
400
Rmb8.3bn
+173% YoY
11%
Baidu search app
na
600,000
na
March 2010
Beijing
April 2015 (IPO)
3.194
150
Rmb2.8bn
+16% YoY
4%
Own mobile app
20m installations
117,889 (4Q14)
na
Source: Companies, media reports, CLSA
Meituan and Dianping

announced merger in
October 2015
In October 2015, Meituan and Dianping announced they would merge to

create Chinas largest O2O and groupbuy services platform. However, the new
company will maintain a co-CEO structure and the Meituan and Dianping
brands will operate separately, including the overlapping high-frequency
groupbuy coupons and restaurant instant-discount businesses. The
transaction has accelerated industry consolidation, which is good for all
players, but the competitive landscape is unlikely to change significantly.
Dianping has the highest

user activity and
engagement
Dianping has the highest user activity and engagement given its strong
presence in top-tier cities and the most and better-quality user-generated
reviews. GeoData showed that Dianping has the best user stickiness and
longest time spent among the three, but has the lowest conversion rate.
Customers use Dianping to browse reviews, but may find better deals on
other platforms.
Figure 144
Figure 145
Figure 146
Average time spent per day
Average weekly visits per user
Conversion rate
14
2.5
(min)
12
1.5
1.0
(%)
2.0
10
6
5
4
3
2
0.5
2
0
(times)
Dianping
Meituan
Nuomi
0.0
1
Dianping
Meituan
Nuomi
Dianping
Meituan
Nuomi
Source: GeoData, CLSA
54
3 November 2015

China internet
Section 4: Dineout
That growth comes at a price. Meituan requires a large sales team for
geographic expansion. Its employee count has doubled YoY to over 15,000 to
support merchant coverage expansion, which has more than doubled to over
900,000. In addition, Meituan is subsiding users aggressively to grow market
share. Net commission rate (after subsidy) has declined as the company is
paying Rmb200m cash in subsidies per month. The group is losing Rmb600m
per month.
Figure 147
Figure 148
Meituan market share
15
100
10
40
30
20
10
0
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
50
1Q13
50
Apr 15
150
(%)
60
Jan 15
200
20
70
Oct 14
250
Jul 14
25
(%)
Apr 14
Groupbuy GMV
YoY growth (RHS)
Jan 14
30
(Rmbbn)
Oct 13
Meituan quarterly GMV
Jul 13
Meituan has 55-60%

market share; company
claims it is higher
Apr 13
But this comes with

heavy investments
Meituan
Meituan is the clear leader and best-performing groupbuy company in China.
It continues to grow rapidly, with GMV almost tripling YoY in 1H15 to
Rmb47bn and a 55-60% market share. Its fast expansion into low-tier cities
has accelerated growth and enabled it to outgrow its peers. About half of its
sales are in tier-3 cities or below.
Jan 13
Meituan is the clear

leader with Rmb47bn
GMV in 1H15
Tencent has a 20% stake in Dianping. In its latest round of financing earlier
this year, Dianping raised US$850m, matching the US$700m raised by
Meituan during the same period.
Figure 149
Figure 150
Dianping market share

30
150
100
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
50
1Q13
25
20
15
10
5
0
Apr 15
200
(%)
Jan 15
10
35
250
Oct 14
12
300
Jul 14
(%)
Groupbuy GMV
YoY growth (RHS)
Apr 14
(Rmbbn)
Jan 14
14
Oct 13
Dianping quarterly GMV
Jul 13
Dianping had about

Rmb20bn in GMV in 1H15,
according to Tuan800
Apr 13
Tencent has 20% interest

in Dianping
Dianping
Starting off as a Yelp-like local service review portal, Dianping has grown into
Chinas second-largest groupbuy website with a 25-30% market share.
Compared with competitors Meituan and Nuomi, Dianping has a significantly
higher user concentration in tier-1 and tier-2 cities. Its lower exposure in
lower-tier cities has put it at a disadvantage, as groupbuy sales grow much
faster in low-tier cities. Sales from tier-3 or lower cities account for 60% of
Chinas groupbuy sales.
Jan 13
Dianping is secondlargest groupbuy site with

25% market share
Dianpings level-2 access on Weixin and level-1 access on mobile QQ could

give it an edge to catch up as groupbuy products can now be shared and
consumed together with friends. Dianpings comprehensive user reviews, on
3 November 2015
55

China internet
Section 4: Dineout
the other hand, are valuable content for Tencents ecosystem. The DianpingTencent partnership creates a closed-loop transaction from discussing, placing
orders, making payment and consuming to writing reviews.
Figure 151
Figure 152
Nuomi quarterly GMV
Nuomi market share

14
(%)
12
10
8
6
4
2
Apr 15
Jan 15
Oct 14
Jul 14
Apr 14
Jan 14
Oct 13
Jul 13
0
Apr 13
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
200
180
160
140
120
100
80
60
40
20
0
Jan 13
(%)
Groupbuy GMV
YoY growth (RHS)
2Q15
(Rmbbn)
3Q13
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1Q13
Baidu argues that its

market share increased
from 10% in January
2015 to 20% in July
Baidu Nuomi
Nuomi is wholly-owned by Baidu and is fully consolidated with Baidus
ecosystem. Baidu acquired a majority stake in Nuomi from Renren in
October 2013 and increased its stake to 100% in February 2014. Baidu
has recently completed integrating Nuomis salesforce with its own and
upgraded its backend system. Baidu has also indicated that its market
share increased from 10% in January 2015 to 20% in July. Nuomi now
covers 400 cities and is the No.1 player in around 60 lower-tier cities by
GMV.
2Q13
Baidu acquired remaining

stake in Nuomi
in February 2014
In June 2015, CEO Robin

Li said Baidu will invest
Rmb20bn into Nuomi
Baidu is investing heavily in Nuomi to gain market share. In June 2015,

CEO Robin Li said Baidu will invest Rmb20bn (over US$3bn) in Nuomi
over the next three years to connect merchants with consumers. The
company has seen strong traction from several marketing campaigns in
2Q15, such as 517 Foodie Day and 620 Fifth Year Anniversary, where
it tripled new users in June over March. In the most recent 718 Summer
Party promotion, Nuomis single-day market share exceeded 40%. As
most groupbuy users are price-sensitive, Baidu is introducing a
membership scheme where better discounts/services are offered to
frequent users.
At the 2Q15 earnings call, Baidu for the first time disclosed its core
search margin and O2O GMV. In 2Q15, Baidus total O2O GMV was
Rmb40.5bn (up 109% YoY), of which Rmb35bn was from Qunar. Other
O2O services Nuomi and food delivery contributed Rmb5.4bn GMV. O2O
losses were around Rmb4bn, depressing its operating margin by 25%.
Figure 153
In 2Q15 Baidus total O2O

GMV was Rmb40.5b
Baidu segment analysis - 2Q15

(Rmbbn)
Search
GMV
Take rate (%)
Revenue
Ebit
Ebit margin (%)
Ebit margin impact (%)
Qunar
O2O &
others
35.1
5.4
2.4
3.1
iQiyi
Total
16.6
14.6
0.8
0.2
1.0
7.8
(0.9)
(2.9)
(0.6)
3.5
53.4
(102.3)
nm
(58.5)
20.9
(6.6)
(18.7)
(5.1)
GMV of O2O and others includes Qunar, Baidu Nuomi and Baidu Takeout Delivery. CLSA estimate.
O2O and others revenue includes Qunar, Baidu Nuomi, Baidu Takeout Delivery, Baidu Maps, Baidu
Connect, Baidu Wallet and other products. Source: CLSA, company
56
3 November 2015

China internet
Section 4: Dineout
Wowo
Wowo is a distant No.4 player in groupbuy and is losing market share. Its
GMV was flat in 2014 and grew only 16% YoY to Rmb2.8bn in 1H15 with a
4% market share. Wowo currently charges a 2% to 8% take rate on
transactions, depending on business segment. However its average take rate
was only 4.5% for 2014, down from 7.5% two years ago. Coupled with costly
marketing expenses, the company was lossmaking with a negative-145%
operating margin in 2014.
Wowo is a sistant No.4

player in groupbuy
Figure 154
Figure 155
Figure 156
Wowo gross billings
Wowo average take rate
Wowo operating loss
450
(US$m)
443
437
440
(%)
7.5
6.9
(5)
(10)
430
420
410
(25)
(30)
400
400
390
(15)
4.5
(20)
(35)
380
370
2012
2013
2014
(32)
(40)
(45)
2012
2013
(50)
2014
(39)
(44)
(US$m, Gaap)
2012
2013
2014
Proprietary online study - Who has the best app?
About 80% of our respondents in Section 2 have used online restaurant

groupbuy. Meituan is by far the market leader with 89% penetration, followed
by Alipay, Weixin and Taobao/Juhuasuan. Purchase frequency is quite high at
4.6 times per week. Groupbuy discount is around 23%.
On average, our panel

saw groupbuy deals offer
around 23% discount
One-stop platforms Alipay, Weixin and Taobao/Juhuasuan recorded higher

usage frequency than specialist groupbuy apps Meituan, Dianping and Nuomi.
This could be due to convenience.
Figure 157
Figure 158
Figure 159
Which O2O groupbuy apps

have you used?
Usage frequency
(5=highest, 1=lowest)
Merchant coverage
(5=best, 1=worst)
Meituan
Alipay
89
Alipay
Weixin
Taobao/JHS
63
Nuomi
59
Dianping
(%)
20
40
4.10
Alipay
4.04
QQ
4.05
Taobao/JHS
4.03
Meituan
4.03
Nuomi
3.97
60
80
100
Weixin
3.88
Nuomi
48
Others
4.08
Dianping
55
QQ
4.24
Dianping
4.38
Taobao/JHS
63
Meituan
4.49
Weixin
71
Others
1
3.53
Others
3.00
3.91
QQ
3.74
2.82
Source: CLSA
However, specialist groupbuy apps are acknowledged to offer wider merchant

coverage and deeper discounts. Meituan and Dianping have the best
merchant coverage while Meituan and Nuomi offer the best discounts. Slightly
over half of our respondents will maintain or increase purchases of groupbuy
products if subsidies are withdrawn.
3 November 2015
57

China internet
Section 4: Dineout
Specialist groupbuy apps

offer wider coverage and
deeper discounts
Figure 160
Figure 161
Discount
(5 cheapest, 1 most expensive)
How will you change your usage

frequency if subsidies are withdrawn?
Meituan
4.15
Nuomi
Increase
11%
4.05
Dianping
Significantly
decrease
34%
3.97
Taobao/JHS
3.90
Weixin
3.78
Alipay
3.75
QQ
Same
43%
3.16
Others
2.76
Slightly
decrease
12%
Source: CLSA
Most respondents
purchase coupons when
searching for restaurants
Most respondents purchase coupons when they are in search of restaurants,

suggesting that groupbuy platforms are useful sales-lead generators for
restaurants. Our respondents purchased coupons after they arrived at the
restaurants only 15% of the time.
Groupbuy deals are not the main factor influencing which restaurant
consumers decide which to visit. Some 62% of diners use groupbuy when
available. Only 18% will only eat at restaurants with groupbuy discounts. The
remaining 20% will try new restaurants with attractive groupbuy deals.
Figure 162
Figure 163
When do you purchase groupbuy coupons?
What is your buying behaviour?
80
(%)
72.3
70
Only eat at
restaurants with
groupbuy
coupons 18%
Only purchase
groupbuy
coupons if
attractive
enough 20%
67.8
60
50
40
25.6
30
20
6.6
10
0
Searching for
restaurant
Decision made,
Reached
heading to
restaurant,
restaurant
waiting for food
Settling bills
Use groupbuy
coupons if
available at the
restaurant 62%
Timeline
Source: CLSA
58
3 November 2015

China internet
Section 5: Takeout delivery
Takeout delivery
What is new is the

enormous size of capital
poured into the space in
the last two years
Takeout delivery segment

could see a 67% Cagr to
Rmb193bn by 19CL
Online food delivery connects restaurants and hungry people. The platform
centralises and digitalises restaurant and menu information, allowing
customers to search, order and pay online. It is a lucrative market, given the
large addressable user base, high usage frequency, high take rate and
payment online. It is easy to migrate online. Chinas online takeout market
was around Rmb15bn in 2014 and we estimate it could expand at an 87%
Cagr to Rmb193bn by 2019, driven by more players and heavy subsidies. We
expect the net take rate (after subsidy) to improve from the current 2% to
8% by 2019. Subsidies are still likely to exist and the net take rate will still be
below the normal 15% level. However, we expect the market to consolidate to
two or three major players in the next few years. The subsidy level should
also ease once the market passes the landgrab phase.
Figure 164
Figure 165
Takeout-delivery O2O GMV
Takeout-delivery online penetration
400
70
(Rmbbn)
300
55.0
40
200
58.0
44.8
50
87% 5Y Cagr
250
28.5
30
150
13.1
20
100
50
(%)
60
350
15
45
113
203
284
340
2014
15CL
16CL
17CL
18CL
19CL
10
5.0
0
2014
15CL
16CL
17CL
18CL
19CL
Source: CLSA

Takeout delivery is a
kickstarter for major
O2O platforms
Takeout delivery is a kickstarter for major O2O players as it is a large market

with standardised and high-frequency service. The segmented is dominated
by four players - Ele.me, Meituan, Baidu Waimai and Koubei - all with
nationwide ambition and financial support from internet giants.
Dozens of small local platforms also exist focusing in niche subsegment, such
as Daojia.com.cn focusing on mid-to-high end food delivery service in 10
cities. Foreign chain restaurants such as Yum!, KFC, Pizza Hut and McDonalds
all operate mobile delivery apps, but they also cooperate with third-party O2O
service platforms to maximise sales.
Meituan and Ele.me are the largest in the market with 40% order share and
33% value share each, followed by Baidu and Taodiandian, according to
Eguan. Ele.me and Meituan have a big lead in the student market. Baidu is
catching up fast in the middle-income white-collar market - it has a 16%
market share in this segment, compared to an 8% overall share.
Figure 166
Figure 167
Figure 168
Order market share (2Q15)
Students market share
White-collar market share
Daojia
1%
Taodiandian
3%
Others
8%
Baidu
8%
Baidu
4%
Meituan
41%
Ele.me
39%
Taodiandian Others
3%
6%
Ele.me
39%
Meituan
48%
Taodiandian
3%
Others
9%
Baidu
16%
Meituan
38%
Ele.me
34%
Source: Eguan, CLSA
3 November 2015
59

China internet
Our proprietary online study also showed a similar picture, with Ele.me and
Meituan leading the market, followed by Baidu and Koubei (previously
Taodiandian). Both Ele.me and Meituan cover about 260-270 cities across the
country as of mid-2015, a wide lead over Baidus 90 cities and Koubeis c.20
cities. Meituan generates the highest daily orders at 2m while Ele.me
generates the highest daily order value of Rmb60m.
Figure 169
Online takeout - Four major platforms

Baidu Waimai
Ele.me
Key investors
Baidu (majority)
Ajisen China, Hina,
Hanking (<10%)
Alibaba, Sequoia and

General Atlantic (Series
C)
Food delivery launched

Headquarters
Latest round of funding
May 2014
Beijing
US$200m in July 2015
Logistics model
System is managed by
Baidu; employees are
outsourced
Other key entry points
Baidu search app
City coverage
Restaurant coverage
Users
Daily order volume
90 major cities
Daily GMV
Rmb60m including
Nuomi (2Q15)
CITIC PE, China Media

Alibaba (50%) and
Capital, Hualian, Gopher transferred Taodiandian
Asset (Series F)
into Koubei
Ant Financial (50%)
CITIC PE, Tencent,
JD.com, Dianping,
Sequoia (Series E)
April 2009
Relaunched June 2015
Shanghai
Hangzhou
US$630m in August 2015 Nearly US$1bn in June
2015
Inhouse in 25 cities,
Through third-party
employing 4,000 full time partnered logistics in 15
key cities
and 200,000 freelance
delivery employees
Dianping
Alipay Wallet app
Mobile Taobao app
260+ cities (July 2015) Around 20 cities
Almost 300,000
Over 100,000
Almost 40m
2m est (July 2015)
Over 1m orders including
800,000 inhouse delivery groupbuy (August 2015)
(July 2015)
Rmb60m (July 2015)
Rmb75/order
Over 10,000
Rmb20.8/order
Over 15,000 (group)
Implied GMV per order

Employees
Koubei.com
Meituan Waimai
November 2013
Beijing
US$700m in January
2015
Inhouse delivery in 140
cities with 380 delivery
stations
Meituan app
250+ cities (June 2015)
Over 220,000
Almost 20m in 1H15
1.99m (June 2015)
2.20m at peak
Rmb41m (June 2015)
Source: Companies, media reports, CLSA
Baidus takeout delivery

service was launched in
October 2014
Baidu Waimai
Baidus takeout delivery service was launched in October 2014 and covers 90
cities. Baidu is currently No.3 nationwide by volume after Meituan and
Ele.me, but it has become the leader among white-collar workers in half of its
covered cities including Beijing, Hangzhou and five provincial cities. Baidu
focuses on middle-class white-collar office workers and matches them with
high-quality, licensed restaurants that can make timely deliveries.
Baidus key advantage is

its technological edge and
search gateway
Baidus key advantage is its technological edge and search gateway, which
allow it to streamline the process and direct customer orders to restaurants in
a highly efficient way. It leverages on its ad-agency network which has
20,000 sales staff to sign up merchants. Baidu can cross-sell search and O2O
products without additional costs.
Baidu outsources the lastmile delivery service to

third parties
Baidu outsources the last-mile delivery service to third parties, but uses its
own software to manage the delivery orders. Food delivery requires a
multipoint-to-multipoint matching system. Baidus algorithm improves
delivery efficiency while competitors still rely on manual planning.
60
3 November 2015

China internet
Food delivery requires a

multipoint-to-multipoint
matching system
Figure 170
Figure 171
Baidu delivery team in Beijing
Ele.me delivery team in Beijing
Source: CLSA
Ele.me is among the

oldest online
takeout platforms
Ele.me
Ele.me (are you hungry in Mandarin) is one of the oldest online-takeout
platforms, having launched its service in April 2009. Ele.me has had at least
six rounds of funding. It raised US$630m in the latest round in August 2015,
valuing the company at US$3bn, similar to global peers. Ele.mes investors
include internet companies Tencent, JD.com and Dianping, as well as funds
such as CITIC PE and Sequoia.
The companys rapid growth is best illustrated by its employee count. Ele.me
only covered 20 cities with a few hundred employees in mid-2014. By July
2015 its headcount had jumped 25x to over 10,000. The first increase was in
its business development team last year, which has expanded its service to
260 cities covering 300,000 restaurants currently. This year Ele.me has hired
some 4,000 delivery staff in 25 top-tier cities to carry out professional lastmile delivery, servicing 100,000 local and chain restaurants.
Average daily GMV was over Rmb60m in July 2015, while peak daily orders
exceeded 2m, of which 800,000 were inhouse. This implies Rmb30 GMV per
order, 50% higher than Meituans Rmb20.
Meituan has the largest

order and user share in
online takeout
Meituan
Meituan has the largest order and user share in online takeout delivery.
Takeout has become a strategic focus of the company and it spun it off as a
standalone business after its restructuring in mid-2015. Takeout is a natural
extension of its groupbuy business, as Meituan already has business
relationships with many restaurants nationwide. Its takeout-delivery platform
was launched in early 2014 and covers over 220,000 restaurants in over 250
cities nationwide, with almost 20m registered users by mid-2015.
GMV from takeout delivery was Rmb4.25bn in 1H15, up 147% YoY. This
segment represented 9% of Meituan Groups total GMV. The company used to
focus low-end customers such as college students, but is gradually moving up
3 November 2015
61

China internet
to white-collar workers and also upgrading its restaurant offerings. In June

2015 alone, Meituans GMV was Rmb1.24bn with 1.99m daily orders, implying
Rmb20.8 GMV per order. Daily orders in the business districts were 610,000,
about 30% of total orders.
Initially, Meituan primarily operated a marketplace model with little
involvement in physical delivery, but this has changed recently, possibly due
to competition from Ele.me and Baidu. The company now has 380 delivery
stations in 140 cities. In 2Q15, Meituan delivered 600,000 orders, which still
accounted for small proportion of its total orders.
Koubei.com (previously Taodiandian)
Alibaba has been slow to penetrate the O2O market. Koubei.com ( ,
meaning word-of-mouth) was established by Alibaba and Ant Financial as a
50:50 joint venture in June 2015. While each injected Rmb3bn to the JV
(c.US$1bn in total), Alibaba also transferred its Taodiandian into the new
business and Alipay connected its offline merchants to the platform and
expand it to other local services.
Koubei is a 50:50 joint

venture between Alibaba
and Ant Financial
Taodiandian ( ) was relatively late to market, established only in

December 2013 (versus Ele.me in 2009 and Meituan in March 2010). It only
offers food-delivery services as a marketplace where merchants and
consumers meet; the platform does not manage actual food delivery
directly. Merchants on the platform make the deliveries. Koubei.com itself
was acquired by Alibaba in 2006. It is a Dianping/Yelp-like local rating
portal, but the business did not do well and the portal has not been updated
since 2011. The JV has adopted the Koubei brand name, which is still
familiar to many Chinese users.
Koubeis new CEO Fan Chi used to manage Alipay and Taobao Movie.
Koubei will operate independently from Alibaba and Ant Finance and is
managed by employees from Taodiandian and the offline team of Ant
Financial. Its daily orders exceeded 1m in August 2015, but that number
included both takeout delivery and groupbuy orders. It currently only
covers 20 cities and 100,000 restaurants.
Proprietary online study - Which app do users prefer?
About 80% of respondents have used online takeout-delivery services.

Meituan is by far the most used (81% of respondents), followed by Ele.me
(63%), Baidu Waimai (46%) and Taodiandian/Koubei (42%). Meituan and
Ele.me also lead in terms of usage frequency and service quality. The rating
differences among top players are small.
About 80% of
respondents have used
online takeout services
Figure 172
Figure 173
Figure 174
Which food-delivery apps

have you used?
Usage frequency
Service quality
Meituan
Meituan
81
Ele.me
63
Baidu
46
Taodiandian
42
Daojia
Others
(%)
20
40
60
80
100
4.27
Ele.me
3.93
Ele.me
4.09
Daojia
3.88
Baidu
4.04
Baidu
3.84
Taodiandian
Taodiandian
12
Meituan
4.16
Daojia
3.70
Others
1
3.84
Others
3.25
3.92
3.38
Source: CLSA
62
3 November 2015

China internet
Meituan and Ele.me are clear leaders as the most-used food-delivery apps.
Our respondents think that restaurant coverage is most important factor in
their choice of food-delivery app, followed by subsidies and fast delivery.
Food quality is less of a concern, which is likely to be related to the choice
of restaurants.
Meituan and Ele.me are

clear leaders as the mostused food-delivery apps
Consumers are divided on subsidies. Half will keep the same spending level or
even increase it if subsidies are withdrawn, while the other half will decrease
their use of food-delivery apps. The food-delivery platforms are providing
good service and usage habits are developing.
Figure 175
Figure 176
Figure 177
Most frequently used

food delivery apps
Reasons for choosing

the most frequently used apps
Will you change usage frequency

if subsidies are withdrawn?
Meituan
70
43
Ele.me
33
Baidu
10
Daojia
Others
40
30
20
10
(%)
Significantly
decrease
7%
Increase
15%
50
11
Taodiandian
(%)
60
10
20
30
40
50
Wide
High
merchant subsidy
coverage
Slightly
decrease
43%
Same
35%
Fast Good food Get used

delivery quality
to
Source: CLSA
Wide restaurant choices,

cash subsidies and
convenience attract users
Takeout orders are mostly

from homes or offices
As most of our respondents are white-collar workers, takeout-delivery orders

are mostly from homes or offices. The key reasons for using mobile apps over
phone/walk in to order takeout delivery are the wide restaurant choices, cash
subsidies and convenience.
Figure 178
Figure 179
Where do you usually

order takeout?
Reasons for using mobile

app over phone or walk in
90
60
(%)
80
70
60
40
50
30
40
20
30
20
10
10
(%)
50
Home
Office
School
More choices
Faster
delivery
Subsidies
More
convenient
Source: CLSA
Average spending is
Rmb87 per order
Among our respondents using food-delivery apps, average spending is Rmb87

per order. But the deviation is high and the median average order size is
Rmb58. Average subsidy received (including coupons, discounts and red
packets) is Rmb8-10 per order. Usage frequency is high at four to five times
per week. Average waiting time is relatively short at 30 minutes.
Figure 180
Ang subsidy (including

coupons, discounts and
red packets) is Rmb8-10
per order
Key food delivery matrix of our respondents

Gross price
(Rmb)
Subsidy
(Rmb)
Weekly usage
(times)
Avg waiting
time (mins)
Average
86.6
10.7
4.8
33.7
Median
58.0
8.0
4.0
30.0
Standard deviation
78.7
9.0
3.1
23.0
Source: CLSA
3 November 2015
63

China internet
We recruited four
university students to try
a range of O2O services
Proprietary checks - Who offers the best user experience?
We recruited four university students in China to try a range of O2O

services - three females and one male, studying in top-tier universities
and aged between 20 and 24. We also chose them because of their
location - one in Beijings Chaoyang District and one in Shanghais Jing'an
District to reflect the most competitive battlegrounds for O2O services;
one living just north of Shenzhen in the recently developed Longhua New
District; and one from tier-2 city Chengdu, capital of Sichuan Province.
Figure 181
Beijings Chaoyang
District and Shanghais
Jing'an District are the
most competitive
battlegrounds
Locations of our four online diners - Beijing, Shanghai, Shenzhen and Chengdu
One student each in

Shenzhens Longhua New
District and Chengdus
Shuangliu County, both
just outside of city
centres
Chaoyang District,
Beijing
Shuangliu County,
Chengdu
Jing'an District,
Shanghai
Longhua New District,

Shenzhen
Source: CLSA
We only gave them

general guidance, given
huge diversity of services
We only gave them general guidance on testing the apps, a budget for
each service and several questions to test the real user experience. We
left them with the choice of merchants (eg, which restaurant for
takeout delivery) and the choice of product or services (ie, what dishes
for their dinner).
We asked our diners to

spend Rmb30 on four
food-delivery mobile apps
On takeout delivery, we compared the ordering and delivery process,

subsidy offered and customer-service experiences among the four popular
food-delivery mobile apps (Baidu Waimai, Ele.me, Koubei and Meituan) in
the four cities. We asked our students to spend Rmb30 on the four apps
and ask the delivery staff several questions to understand the behind-thescenes delivery process.
64
3 November 2015

China internet
Figure 182
Online food delivery exercise - Summary

Baidu Waimai
Ele.me
Koubei.com
Meituan Waimai
Restaurant coverage
Quality of reviews
Ordering process
Subsidies & discounts
Payment options
Delivery process
Delivery speed
Overall rating
Key findings are:

Four delivery platforms
have similar coverage
Restaurant choice. The four delivery platforms have similar coverage in
the four cities we tested, covering a fair variety of chain and independent
restaurants as well as fastfood shops, cafes and snack bars. Our diner in
Shanghai commented that in terms of coverage, Koubei is slightly better
while the other three are similar.
Review. All the platforms encourage users to rate and provide feedback
on restaurants. Our diners commented that quality and quantity of reviews

are better at Koubei and Ele.me, relative to Baidu and Meituan. Ele.me
allows users to comment on individual dishes, while the other three only
allow users to review/rate the restaurants.
Ordering process. The mobile ordering process varied slightly from

platform to platform, but was similar and fairly easy to use. Only one diner
complained that Meituan cannot specify delivery time.
Baidu and Ele.me are

more aggressive in
providing subsidies
Subsidies. The four platforms offer various subsidies, including first-timeuser discount, coupons for orders exceeding a certain threshold, discounts
for use of certain payment channels, red packets to share with friends and
restaurant-specific discounts. Baidu and Ele.me are more aggressive in
providing subsidies, while Koubei is the least aggressive. Koubei is the only
platform that does not provide payment discounts or red packets.
Payment. Aside from Koubei, the apps provide various payment options
including Alipay, Baidu or WeChat Wallet, credit or debit card and cash on
delivery. Alipay is mandatory on Koubei.
Half of our orders were

delivered by staff of local
restaurants
Delivery. Half of our orders were delivered by staff of local restaurants.
The remaining half were delivered by O2O platforms inhouse or

outsourced delivery teams. All four platforms were involved in the delivery
process. Baidu and Maituan appeared to have a relative large inhouse
delivery team, while Ele.me and Koubei teamed up with third-party
delivery companies and are experimenting with crowdsourced delivery
services.
Delivery speed. Delivery was generally fast at around 40-50 minutes
across all locations. Our diner in Shanghai tested and requested orders
from the four platforms to arrive at 5:30pm. Three of them arrived at the
same time from the same lift at 5:25pm.
3 November 2015
65

China internet
Baidu offered the highest

subsidies to catch up and
promote Baidu Wallet
Baidu Waimai
Baidu offered the highest subsidies to catch up and promote Baidu Wallet.
Our diners received Rmb6-15 discounts as first-time users of Baidu Waimai or
Baidu Wallet. There was another Rmb10-15 in cash coupons after the next
purchase and a further Rmb0-188 in red packets to share with friends.
There was promotional logo and slogan, Its safer to use Baidu Wallet within
the app, although the usage of Baidu Wallet is not compulsory.
Many restaurants on Baidu Waimai were marketed as delivered by Baidu.
Three of our four orders from Baidu were delivered by Baidus outsourced or
inhouse delivery team. In Beijing, Baidu even gave free branded tableware.
Figure 183
Baidu Waimai - Summary

Beijing
Shanghai
Shenzhen
Chengdu
Spicy Old Mum
No.1 Deep Fried
HK-style pot rice
Chen Jisi Rice
Spicy soup base
Fried chicken wing
Hong Kong-style
Lunch box x4
with 10 items
and others
pot rice x1
28.0
50.0
19.0
68.0
Delivery fee (Rmb)
7.0
0.0
0.0
0.0
Subsidy (Rmb)
0.0
(15.0)
(7.0)
0.0
Vendor
Items ordered
Product price (Rmb)
Net price (Rmb)
35.0
35.0
12.0
68.0
Credit Card
Alipay
Baidu Wallet
Cash on delivery
Delivery terms
Delivery fee includes

Rmb2 for plastic packing
and Rmb5 for delivery
Preselected
delivery time
Deliver immediately,
1 hour expected
Preselected
delivery time
Subsidy terms
No subsidy
Rmb15 for first order
Rmb7 subsidy for

Baidu Wallet payment
No subsidy as our diner

wasnt a first time user
12:04pm
1:35pm
7:09pm
9:46am
12:00pm (selected)
Payment method
Order time
Estimated delivery time
Actual delivery time
Where food came from?
Who delivered?
Comments from delivery
staff?
12:55pm*
5:30pm (selected)
8:01pm
Around 1 hour
5:25pm
Around 50min
Restaurant
Restaurant
Restaurant
Professional kitchen
Baidu delivery
Outsourced delivery
Restaurant
Outsourced delivery
Both Baidu inhouse

Delivery staff is
delivery team and employed by third-party.
restaurant staff deliver
About 30 orders is
orders. delivered per day for all
platforms. No uniform,
Delivery 20-30 orders
no delivery bags.
per day, base salary at
Restaurant accepts About 80-100 orders are

order from multiple
delivered per day
platforms, about
30% of orders
comes from Baidu
Rmb3,600 plus between

Rmb1-6 per order bonus
Packaging quality
Food quality
Other comments
Good
Average
Good
Very good
Average
Average
Above average
Good
*Baidu would take 50%

off if the order did not
arrive in 80 minutes (ie,
by 1:25pm in this case)
Vendor is an online-only
business with no
restaurant, focusing on
high-end segment
Source: CLSA
66
3 November 2015

China internet
Figure 184
Baidu Waimai order screenshots (from all four diners)

Main app menu
Restaurant selection
Restaurant details
Menu selection
Payment screen: Choice of

Alipay, credit & bank cards
Rmb15 coupon received
Rmb188 red packet to

share with friends
Order tracking
Shanghai food
Chengdu food
Beijing food
Baidu-branded tableware
Source: CLSA
3 November 2015
67

China internet
Ele.me delivered
consistent services across
our four users
Ele.me
Ele.me is one of the largest platforms with a 30-40% market share. In our
test it delivered consistent services across all four users.
Subsidies offered by Ele.me are generally less aggressive than Baidu, as the
platform is not required to promote its online-payment service. It however
offers a generous Rmb15 first-time-user discount and its red packet also
varies between users and locations.
Delivery service was smooth. Ele.me has an inhouse delivery team, but only
our user in Beijing was delivered by Ele.me. Restaurant staff delivered our
order in Shanghai and Shenzhen, while outsourced staff handled our order in
Chengdu.
Packaging and food quality is generally good. Our users were generally
satisfied by the packaging and food quality. In Chengdu, the outsourced
delivery staff stored our lunch boxes in a professional delivery bag, keeping
food warm.
Figure 185
Ele.me - Summary
Vendor
Items ordered
Product price (Rmb)
Delivery fee (Rmb)
Subsidy (Rmb)
Net price (Rmb)
Payment method
Beijing
Shanghai
Shenzhen
Chengdu
Programme monkey
(840m)
Jia Kitchen
(1.09km)
Wooden bucket rice

(324m)
Shen Xiaofu
Hong Kong-style Beef and mushroom rice

roast duck
Four lunch boxes,

Rmb15 each
Spicy-sour noodle
15.0
30.0
17.0
60.0
2.0
0.0
0.0
0.0
-1.0
-8.0
0.0
-18.0
16.0
22.0
17.0
42.0
Alipay
Online payment
Alipay
Online payment
Delivery terms
Not applicable
Free delivery from

Rmb25 per order
Free delivery from

Rmb15 per order
Always free delivery
Subsidy terms
Rmb1 red packet for

online payment
Rmb8 for online

payment, max 2 orders
per day
Not applicable
First-time-user discount
of Rmb15, red packet
another Rmb3
12:32pm
2:13pm
7:51pm
10:08am
1 hour expected
5:30pm
(selected)
estimated 8:16pm
11:45am
(selected)
50 minutes
5:25pm
Around 20 minutes
Order time
Who delivered?

staff?
Packaging quality
Food quality
Other comments
Restaurant
Restaurant
Restaurant
Restaurant
Part-time staff who

works for Ele.me and
Dada, a third-party
crowdsource platform
Restaurant staff
Restaurant staff
Outsourced
staff
Delivers 20-30 orders Delivers about 15 orders Delivers max 100 orders
Delivers around 60
per day. Earns Rmb5 per per day. Get paid Rmb4
per day for multiple orders per day. Staff are
order from Ele.me, Rmb9 per order, plus Rmb800 platforms, around 30%
paid fixed monthly
per order from Dada
base salary
from Ele.me
salary, not per order
Good
Good
Good
Poor
Good
Above average
Food quality matches

image on Ele.me website
Very good
Good
Comes with a delivery
bag to keep food warm
Source: CLSA
68
3 November 2015

China internet
Figure 186
Ele.me order screenshots (from all four diners)

Menu item selection
Order confirmation
Payment, delivery time,

coupon selection
Payment options: WeChat,

QQ Wallet, Alipay
Order status
Red packets
Summary of red packets

to share through Wechat
Shanghai food
Chengdu express delivery
Beijing food
Source: CLSA
3 November 2015
69

China internet
Koubei collaborates
with Alibabas
invested companies
Koubei
The platform collaborates with Alibabas invested companies such as
etaoshi.com () and shbj.com (), leveraging on their delivery
services and user data. Koubei is pure online platform. Delivery was provided
by third parties or the restaurants. The delivery in Beijing is provided by
third-party company Shbj.com. This could make it more difficult to control
service quality. For example, our diner requested that the order be delivered
at 5:30pm. The delivery staff missed the request and delivered at 2pm, 3.5
hours early. Our diner asked the delivery staff to take back the order and
deliver again at 5:30pm, which they refused to do.
Koubei is bundled with Alipay and Taobao. No other payment method or cash
on delivery is accepted.
Koubei offered the least subsidy among the four platforms. It only offered
Rmb15 for first-time users. There was no additional payment subsidy,
coupons or red packets.
Figure 187
Koubei - Summary
Vendor
Beijing
Shanghai
Shenzhen
Chengdu
GuanGong Mutton Soup
Echo Sushi
Xianggang style
Duck blood and

vermicelli soup shop
stone-pot rice
Items ordered
Mutton soup
Princess sushi roll
with sheeps stomach

Product price (Rmb)
Rice with preserved

bacon and cucumber
side dish
Duck blood soup x 1

Beef rice x 1
23.0
52.0
23.0
28.0
Delivery fee (Rmb)
5.0
0.0
0.0
0.0
Subsidy (Rmb)
0.0
0.0
0.0
-15.0
Net price (Rmb)
28.0
52.0
23.0
13.0
Payment method
Alipay
Alipay
Alipay
Alipay
Delivery terms
Min order of Rmb20
Min order of Rmb50
Min order of Rmb20
Min order of Rmb20
Subsidy terms
Not applicable
Not applicable
Not applicable
Rmb15 discount
for first-time users
Order time
12:28pm
1:29pm
8:06pm
12:40pm
1:20-1:35pm
Requested 5:30pm
8:50pm
Requested 1:25pm
40 minutes
2:10pm (40 minutes)
Around 1 hour
Around 40 minutes
Restaurant
Restaurant
Restaurant
Restaurant
Third-party company
shbj.com
Restaurant staff
Restaurant staff
Restaurant owner!
Delivers around 10-20

orders per day
Staff did not see the

requested delivery time

orders per day, around
30% from Koubei
Owner and her staff

together deliver 60-70
orders per day
Packaging quality
Good
Very good
Good
Good
Food quality
Good
Good
Above average
Good
Who delivered?
staff?
Other comments
Source: CLSA
70
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China internet
Figure 188
Koubei order screenshots (from all four diners)

Access from Alipay main
menu
Koubei main menu
Selecting food item
Order confirmation
Alipay integration
Order status
Real time order tracking
Shanghai food
Chengdu food
Shenzhen food
Source: CLSA
3 November 2015
71

China internet
Meituan also offered

relatively large subsidies
Meituan Waimai
Meituan is one of the leading platforms with a large geographic footprint and
high order volume. In our test, the platform offered some of the largest
subsidies, paying Rmb15 for first-time users as well as discounts for orders
exceeding a certain threshold, in an attempt to raise ASP per order. Meituan
provided discounts for payment using bank debit/credit cards, as the platform
is not tied to one of Baidu, Tencent or Alibabas payment services.
Meituan also has an inhouse delivery team, similar to Ele.me. Only our Beijing
users order was delivered by a Meituan staff, who delivers around 20-30
orders per day for various restaurants and receives a base salary of
Rmb3,600 per month plus Rmb5 per order. All other orders were delivered by
restaurant staff.
Packaging and food quality is generally good. Our diner in Shanghai
complained that the Meituan Waimai app cannot specify a preferred delivery
time, which meant he had to call the restaurant separately to arrange a
5:30pm delivery.
Figure 189
Meituan - Summary
Vendor
Items ordered
Product price (Rmb)
Delivery fee (Rmb)
Beijing
Shanghai
Shenzhen
Chengdu
Hallasan Korean
Speciality cook
Wooden bucket rice
Second sister
Sauted green beans Beef and mushroom rice
Potato & pork rice x1

Tomato & egg rice x1
Pork Bibimbap x1
38.0
28.0
16.0
28.0
4.0
0.0
0.0
0.0
Subsidy (Rmb)
-10.0
-15.0
-1.0
-6.0
Net price (Rmb)
32.0
13.0
15.0
22.0
Payment method
WeChat payment
Delivery terms
Subsidy terms
Order time
Who delivered?
staff?
Packaging quality
Food quality
Other comments
Rmb10 discount for

orders of over Rmb35
Online payment
Online payment
Online payment
Min order of Rmb25
Min order of Rmb15
Always free delivery
Rmb15 discount for

Rmb1 discount for first Rmb6 discount for orders
of over Rmb20
first time users time users of bank debit
or credit card payment
12:04pm
2:06pm
12:38pm (Estimated)
See below
7:27pm (Estimated)
Not known
Around 40 minutes
5:25pm
7:15pm (18 minutes)
1:15pm (37 minutes)
Restaurant
Restaurant
Restaurant
Restaurant
Restaurant staff
Restaurant staff
Restaurant staff
Delivers around 20
Delivers 20-40 orders
orders per day, fixed per day, around 30-40%
monthly salary of
of orders from Meituan
Rmb4,000
Delivers around 50
orders per day, mostly
within 1km radius
Meituan team
orders per day for
various restaurants. Base
salary Rmb3,600 per
month, plus Rmb5 per
order
6:57pm
12:38pm
Very good
Good
Good
Good
Good
Average
Above average
Good
Meituan cannot specify

preferred delivery time.
Called restaurant to
arrange 5:30pm delivery.
Delivery team is not
uniformed and seems
unclean
Source: CLSA
72
3 November 2015

China internet
Figure 190
Meituan order screenshots (from all four diners)
Shanghai food
Chengdu food
Beijing food
Source: CLSA
3 November 2015
73

China internet
Globally, two pure online

food-delivery peers:
Just Eat and Grubhub
Who are the overseas peers?
Globally, there are two pure online food-delivery peers: London-listed Just Eat
which primarily operates in Europe and Latam; and NYSE-listed Grubhub
which operates in 900 US cities and London. In addition, Frankfurt-listed
Rocket Internets Global Online Takeaway Group operates multiple brands
including Delivery Hero and Foodpanda across emerging markets.
Characteristics of overseas peers are:
Take rate at 15% and improving. All overseas companies operate a
similar per-order commission model. Grubhub and Just Eat enjoy a take
rate of 15.5%, while Delivery Hero and Foodpandas take rates are lower
at 11-13%. Both Grubhub and Just Eats take rates have improved over
the past couple of years, driven by better monetisation such as Grubhubs
launch of an auction-pricing system and Just Eats payment fees.
Both has around 15%

take rate, with wide
margin of over 30%
Wide-margin business. Both Grubhub and Just Eat have been profitable
for a long time. Grubhubs non-Gaap Ebitda margin was over 30% in the
past four quarters, while Just Eats 1H15 Ebitda margin was 40-44% in
established countries UK and Denmark.
Heavy early investment. Delivery Hero and Foodpanda are still in rapid
expansion and development phases and are lossmaking due to large sales
and marketing expenses. Likewise, Just Eats expansion to new countries
dragged the groups overall Ebitda margin down to 24% in 1H15.
Profitable even at a low

market share
Profitable even at a low market share. Grubhub and Just Eat achieve
15% take rates and 25% margins in the USA and UK even when online
penetration and their market shares are relatively low. Just Eat is the
market leader in UK, but online takeout penetration is only 30%. Grubhub
is profitable in the USA with a c.5% market share.
Figure 191
Global takeout comparison
Regions served
Countries served
Cities covered
Restaurants
Market cap/valuation (US$m)
Financial period
Active users (m)
Annualised orders (m)
Grubhub (GRUB US)
Just Eat (JE/ LN)
Delivery Hero
Foodpanda
USA
Western Europe
Europe & Latam
Emerging markets
14
24
Rocket (RKET GR)
39
900+
526
35,000
59,000
90,600
38,300
2,280
3,994
3,140
628
2Q15
1H15
1Q15
1Q15
5.9
11.0
5.8
2.8
80.1
83.8
68.0
16.4
Annualised GMV (US$m)
2,272
2,159
1,323
234
Financial period
2Q15
1H15
FY2014
1Q15
568
1,079
736
58
GMV (US$m)
Revenue (US$m)
88
166
99
15.5%
15.4%
13.4%
10.9%
Total orders (m)
20.0
41.9
39.5
4.1
GMV per order (US$)
28.4
25.8
18.6
14.3
4.4
4.0
2.5
1.6
Est monetisation rate (%)
Revenue per order (US$)

Non-Gaap Ebitda (US$m)
Non-Gaap Ebitda margin (%)
28
40
(79)
(21)
32.3%
23.9%
(79.5%)
(326.3%)
Just Eat figures are translated at 1 = US$1.542, Rockets figures are translated at 1 = US$1.122. Source: Companies, CLSA
74
3 November 2015

China internet
Figure 192
Figure 193
Grubhub quarterly active diners
Grubhub active diners

50
20
2
1
3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
Qtr order per active user ('000)

Daily average grubs
300
250
200
150
2
10
100
3.4
30
(Order)
3.8
40
3.7
60
3.5
(%)
3.8
Active users
YoY (RHS)
4.2
(m)
4.1
Grubhubs quarterly
active diners still small at
5.9m in 2Q15
Grubhub
Grubhub is one of the largest online takeout-delivery platforms in the USA,
covering 35,000 restaurants in 900 US cities and London. The company can
be a global business benchmark: 14-15% and improving take rate plus a
consistent 30%+ non-Gaap Ebitda margin. Even after a decade of operation,
Grubhub still has a relatively low penetration of the US takeout-delivery
market. Quarterly active diners stood at 5.9m in 2Q15, up 42% YoY, a
fraction of the US addressable population.
3.4
Grubhub is one of the

largest online takeout
platforms in the USA
3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
50
0
Grubhubs revenue grew

by 47% YoY in 2Q15
User engagement on Grubhub has slowed due to intense competition, but its
take rate is improving. Gross food sales rose 34% YoY in 2Q15, but revenue
growth was faster at 47% YoY. This was driven by GrubHubs auction-pricing
system launched in early 2014, where restaurants can choose the level of
commission - at or above the floor rate - which affects their relative priority in
the sorting algorithm. Average take rate was 15.5% in 2Q15.
Figure 194
Overall take rate was

15.5% in 2Q15
Figure 195
Grubhub gross food sales

(US$m)
Gross food sales

YoY (RHS)
Grubhub take rate

(%)
(US$)
Average revenue per order (%)

Take rate (RHS)
70
4.6
60
4.4
500
50
4.2
15.0
400
40
4.0
14.5
300
30
3.8
14.0
200
20
3.6
13.5
3.4
13.0
100
10
3.2
12.5
3.0
700
600
3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
16.0
15.5
12.0
Grubhubs margin has also improved with scale. Adjusted Ebitda margin has
maintained at about 30% since its IPO, primarily due to cut back on sales and
marketing expense and operating leverage.
Figure 196
Grubhub had 32%

adjusted Ebitda
margin in 2Q15
Figure 197
Grubhub revenue
100
90
80
70
60
50
40
30
20
10
0
(US$m)
Grubhub adjusted Ebitda

Revenue
YoY (RHS)
(%)
90
35
80
30
70
60
20
40
15
20
3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
Adjusted Ebitda
Adj Ebitda margin (RHS)
(%)
36
34
32
25
50
30
(US$m)
30
28
26
10
24
10
22
20
3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
3 November 2015
75

China internet
Just Eat
Just Eat demonstrates the profitability that other market leaders can achieve.
The company is the No.1 online food delivery platform in the UK and in
Denmark, which contributed combined 78-79% of 1H15 orders and revenues.
Overall revenue grew at robust 54% YoY in 1H15.
Just Eat demonstrates

profitability that can be
achieved for the market
leader
Figure 198
Figure 199
Figure 200
Just Eat active users
Just Eat takeout restaurants
Just Eat orders
12
(m)
Active users
YoY (RHS)
10
90
11.0
80
70
8.1
60
6.9
5.9
6
4
(%)
50
40
4.1
30
2.4
20
2
0
10
2011
2012
2013
2014
1H14
70
45.7
50
10
10
0
2014
1H14
70
60
41.9
50
40
27.5
25.3
20
2013
80
40.2
40
30
2012
90
61.2
50
17.0
2011
(%)
60
29.9
30
20
70
40.8
36.4
40
No. of orders
YoY (RHS)
(m)
80
59.0
60
1H15
('000)
30
13.9
20
10
2011
1H15
2012
2013
2014
1H14
1H15
Just Eat has multiple revenue sources. It charges restaurants one-off

connection fees to join the platform, ongoing commission rate of 11-12% on
successful orders (which accounted for the companys 79% of revenue),
credit card processing fees and advertising fees. Overall take rate was 15.4%
in 1H15.
Commissions make up
79% of Just Eats revenue
Figure 201
Figure 202
Just Eat: Revenue (m)
Just Eat: Revenue composition
200
180
160
140
120
100
80
60
40
20
0
Revenue (LHS)
Monetistaion rate
(m)
(% YoY)
157.0
107.8
96.8
69.8
59.8
33.8
2011
2012
2013
2014
1H14
1H15
Topplacement
fee and
others 5%
15.6
15.4
15.2
15.0
14.8
14.6
14.4
14.2
14.0
13.8
13.6
Connection
fees 3%
Payment
card/admin
fees 13%
Commission
79%
The business model is highly profitable when established. Just Eat group had
a 24% non-Gaap Ebitda margin in 1H15, but in its established UK and
Denmark markets it enjoys 44% and 40% Ebitda margins, respectively.
Group margin is dragged by investment in new markets, such as France and
Mexico.
Figure 203
Just Eat had 24%

non-Gaap Ebitda margin
in 1H15
Figure 204
Just Eat underlying Ebitda

45
(m)
Just Eat underlying Ebitda margin
Underlying Ebitda (LHS)

Underlying Ebitda margin
40
(%)
25
32.6
35
30
25.8
25
20
10
5
0
0.1
2011
10
5
2.3
2012
20
15
15.9
14.1
15
30
2013
2014
1H14
1H15
50
(%)
1H14
1H15
25
0
39
44
40
40
23
24
(43) (25)
(25)
(50)
UK
Denmark
Others
Group
76
3 November 2015

China internet
Chinese great leap forward in online takeouts

The latest figures from Ele.me and Meituan show that
Chinese firms had a great leap forward in online takeouts
over the past 18 months. Ele.me and Meituan each cover
220-300k restaurants across China, more than Grubhub,
Just Eat, Delivery Hero and Foodpanda combined.
they have relatively high numbers of student users, but

were up 100% QoQ in 2Q. The order volume and scale
efficiency are still much higher than overseas peers.
Chinas order volume is huge. Ele.me and Meituan each

had 2m orders per day in June-July 2015 or annualised
orders of 730m. Orders may decline in the summer as
GMV per order is low in China due to aggressive

subsidies and a low free-delivery threshold to
encourage usage. However, Meituan and Ele.mes
annual GMV still leads Grubhub and Just Eats due to
their large order volume.
No. of restaurants
Active users1
Grubhub
Grubhub
35
Just Eat
Just Eat
59
Delivery Hero
Foodpanda
38
Ele.me
Meituan
('000)
220
50
100
150
200
250
300
Ele.me
300
11
Delivery Hero
91
Foodpanda
40
Meituan
350
(m)
20
10
20
30
40
50
Grubhub and Just Eat are active user that place an order within the last 12 months, while Ele.me and Meituan are likely registered users.
Annualised orders
Annualised GMV (US$m)
Grubhub
80
Grubhub
Just Eat
84
Just Eat
Delivery Hero
Ele.me
730
Meituan
726
(m)
1,000
2,000
3,000
4,000
Grubhub
383.1
Delivery Hero
Foodpanda
83.5
Foodpanda
Ele.me
85.9
Ele.me
(US$)
117.5
300
25.8
Delivery Hero
228.2
200
28.4
Just Eat
196.3
100
(US$m)
2,349
GMV per order
Grubhub
Meituan
3,438
Meituan
100 200 300 400 500 600 700 800 900
Just Eat
234
Ele.me
Annualised GMV per user
1,323
Foodpanda
16
2,159
Delivery Hero
68
Foodpanda
2,272
400
500
19.5
14.3
4.7
Meituan
(US$)
3.2
10
15
20
25
30
Note: Grubhub and Just Eat are annualised based on reported 2Q/1H15 results, while Delivery Hero and Foodpanda are annualised based on 1QFY15
figures. Ele.me and Meituan figures are annualised based on July 2015 and June 2015 monthly figures respectively. Source: Companies, CLSA
3 November 2015
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China internet
Rocket Internet operates

a portfolio of online
takeout brands
Delivery Hero and Foodpanda

Rocket Internet operates a portfolio of online takeout-delivery brands under
its Global Online Takeaway Group. Two key brands are Foodpanda and
Delivery Hero, covering a wide footprint of 39 and 24 countries,
respectively, compared to 14 countries for Just Eat and two countries for
Grubhub. But both Foodpanda and Delivery Hero are lossmaking. Their
blended take rates are also lower at 11-13%.
Figure 205
Foodpanda and Delivery

Heros blended take rates
are also lower at 11-13%
Rocket Internet Global Online Takeaway Group

Brand
Countries
Restaurants
Users (m)
Orders pa (m)
Foodpanda
39
46,000
2.30
13.0
Delivery Hero
24
90,000
5.80
63.0
Talabat.com
1,400
0.50
5.8
LaNeveraRoja
4,000
0.56
1.4
Pizzabo
312
0.24
1.1
71
142,000
Total
84.0
78
3 November 2015

China internet
Section 6: Grocery delivery
Grocery delivery
Online grocery requires
a logistically
complex operation
Online grocery is a challenging segment with a competitive market and

structurally thin margins. Of the top-three consumer segments (electronics,
apparel and grocery), grocery has been the slowest to migrate online with
less than 5% penetration. This is because it requires a logistically complex
operation, especially for fresh food. It entails stocking a wide range of
perishable products, collating large-volume, low-value orders and delivering
the products in refrigerated trucks within a limited timeframe.
Online F&B GMV was only

Rmb66bn in 2014
according Euromonitor
Online grocery GMV was only Rmb66bn in 2014 according Euromonitor and
online penetration was 1.6%. We forecast the segment to expand at a 35%
Cagr to Rmb260bn by 2019 as leading e-commerce players are building
infrastructure to tap the market. Alibaba has relaunched its online
supermarket, while JD has purchased a 10% stake in Yonghui to create a
hybrid online and O2O grocery-retail model. Food-delivery companies also
offer grocery-delivery services. We believe online F&B penetration (online
retail plus O2O model) is likely to reach 5.7% by 2019.
Expect 31% grocerydelivery GMV Cagr to

Rmb260bn by 19CL
Figure 206
Figure 207
Online grocery GMV
Online grocery penetration
350
(Rmbbn)
300
5.7
(%)
4.7
5
35% 5Y Cagr
250
3.8
200
2.9
150
100
2.2
1.6
50
67
97
135
183
238
302
2014
15CL
16CL
17CL
18CL
19CL
0
2014
15CL
16CL
17CL
18CL
19CL
Source: CLSA
The online grocery market currently adopts two business models, plus
hybrids: an asset-heavy online supermarket model that requires large upfront
capital to build dedicated infrastructure; and a flexible O2O agency model
that functions like a concierge service.
Figure 208
Figure 209
Asset-heavy online supermarket model
Asset-light on-demand/O2O model
Supplier
Supplier
Entirely
in house
Operated by
third party
Suppliers
Regional DCs
Regional DCs
Central fulfilment centre

Local stores
Local stores
O2O
Customer
Customer
Customer
Customer
Local stores
O2O
Customer
Customer
Source: CLSA
3 November 2015
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China internet
Asset-heavy online supermarket model
This model is typically

used by companies that
were founded earlier
This model is typically used by traditional supermarket chains and onlineonly companies that were founded earlier. It requires substantial upfront
capital to build dedicated infrastructure to establish a centralised
operation. The warehouse could have various degrees of automation, from
dark stores that appear like a conventional supermarket where staff
manually pick goods to fill a customers order, to automated fulfilment
centres with miles of conveyor belts processing hundreds of orders hourly.
But it takes a long time

to reach scale and
become profitable
As fresh food is easily perishable, companies also set up cold-chain

logistics to conduct last mile delivery in house. This model takes a long
time to reach scale and become profitable. A notable online-only success is
Ocado in the UK. Ocado was lossmaking after launching in 2000, but
delivered its first full-year pretax profit in 2014.
Asset-light on-demand/O2O model
Alternative is on-demand
or O2O that functions like
a concierge service
The alternative is the on-demand or O2O model that has emerged in the
past few years, made possible by the mobile internet. It functions like a
concierge service in which customers place orders online. The platforms
either send the orders to local supermarkets where store employees pack
the orders; or alternatively, they send freelance personal shoppers to
stores to purchase the items. The operators then collect the orders and
charge a delivery and markup charge when shipping them to customers.
This avoids costs of a

fulfilment centre and
cold-chain logistics
This model avoids the upfront costs for a fulfilment centre and the ongoing
cold-chain logistics costs, but profitability is unclear. Platforms with this
model include Instacart, Google Express and part of AmazonFresh that
conducts neighbourhood services. In the USA, all these services are
currently confined to several metro areas such as San Francisco, Los
Angeles, New York and Philadelphia, but this unlikely to become a
nationwide service.
80
Chinas online grocery

segment is still at an
early stage
Chinas online grocery market is still at an early stage and there is no clear
leader yet. Yihaodian is the largest online grocery retailer, struggled to
turn profitable. It was sold to Wal-Mart in July 2015 and the founders left
the company. Other key players include SF Best and Cofco Womai, which
primarily operate asset-heavy models covering key cities, while dozens of
startups such as Benlai.com and Swbj.com are competing in O2O, mostly
in tier-1 and top tier-2 cities.
Alibaba and JD.com are

trying both approaches
Alibaba and JD.com are building a hybrid online-plus-O2O model. Alibaba

is expanding the geographical coverage of Tmall supermarket, which
operates an asset-heavy model with Cainiao Logistics, while the company
is also experimenting O2O through investee companies. JD has built a
cold-chain logistics, but it mainly covers Beijing, Shanghai and nearby
areas, offering imported food and beverages. It is experimenting with the
O2O model and crowdsourced delivery through JD Daojia, which has
launched in seven cities year-to-date.
3 November 2015

China internet
Figure 210
Key online grocery platforms

Tmall
Yihaodian
SF Best
Cofco Womai
JD Daojia (O2O)
PC website
chaoshi.tmall.com
www.yhd.com
www.sfbest.com
www.womai.com
Mobile app only
Parent company
Alibaba
Wal-Mart
SF Express
Cofco Group
JD.com
Operation model
Online supermarket
marketplace. 3P
merchants supply and
deliver products
Online supermarket
with both 1P direct
sales and 3P
marketplace
Online supermarket
Online supermarket
On-demand O2O:
Product supplied by 3P
merchants, JD provides
logistics
Launched
2012
August 2013
May 2012
August 2011
Early 2015
Coverage for packaged 9 eastern provinces

food
Nationwide
Nationwide
Nationwide1
6 cities
Coverage for
fresh food
Not disclosed
57 cities
69 cities in the east

In house for 8 cities
6 cities
Free-shipping threshold Rmb88 for first 10kg
Rmb68-199 for 10kg

depending on location
Rmb99 for first 10kg

Rmb100 for 10kg
Rmb199 no weight limit Rmb200 for 20kg
Rmb39
Standard shipping
charge
Rmb20 for first 5kg,

then Rmb1 per kg
Rmb10
Rmb6
54 cities in the east

then Rmb1 per kg

then Rmb0.7 per kg
Covered by third-party logistics provider. Source: Companies, CLSA
All operators have limited

geographical coverage
All online grocery platforms have limited geographical coverage at the moment.
Most offer nationwide coverage for packaged food (sometimes through thirdparty logistics providers), but coverage for fresh food is often limited. The
expansion of online fresh food coverage could be gradual because:
Geography. China is the second-largest country by geographical area. It
is bigger than the USA and about 40x the size of the UK. Six to seven big
fulfilment centres are needed across the country to provide nationwide
delivery of general products. However, F&B is delicate and requires speedy
delivery even in rural areas. Building a refrigerated grocery-delivery
network nationwide is uneconomical.
Online supermarkets
are constrained by
geography, population
density and demographics
Population density. High population density makes investment in big,
automated distribution centres commercially viable. However, if population

density is too high, consumers can easily shop in offline grocery stores and
convenience stores in residential districts. The online grocery model may
only be suitable for areas such as the coastal provinces in the east, plus
several metropolitan areas in central and western China.
Demographic mix. Ideal customers for online grocery retailers are middle
to high-income families with at least three people in the household. These

customers normally make larger orders with a higher proportion of mid-tohigh-end products, which justifies the fulfilment cost. This is a challenge in
China, as households are generally smaller and customers prefer more
frequent, small-basket shopping because of the limited living space in
central districts.
Online supermarkets will cover most tier-1 and tier-2 cities by year-end.
Next is to raise promotions to get consumer awareness and boost online
sales. Tmall supermarket has started offering Rmb1bn subsidies in
aggregate for Beijing residents.
Tmall supermarket differs

from the main site as
it has abolished the
seller concept
Tmall supermarket
Tmalls online grocery shopping channel was launched back in 2012 and
currently provides products in seven major categories such as fresh food,
housewares and mother and maternity.
It has unified product display and fulfilment services and abolished the seller
concept - ie, vendor details are not disclosed. This is to build up trust with
consumers who want to purchase the products from Tmall directly. All
3 November 2015
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China internet
deliveries are supported by Cainiao, which provides free next-day delivery to

dozens of cities for purchases of more than Rmb88 and under 10kg. This
enables Alibaba to control service and delivery quality. Alibaba reportedly
charges a high take rate of 15-25% (versus Tmalls average take rate of 23%) on its online grocery channel.
However, vendors still hold the responsibility of inventory management,
product-page maintenance, marketing and pricing, while Cainiao and its
logistics partners coordinate storage, picking, packing and fulfilment services.
Figure 211
Figure 212
Tmall supermarket landing page
Tmall supermarket product page
Basically a Tmall branded store A store that follows Alibabas look

& style with no emphasis of
individual product or brand
Product is sold by Tmall

supermarket rather than
a third-party store
Dry-goods delivery is provided by Alibabas 48%-owned affiliate China Smart

Logistics, better known as Cainiao, which has six distribution centres in
Chengdu, Tianjin, Shanghai, Suzhou, Jinhua and Guangzhou. It plans to offer
next-day delivery of dry goods in 50 cities by the end of 2015, covering a
population of more than 100 million. For fresh food, Cainiao has three new
distribution centres in Beijing, Shanghai and Guangzhou that are equipped for
cold-chain storage and delivery with temperature-controlled warehouses as
well as refrigerated trucks. These can provide 24-hour, door-to-door delivery
to 18 cities when completed.
JDs online grocery

strategy is a hybrid of the
online supermarket and
O2O models
JD launched its O2O

brand JD Daojia in
early 2015
82
JD.com and JD Daojia

JDs online grocery strategy is a hybrid of the online supermarket and O2O
models, providing a one-stop food-shopping platform. Standardised, dry food
and imported/premium fresh food can be sold through its online supermarket,
while daily fresh food will be better offered over its O2O model. JD has
partnered with local supermarkets, convenience stores and restaurants to
take orders online and deliver them to customers. This enables JD to reduce
inventory risk and cold-chain investment. Its recent investment in Fruitday
and acquisition of a 10% stake in Yonghui Superstores will enhance its
online grocery strategy.
JD launched its O2O brand JD Daojia () in early 2015. The service was
first tested in Beijing in April this year, later rolling out in the tier-1 cities of
Shanghai, Guangzhou and Shenzhen, as well as tier-2 city Wuhan in July. It is
a marketplace strategy. JD does not manage the products/services provided
by third-party merchants and only handles the fulfilment portion for some
verticals. The platform is centred on fresh food and groceries, restaurant and
fastfood delivery, flowers and some home services such as housecleaning,
laundry, massage and beauty services.
3 November 2015

China internet
Figure 213
JD Daojia screenshots
Main menu
Pick a supermarket
Select products
Pick a restaurant
Select a dish
JD cooperates with local

retail chains, convenience
stores and hypermarkets
JD cooperates with local retail chains, convenience stores and

hypermarkets for its fresh food and grocery offerings. Consumers place
orders through smartphones. JD sends its own or crowdsourced delivery
staff to pick up and deliver the products to a customer located within 3km
and two hours.
JD is experimenting
with a crowdsourced
logistics model
JD is experimenting with a crowdsourced logistics model () for

fresh-food delivery. JD already has a large team of local couriers across
the country for its e-commerce service. They will handle most of the
delivery services for JD Daojia. JD is also recruiting people aged over 18
years who have 3G smartphones to join its crowdsourced delivery team.
They work on a part-time, on-demand basis. Orders are managed and
routed using an algorithm similar to that of ride-sharing network Uber,
with each courier earning Rmb6 per order plus bonuses.
Crowdsourced
delivery team entails
implementation
challenges
A crowdsourced delivery team is a great concept. However, there are

implementation challenges. Initially, only housewives or retirees may be
interested in joining the crew, as they only earn Rmb6 per order. It is only
when volume increases that the system could attract professional delivery
people who can deliver 10 orders and earn Rmb60 per trip.
Figure 214
Figure 215
JDs delivery team in Daojia uniforms
JDs fulfilment staff sorting Daojia fresh-food orders
3 November 2015
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China internet
Yihaodian is known
primarily as a grocery
retailer, but with an
expanding marketplace
Yihaodian
Founded in 2008, Yihaodian (YHD) is Chinas largest online grocery retailer
and has expanded its marketplace for nongrocery items. Wal-Mart
previously held 51% stake, but acquired the remaining shares from the cofounders and Ping An in July 2015, making YHD a fully owned subsidiary of
Wal-Mart. YHD currently offers more than 8m direct-sales and marketplace
products, covering 14 product lines including F&B and imported food, plus
a wide range of nonfood items such as mother & baby care, home goods
and clothing.
YHD generated Rmb18bn GMV in 2014 with a 1.4% B2C market share, per
iResearch. The company is lossmaking. The platform has 100m registered
customers, over half of whom are under 30 years old.
YHD has more than 200 distribution centres in 40 Chinese cities, providing
next-day and even half-day delivery service. Its free-shipping threshold
varies by location and product, starting from Rmb68/99 for normal goods
and fresh food respectively in Beijing and Shanghai, up to Rmb199 outside
the core area.
Figure 216
Figure 217
Yihaodian fresh food channel on PC
Yihaodian on Mobile
Fresh food channel offers

fruits, vegetables, meat,
seafood, eggs, frozen
food, dairy and bakery
products.
SF Best was launched in

2012 by logistics
company SF Express
SF Best
SF Best was launched in 2012 by logistics company SF Express. The
website has an emphasis on fresh food, imported food and grocery items.
However, it also has a marketplace for nonfood products. According to
management, the platforms GMV more than doubled in 2014 and average
order size is Rmb260, or Rmb400-500 per order for imported food.
This service rides on SF Expresss existing cold-chain service, improving its
utilisation. SF Express already provides cold-chain logistics to business
customers (ie, other e-commerce sites) and operates 10 cold warehouses
in key cities including Shanghai, Xiamen, Beijing and Guangzhou.
SF also invested
significantly to set up
offline convenience stores
84
SF has also invested significantly to set up physical convenience stores. In

2014, it launched hundreds of Heike stores that function as delivery
dropoff and self-pickup stations, as a marketing channel and to provide
3 November 2015

China internet
services such as dry cleaning, telephone-fee recharging and bill payment.

In addition, the stores have also become temporary local cold-storage
solutions, which eliminate the cost of redelivery if the first delivery fails.
These stores are now in the process of rebranding to SF Home stores to
better align with the SF Best brand and promote imported goods sold on
SF Best.
Figure 218
Figure 219
SF Best home page on PC
SF Home offline shop
Womai.com is a B2C
website launched in 2009
by SOE Cofco
Cofco Womai
Womai.com is a B2C website launched in 2009 by Cofco, Chinas largest
state-owned food-processing, manufacturing and trading company. The
platform benefits from Cofcos supply chain but also provides products
from other brands and offers imported food. It operates the asset-heavy
model and delivers products through both inhouse cold-chain and thirdparty providers.
Figure 220
Figure 221
Cofco Womai homepage on PC
Cofco Womai on mobile
3 November 2015
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China internet
On groceries, we did not

gave them a shopping list
Proprietary user-experience check
On grocery, we asked the four shoppers to buy fresh food online from their
mobile phones in Beijing, Shanghai, Shenzhen and Chengdu. We gave them
Rmb50 budget to purchase fresh or chilled food from JD Daojia, Yihaodian
and Tmall. In Shenzhen, as JD and Tmall has yet to cover the areas, our
shoppers tested SF Best and Cofco Womai instead.
Key highlights are:
Geographic limitations. Beijing and Shanghai have the best coverage of
online grocery. All three platforms (JD Daojia, Yihaodian and Tmall) are
able to deliver to our shoppers home in central area. However, the
delivery in Chengdu and Shenzhen is quickly problematic. JD Daojia has
not been launched in Chengdu, while both Tmall and JD Daojia are not
available in our shoppers home in Shenzhen, despite that it is just 10km
away from the CBD.
All platforms showed

some geographical
limitations
30 minutes to four days. Delivery time varied widely between platforms,

but the order was received next day, on average. The fastest service is the
express delivery offered by Yihaodian where our orders arrived in 30
minutes in Beijing. JD Daojia is also fast with its O2O model, where
products were delivered within 2 hours. Crowdsourced delivery also
appears working. Delivery is noticeably slower in Chengdu taking 2-3 days.
The slowest service was an order from a Yihaodian 3P merchant to
Shenzhen that took 4 days.
No wasted food. Food received was all in good condition despite some
delays on delivery.
Delivery time also varied

widely between locations
and platforms
Not a lot of subsidy. JD Daojia is the only platform that offers subsidies
to encourage usage. JD is practically giving away fresh fruits (Rmb5.9 for

two mangos), while JD subsidises Rmb10 for orders over Rmb29 and
another Rmb10 for paying with JD Wallet. All other platforms do not
subsidise and most also charge delivery fees for small orders.
Direct
sales versus marketplace. Third-party merchants and

outsourced logistics provided inferior user experience as delivery speed
and freshness cannot be guaranteed. There was also problem that the
actual goods not matching the photos and reviews online. For example,
the size of delivered prawn/orange was smaller than that suggested
online.
Figure 222
Online grocery-shopping exercise - Summary

Tmall
Yihaodian
JD Daojia
SF Best
Cofco Womai
Location tested
Beijing, Chengdu,
Shanghai
Beijing, Chengdu,
Shanghai, Shenzhen
Beijing, Shanghai
Shenzhen
Shenzhen
Key strengths
Easy ordering process 1P products are fresh; Good experience; fast

as customers are
inhouse delivery is
delivery, fresh food,
strong with good
familiar with Tmall
pays lots of subsidies
geographical coverage
Fast inhouse delivery; Fast inhouse delivery

SF collects from
merchants and
delivers to customers
Key weaknesses
Cannot guarantee
delivery speed and
product quality
High free-delivery
threshold in general
Product selection is
not wide enough
Unable to control 3P
delivery speed and
product quality
Limited geographical
coverage today
Delivery station does

not have cold storage,
therefore there is only
one chance to deliver
Covered by third-party logistics provider. Source: Companies, CLSA
86
3 November 2015

China internet
Key observations:
Yihaodians local expressdelivery service is very
powerful. It stocks key
SKUs (excluding fresh
fruit) in its local service
centres and promises
same-day delivery when
ordered before 6pm. Our
products were delivered
within 30 minutes.
Beijing
Beijing has the best coverage of fresh food and grocery delivery among the
four tested cites. Delivery is very fast. Yihaodians local express delivers
goods within 30 minutes, while JD Daojias O2O model delivers within two
hours. Tmalls next-day delivery is good, but may not be competitive.
Figure 223
Beijing fresh food delivery

JD Daojia
Two mangos
600-650g
Products
JD Daojia + crowdsourced
delivery also works well.
Our shopper tested
multiple orders and they
were generally delivered
on-time (ie, 2 hours) with
good quality of products.
With strong competitors,
Tmall supermarket appears

uncompetitive in Beijing.
Free-delivery threshold is
the highest at Rmb88, but
Tmall can only provide
next-day delivery.
Product price (Rmb)

Add: Shipping cost (Rmb)
Less: Subsidies (Rmb)
Total price (Rmb)
Shipping terms
Subsidy terms
Order date & time
Promised delivery time
Delivery address
Who delivered?
Condition of goods
Other comments
5.9
0.0
0.0
5.9
Free shipping for
special flash sales
No subsidy
15 August 2015
5:16pm
Within two hours
Two hours
East
Crowdsourced
freelance staff who
also work for takeout
platforms, gets paid
Rmb6 per order
Best among three
Tmall
Yihaodian
Milk 500ml x2
Cookies 200g
Yogurt drink x5 Ocean Spray craisins
142g
Local grapes 1kg
Milk 200ml x6
US cherries 500g
79.9
51.6
0.0
0.0
0.0
0.0
79.9
51.6
Minimum order
Free shipping for
of Rmb88 local express scheme
No subsidy
No subsidy
15 August 2015
15 August 2015
5:24pm
5:30pm
Next day
Within four hours
16 August 2015
30 minutes
4:38pm
Third Ring Road, Beijing
Third-party Inhouse staff, gets
express delivery
Rmb1 for local
orders, Rmb3 for
normal orders
Average
1 item refunded
Average
Source: CLSA
Figure 224
Beijing fresh food delivery

JD Daojia order screenshot
Tmall order screenshot
Yihaodian order screenshot
Source: JD Daojia, Tmall, Yihaodian, CLSA
3 November 2015
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China internet
Key observations:
JD Daojia provides the
fastest delivery by a wide
margin. This reflects the
flexibility of the O2O
model, where delivery
can be made as little as
two hours. Crowdsourced
delivery also appears to
be working.
JD Daojia subsidises the
most among the three
platforms we tested in
Shanghai and it has the
lowest free-shipping
threshold at just Rmb39.
Our shopper commented
that JDs training of
freelance delivery staff is
not sufficient. While
service attitude was
good, the staff member
was inexperienced and
did not know the location
of the local market.
Yihaodians delivery staff
was also relatively new,
according to our shopper.
Base pay is Rmb2,500
plus Rmb3 per order. One
can deliver as much as
100 orders in a day!
Tmalls order was actually
provided and fulfilled by
third-party supplier
Yiguo. Cainiao did not
play any role in this
delivery.
Shanghai
Shanghai also has good coverage for online grocery as one of the wealthiest
cities in China. Delivery is generally fast. JD Daojias O2O model delivers
within one hour, while the rest delivers by the next day. Delivered goods are
all in good condition, due to short travel distance. In conclusion, our shopper
prefers Tmall for high-value items (fruit, veg & seafood) and JD Daojia for
low-value orders.
Figure 225
Shanghai fresh food delivery

JD Daojia
Products
Tmall (3P)
Yihaodian (1P)
Fresh vegetables
Frozen seafood
500g lotus 350g local crab stick
500g pumpkin
200g Canadian
100g spring onion
cooked prawn and
500g asparagus 150g local whitebait
Fresh vegetables
600g cabbage and
350g broccoli
500g balsam pear
and 500g aubergine

Product price (Rmb)
Total price (Rmb)
48.5
59.8
30.2
0.0
20.0
20.0
-20.0
0.0
0.0
59.8
50.2
28.5
Shipping terms
Free shipping for

orders over Rmb39,
otherwise Rmb6
Subsidy terms
Rmb10 subsidy for

new users on order
of over Rmb29
No subsidy
No subsidy
JD Wallet
Provides another
Rmb10 subsidy
Normal Tmall
payment methods
Supports Alipay QR
code payment
8 August 2015
8 August 2015
1:43pm
1:57pm
1:33pm
Within 2 hours
Next day by 10pm
Next day by 6pm
Within 1 hour
Next day 2pm
Next day 10am
Payment method
Order date & time

Delivery address
Who delivered?
- Uniformed?
- Cooler box?
- Condition of packaging?
- Branded packaging?
Condition of goods
Other comments
Free shipping for

Free shipping for
orders over Rmb88 orders over Rmb99,
and within 10kg;
otherwise Rmb20
otherwise Rmb20
on delivery
8 August 2015
Wuding Road, Jingan District, Shanghai

Crowdsourced
freelance delivery
Staff from third

party merchant
yiguo.com
Yihaodian staff
No
No
No
Not applicable
Yes
Not applicable
Basic plastic bag
Good
Good
No
Third-party brand
No
Fresh
Fresh
Fresh
Basic packaging Well packed with ice

similar to
bags and dry ice
supermarket
Products are
better quality
than JD Daojia
Source: CLSA
88
3 November 2015

China internet
Figure 226
Shanghai fresh food delivery

JD Daojia order screenshot
Yihaodian 1P order screenshot
JD Daojia: Express delivery
Yihaodian: Express delivery
Tmall: Express delivery
Not available
JD Daojia: packaging
Yihaodian packaging
Tmall packaging
JD Daojia purchased items
Yihaodian purchased items
Tmall purchased items
Source: CLSA
3 November 2015
89

China internet
Key observations:
Our shopper was
dissatisfied by
Yihaodians delivery
speed. The product was
delivered directly from a
3P merchant and took
four days to arrive. Poor
delivery could have
impacted food quality
Our shopper noted SF
Bests delivery was fast,
but the product selection
is not good enough.
Womais delivery station
in Shenzhen does not
have refrigeration
facilities. If delivery fails,
the order will be
cancelled and will not be
delivered again. Money
will be refunded.
Cofco Womai is the only
platform with a redpacket promotion after
the purchase, where
shoppers can share cash
coupon with friends.
Shenzhen
Online grocery service in Shenzhen is restricted. Although our shoppers
home is just 10km north of the city centre in Shenzhens Longhua District,
the area is not served by either JD Daojia or Tmall. JD Daojia will cover the
district in September, as per our shoppers conversation with customer
service. We tested Yihaodian, SF Best and Cofco Womai instead in Shenzhen.
Figure 227
Shenzhen fresh food delivery

Products
Yihaodian 3P
12 oranges from
Zigui, Hubei Province
SF Best
Strawberry yoghurt
340g x2
Frozen dim-sum
350g x1
34.1
10.0
0.0
44.1
Free shipping for
orders over Rmb99,
otherwise Rmb10
No subsidy
14 August 2015
2:40pm
Next day
Cofco Womai
Vanilla ice cream
multipack 402g
Product price (Rmb)

Total price (Rmb)
Shipping terms
39.8
0.0
0.0
39.8
Free delivery for this
specific merchant
Subsidy terms
Order date & time
No subsidy
No subsidy
7 August 2015
14 August 2015
4:35pm
2:52pm
Dispatch within
Next day
1-2 days
11 August 2015
15 August 2015
15 August 2015
10am (4 days)
5pm (Next day)
6pm (Next day)
Longhua New District, Shenzhen
EMS
SF Express
Cofco staff
Not applicable
Yes
Yes
Excessive!
Good
Good
Third-party brand
Yes, SF brand
No
Average
Good
Good
Products were
shipped directly from
3P merchants

Delivery address
Who delivered?
Cooler box?
Condition of packaging?
Branded packaging?
Condition of goods
Other comments
49.0
10.0
0.0
59.0
Vary by location
Source: CLSA
Figure 228
Shenzhen fresh food delivery

SF Best order screenshot
Cofco Womai order screenshot
Source: Yihaodian, SF Best, Cofco Womai, CLSA (continued on the next page)
90
3 November 2015

China internet
Figure 228
Shenzhen fresh food delivery (Continued)

Yihaodian: Transaction confirmation
SF Best: Payment options
Cofco Womai: Red packet rebate
Yihaodian packaging
SF Best packaging
Source: CLSA
Delivery became an issue

outside of tier-one cities
and outside of central
business area
Our shopper failed to find

alternative O2O apps
3 November 2015
Chengdu
Delivery is an issue outside of tier-1 cities and central business districts. Our
shopper lives in Chengdu, a tier-2 city home to 14 million people. His home is
just outside of the ring road in Shuangliu County, close to the international
airport. Yihaodian and Tmall supermarket serve the area, but delivery is done
by traditional express-delivery companies SF Express and YTO Express. The
packaging and goods were good, but the delivery time was much longer: it
took two to three days to receive the goods.
JD Daojia has not launched services in Chengdu, like other startups such as
Bee Quick (). Only 1mXian () covers Chengdu, but service is
limited to a very small central business area in the city.
91

China internet
Figure 229
Key observations:
Chengdu fresh food delivery
Delivery took longer. Both
Products
Product price (Rmb)
Shipping cost (Rmb)
Subsidies (Rmb)
Total price (Rmb)
Shipping terms
orders were delivered by

traditional third-party
express delivery companies
and took2-3 days to arrive.
Our shopper was not happy

about the quality of frozen
prawns from Yihaodian.
They were smaller than the
website suggested and
some prawns had broken
into pieces.
Subsidy terms
Order date & time
Dispatch date & time
Delivery address
Who delivered?
- Uniformed?
- Cooler box?
- Condition of packaging?
- Branded packaging?
Condition of goods
Yihaodian 3P
Tmall supermarket
1kg frozen Canadian prawns
12 lemons from South Africa
68.0
38.0
0.0
0.0
0.0
0.0
50.2
38.0
Free shipping for orders over
Varies by merchant
Rmb68, otherwise Rmb20
No subsidy
No subsidy
8 August 2015 12:48pm
10 August 2015 12:56 pm
10 August 2015 11:56pm
11 August 2015 10:17pm
10 August 2015 4:28pm
13 August 2015 1:57 pm
(2 days)
(3 days)
Shuangliu County, Chengdu
Third-party express delivery
Third-party express delivery
company SF Express
company YTO Express
Not relevant
Not relevant
Yes
Not applicable
Good
Good
Third-party brand
Third-party brand
Average
Good
Figure 230
Yihaodian packaging
Tmall packaging
Tmall purchased items
Source: CLSA
92
3 November 2015

China internet
Section 7: Travel
Travel
Travel is the secondlargest O2O subsegment
Travel was the first and biggest online service, ranging from hotel booking
and air ticketing to, recently car hailing. There are two main types of
travel apps: OTAs and local travel. Ctrip and Qunar dominate the OTA
market with over 80% share, an aggregate 24% hotel-booking volume
share and 59% air-ticketing volume share (online plus offline). Mobile
internet has accelerated online penetration to low-tier cities. The extensive
leisure travel product offerings, special promotions and speedy service
have also attracted more users online.
Local travel is dominated

by Didi-Kuaidi and Uber
Local travel is dominated by Didi-Kuaidi and Uber. Didi-Kuaidi is a

monopoly taxi-booking app with 1.35m-plus taxi drivers in 360 cities
nationwide, servicing about 4m orders per day. However, it faces intense
competition with Uber in private car-hailing services. Uber has partnered
with Baidu and has integrated with Baidu Map and Baidu Wallet. Private
car hailing has much greater revenue potential than taxis.
Travel is a Rmb2tn market

Chinese travel industry
is worth Rmb2.1tn and
growing at 8.6% YoY
Travel is the third-largest consumer segment after food and housing in

China and is the second-largest O2O service segment. Chinese consumers
spent approximately Rmb1.2tn on travel (up 12% YoY) in 2014 according
to Euromonitor, but including business travel and inbound tourists, we
estimate Chinas travel market was worth Rmb2.1tn (up 8% YoY) in 2014.
Travel industry is complex

and fragmented
The industry is fragmented with many different types of travel-service

providers (TSPs) such as airlines, buses, railways, local transport
providers, hotels and other lodging. It also involves many intermediaries
such as traditional and OTAs which bundle and resell products like
package holidays. Among TSPs, accommodation is the biggest travel
segment, contributing one-third of the market, followed by rail, bus and
air fares.
Figure 231
Figure 232
Consumer spending on travel
Travel industry size
(%)
35
Consumer spending on travel

YoY (RHS)
1.2
30
Composition of travel industry

(%)
Travel industry size

YoY (RHS)
25
2.0
20
1.5
15
1.0
10
0.5
0.0
Accommodation
33%
Air
17%
Rail
24%
Local & other
transport
5%
Bus
21%
15CL
2014
2013
2012
2011
2010
2009
2008
15CL
2014
0
2013
0.0
2012
2011
0.2
2010
10
2009
0.4
2008
15
2007
0.6
2006
20
2005
0.8
2007
25
2006
1.0
2.5
(Rmbtn)
2005
1.4
(Rmbtn)
Figure 233
Consumer spending on travel includes expenditure on travel services (air, bus, rail and others), package holidays and accommodation.
Travel industry includes airlines, bus, rail, local and other transport, hotels and other lodging. Source: Euromonitor, CLSA
Travel is a subset of the tourism industry. According to the China National

Tourism Administration (CNTA), Mainland tourism revenue (domestic and
inbound) was Rmb3.3tn (up 14.6% YoY) in 2014. Domestic tourism grew
15.4% YoY to Rmb3.0tn, driven primarily by a 10.7% YoY increase in the
number of trips.
3 November 2015
93

China internet
Section 7: Travel
25
20
15
10
5
3,000
20
15
10
1,000
5
16CL
15CL
0
2014
16CL
15CL
2014
2013
2012
2011
2010
2009
2008
2007
25
2,000
30
2013
1,000
35
4,000
2012
2,000
40
2011
3,000
45
3,500
(%)
(Rmbbn)
Expenditure
YoY (RHS)
3,000
60
50
2,500
40
2,000
30
1,500
20
1,000
10
500
0
2014
30
5,000
50
2013
35
4,000
Domestic
Outbound
YoY (RHS)
2012
40
(Rmbbn)
2011
45
6,000
Domestic tourism expenditure

(%)
2010
5,000
50
2009
Domestic
Inbound
YoY (RHS)
2008
(Rmbbn)
2007
6,000
(%)
Figure 236
2010
Tourism spending by Chinese
2009
Figure 235
China tourism revenue
2008
Figure 234
Source: CNTA, Euromonitor, CEIC, CLSA
Tourism statistics include

non-travel expenditure
Tourism statistics include non-travel expenditure such as food and shopping.

Figure 239 compares travel market size versus tourism spending. Tourism
revenue and expenditure include expenditure on travel such as transport and
accommodation, as well as non-travel spending such as food, shopping and
entertainment. Travel agencies often bundle these nontravel elements into
package holidays, but online players generate most revenue from the travel
portion of tourism spending.
Figure 237
Travel market versus tourism spending

Hotels
Rmb420bn
Other accommodation Air transport

Rmb233bn
Rmb341bn
Rail transport
Rmb434bn
Other transport
Rmb506bn
Car rental
Rmb38bn
Attractions
Rmb120bn
China
travel
market size
Accommodation
Rmb715bn
Local travel
Rmb280bn
Others
Excursions
Rmb164bn Rmb164bn
Entertainment Food
Rmb226bn
Rmb772bn
Shopping
Rmb1,324bn
Tourism
spending
by Chinese
(Rmbbn)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Travel service providers

remain fragmented,
but online distribution
has consolidated
Dominated by Ctrip and Qunar
Travel service providers remain highly fragmented in China as most are

independent enterprises. However, online travel-product distribution has
consolidated. The two main online travel categories are OTAs and local
transport apps (such as Didi-Kuaidi).
OTAs provide a one-stop shop for a wide range of travel products including
flights, hotels, train tickets and packaged holidays. Online migration has
accelerated with mobile internet, which currently contributes over 60% of
volume. Ctrip, Qunar and Tencent-backed Tongcheng lead the market. There
are also specialist services such as Alibabas Alitrip and review sites. However,
Ctrip has become a near-monopoly in Chinas online travel market since
94
3 November 2015

China internet
Section 7: Travel
acquiring a 48% voting right in eLong and 45% voting right in Qunar. CtripeLong-Qunar holds over 80% revenue share of the online travel market.
Since the acquisitions, Ctrip has reduced couponing at the high-end hotels
that contribute 60-70% of its revenue and has kept couponing high in the
mass market (mainly through eLong and Qunar) to fend off small players and
new entrants such as Meituan and small travel agents on Alitrip.
Local travel apps have
emerged with the rising
penetration of
smartphones
More Local travel apps have emerged with the rising penetration of GPSenabled smartphones and mobile internet. The first such apps were mobile
map and navigation apps such as Google Maps and Baidu Map, which
monetise through advertising and data licensing. They were followed by taxi
and car-hailing apps such as Uber and Didi-Kuaidi, which integrate map,
location and payment functions. The car-hailing apps have evolved to include
ride-sharing, carpooling and designated-driver services in China.
Figure 238
Chinas top mobile travel apps

Segment
Market
size
Ctrip
(Rmb) YoY%
Ctrip, Qunar and

Tongcheng are clear
leaders in OTA segment
Tencent Alibaba Others
Tourism
Guide,
sharing &
review
Hotel booking
na
643bn
Flight booking
340bn
& flight info
Rail booking
& rail info
Package tour
booking
Didi-Kuaidi is the leader

for local travel
Baidu
Qunar
450bn
100bn
na
Ctrip
Baidu
QQ travel
Mafengwo
Daodao
Qyer
Ctrip
Qunar
eLong*
Alitrip
Lvmama
Tujia
Meituan
Ctrip
Qunar
Tongcheng
Alitrip
Aotian
Umetrip
Veryzhun
Shunya
Qunar
Tongcheng
Alitrip
12306
Aotian
Tieyou
Ctrip
Qunar
Tongcheng
Baidu
Tencent
Autonavi
Didi
Kuaidi
Didi
Kuaidi
uCar
Dida
Didi
Kuaidi
eDaiJia
aiDaijia
CAR
iCarsclub
+7%
+7%
+11%
+12%
Tuniu
Local travel
Maps &
navigation
Taxi booking
Ride sharing
& carpooling
na
150bn
???
na
???
???
Yongche
Designated
driver
Car rental &

sharing
???
37bn
Uber
???
+17%
eHi
Baojia
Source: CLSA
3 November 2015
95

China internet
Section 7: Travel
Figure 239
China listed online travel companies and key unlisted players

Ctrip
Code
Mkt Cap
Shareholders
Tuniu
Alitrip
LONG US
US$600m
Ctrip (37%)
Tencent (15%)
Qunar.com
elong.com
elong.net
xici.net
huoche.com
Mostly a commission- Started off as a pure Tongcheng targets to It has the secondbe No.1 in leisure
largest hotel network
based revenue model metasearch engine
helping users
travel in China. It is in China after Ctrip.
compare products and the leading player in Its air-ticketing
pricing and direct
the local attraction
business is relatively
traffic to different
ticket segment
small
websites. Now also
The company then
engaged in direct
expanded into hotels,
sales of hotels
flights, car rentals
and cruises
TOUR US
US$1.5bn
JD.com (28%)
Unlisted
na
Alibaba
Tuniu.com
Alitrip.com
Focus on leisure
travel products
including organised
packaged tours, selfguided tours and
other products
covering 120
countries. Operates
60 regional service
centres
32,200 as at 2014
Not disclosed
Rmb11.4bn (15CL)
Rmb917m (15CL)
2,799 as at 2014
na
Rmb7bn (15F)
-Rmb1bn (15F)
Became an
independent business
unit of Alibaba in
October 2014. A
marketplace platform
with 10,000
merchants providing
airplane tickets,
packages, hotel
booking services, visa
application services
and tour guide
services
Not disclosed
Not disclosed
Not disclosed
Not disclosed
CTRP US
US$12.4bn
Baidu (25%)
Priceline (10%)
Key brands Ctrip.com
Tieyou.com
Tujia.com
Business
model
Employees
GMV
Revenue
Profit
Qunar
Tongcheng
QUNR US
US$6.0bn
Ctrip (45%)
Unlisted
na
Wanda, Management,
Ctrip, Tencent
ly.com
17u.com
17u.net
8,000 as at 2Q15
Rmb140bn (15CL)
Rmb3.9bn (15CL)
-Rmb2.6bn (15CL)
Not
Not
Not
Not
eLong
disclosed
disclosed
disclosed
disclosed
4,564 as at 2014
na
Rmb1bn (15F)
-Rmb1bn (15F)
Source: Companies, Bloomberg, CLSA
Accommodation reservation
Accommodation reservation GMV was Rmb634bn in 2014. Negatively affected

by anticorruption measures and oversupply of rooms, Chinas hotel industry
struggled in the past few years with flat room rates and revenue at star-rated
hotels. Hotels have relied more on OTAs to improve the occupancy rate, which
was only 53% in 2014.
Travel-accommodation
reservation is the largest
segment by GMV
Figure 240
Figure 241
Star-rated hotel occupancy rate
Average room rate
(ppt)
1-5 Stars (YoY chg)

Occupancy rate (RHS)
(%)
70
65
1
0
60
(1)
55
(2)
(3)
(4)
(5)
2011
2012
2013
2014
2015
350
Figure 242
(Rmb)
Room revenue
Average room rate

YoY (RHS)
(%)
10
35,000
30,000
25,000
310
20,000
300
15,000
10,000
340
330
320
290
50
280
45
270
(2)
5,000
260
(4)
2011
2012
2013
2014
2015
(Rmbm)
2011
2012
Total revenue
YoY (RHS)
2013
2014
(%)
2015
35
30
25
20
15
10
5
0
(5)
(10)
(15)
Source: CEIC, CLSA
Hoteliers spend more to

promote online to fill the
empty rooms
OTAs benefit from greater bargaining power against hotels given the dismal
occupancy rate. Online hotel booking continues to record significant 50-100%
volume growth. The adoption of mobile internet opens up new opportunities
such as same-day booking. OTAs continue to expand their hotel network by
signing up mid-to-low-end hotels, inns and hostels.
Ctrip is the market leader in hotel reservations with 24m rooms sold in 2Q15,
while Qunar and eLong sold 18m and 11m rooms respectively. The three
listed OTAs combined could have a 30% market share by volume. Coupled
with unlisted platforms such as Meituan and hotels direct online booking, we
estimate Chinas online hotel booking penetration could have reached 40%.
96
3 November 2015

China internet
Section 7: Travel
Figure 243
Figure 244
Figure 245
Hotel revenue
Hotel room-nights sold
Revenue per room-night

60
eLong
50
eLong
Figure 246
Figure 247
Figure 248
Hotel revenue growth
Hotel room-nights sold growth
Commission rate estimate
80
100
60
50
40
20
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
2Q13
(50)
Ctrip
Qunar
eLong
2Q15
100
150
1Q15
120
200
(%)
18
16
14
12
10
8
6
4
2
0
4Q14
eLong
3Q14
Qunar
2Q14
140
eLong
1Q14
Qunar
4Q13
160
Ctrip
3Q13
(% YoY)
250
(% YoY)
Ctrip
2Q13
300
2Q15
Qunar
1Q15
Ctrip
2Q13
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
0
2Q13
0
1Q13
10
0
2Q15
20
5
1Q15
10
200
4Q14
400
3Q14
30
2Q14
15
1Q14
40
600
4Q13
20
3Q13
800
2Q13
(Rmb)
4Q14
25
Qunar
3Q14
Ctrip
2Q14
eLong
1Q14
1,000
Qunar
4Q13
1,200
(m)
3Q13
30
(Rmbm)
Ctrip
Commission rate is estimated as % of nationwide star-rated hotel room rate. Source: Companies, CLSA
Hotel competition may

have eased
OTAs have competed aggressively to gain customers through couponing, but

competition may have eased. According to Ctcnn.com, a China-based travel
media website, the average hotel room rate is recovering, while the coupon
rebate is falling meaningfully. Since Ctrip acquired a minority stake in eLong
in May, both companies have reduced their couponing at high-end hotels.
Figure 249
Figure 250
Hotel room-rate index (lower index = lower prices)
Hotel coupon index (higher index = more rebates)
110
(index)
160
TongCheng
eLong
Ctrip
(index)
140
105
120
100
100
80
95
60
40
90
20
85
Jan 13
Jul 13
Jan 14
Jul 14
Jan 15
Jul 15
0
Jan 13
TongCheng
Jul 13
Jan 14
eLong
Jul 14
Ctrip
Jan 15
Jul 15
Source: Ctcnn, Wind, CLSA
Air ticketing
China air travel was
a Rmb340bn market
in 2014
China air travel was a Rmb340bn market in 2014, dominated by three

state-owned airlines: Air China, China Eastern and China Southern. The
airlines top-line growth has fallen to single digits due to the expansion of
the highspeed rail network and the governments austerity campaign,
which discouraged business travel.
Air passenger traffic was

up 12.7% YoY in 2Q15
However, air passenger volume - especially mass market - continues to

grow strongly thanks to lower fuel surcharges and strong outbound
demand. Chinas air passenger traffic was up 12.7% YoY in 2Q15, the
3 November 2015
97

China internet
Section 7: Travel
second-fastest growing quarter since 2011 (the fastest being 1Q15). Seat
reservations reported by TravelSky were also up 12.9% YoY in 2Q15
(versus 11.5% YoY in 1Q).
Figure 251
Figure 252
China airline passenger traffic

(m)
45
Booking volume on Chinese airlines
Total
(%)
YoY (RHS)
40
25
(% YoY)
35
Total
Domestic
International
30
20
25
35
15
30
10
25
20
15
10
Jan 14
Jul 14
Jul 15
Jan 15
0
Jan 13
Source: CAAC, CEIC, CLSA
Jul 13
Jan 14
Jul 14
Jan 15
Airlines commission rate cuts in the past 12-18 months have squeezed out
small players in the flight-ticketing market, but had little impact on the
leaders Ctrip and Qunar as the airlines offer more volume-driven commission.
Ctrip and Qunar have increased their market share gains, growing volume
and commission revenue at over 50% YoY. Qunar overtook Ctrip to be Chinas
top air-ticketing platform in 3Q13 and it now holds a 26.7% market share,
versus Ctrips 24.5%. But Ctrip has followed Qunars strategy and opened up
its platform to third-party travel agents, which now contribute over 60% of
the air tickets sold on Ctrip. Ctrips air-ticket sales volume growth exceeded
Qunars in the past two quarters.
Figure 255
Flight tickets sold
Commission/ticket
Ctrip
Qunar
eLong
Figure 256
Figure 257
Figure 258
Flight revenue growth
Flight ticket sold growth
Commission rate estimate1
(% YoY)
Ctrip
Qunar
0.07
80
0.03
0.02
20
0.01
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
0.00
1Q13
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
0
1Q13
2Q15
20
1Q15
40
0.04
40
3Q14
60
eLong
0.05
60
2Q14
80
Qunar
1Q14
100
Ctrip
4Q13
120
(Rmb)
0.06
3Q13
100
Qunar
2Q13
Ctrip
140
1Q13
(% YoY)
160
4Q14
1Q13
2Q15
1Q15
4Q13
3Q13
4Q14
0
3Q14
0
2Q14
1Q14
10
4Q13
5
3Q13
200
2Q13
20
2Q15
10
1Q15
30
400
4Q14
40
15
3Q14
20
600
2Q14
800
1Q14
50
2Q13
(Rmb)
60
Qunar
1Q14
Ctrip
4Q13
Qunar
25
1,000
3Q13
Ctrip
(m)
30
2Q13
(Rmbm)
2Q15
Figure 254
Flight revenue
1Q15
Figure 253
4Q14
Ctrip has about 24.5%

share of Chinas airticketing market, versus
Qunars 26.7%
1,200
Jul 15
Source: TravelSky, Wind, CLSA
3Q14
Jul 13
2Q14
20
Jan 13
Note: Ctrips air-ticketing figures are our estimates. 1Commission rate is estimated as % of average ticket price. Source: Company, CLSA
98
3 November 2015

China internet
Section 7: Travel
Rail ticketing
Rail travel has become an important part of Chinese travel, given the expansion
of highspeed railways. OTAs started offering train ticketing in 2012 as a way to
attract and retain customers. Rail booking is a sizable market with 6.5m
travellers daily. OTAs do not earn commissions directly from the rail service, but
they can cross-sell other services, such as travel insurance, hotels near the
train station or even alternative flight options.
OTAs started offering rail

tickets in 2012 to attract
and retain customers
Figure 259
Figure 260
China rail passenger traffic
China railway industry revenue

14
500
12
150
2014
0
2013
0
2012
50
2011
100
7M15
2014
2013
2012
2011
2010
2009
2008
2007
2006
200
0
2005
10
250
12
300
500
14
350
2010
1,000
18
16
2009
(%)
YoY (RHS)
400
10
1,500
Revenue
2008
2,000
(Rmbbn)
450
2007
(%)
YoY (RHS)
2006
Passenger traffic
2005
2,500
(m)
Source: CEIC, Euromonitor, CLSA
Ctrip bought trainticketing app Suanya

for US$16m
About 30% of Chinas

urban-transport journeys
are in taxis
Ctrip recently acquired train-ticketing app Suanya for US$16m. The company
believes train services will become increasingly important and there is
growing demand for highspeed train services among business and premium
travellers as the network expands. There were 2.4bn rail passenger trips in
2014, over 6x the 392m air passenger trips. Ctrips train-ticket sales volume
grew 200% YoY in 2Q15 and is now comparable to its air ticket sales volume.
The rail-ticketing revenue contribution is small, but profitable with a 50%
operating margin. Rail ticketing is a high-frequency and mobile-driven service
(80%) and is a great way to grow mobile users.
Taxi hailing
Despite heavy construction of subways and urban railways, Chinas masstransit network is still underdeveloped. Most passenger journeys are on the
road, with around 60% on buses and trams/trolleys and around 30% in taxis.
The share of subway journeys is increasing, but is still about 10% of total.
Figure 261
Share of subway journeys

is increasing, but is still
about 10% of total
Urban public-transport passenger journeys
140
(bn)
Bus & tram
Subway
Taxi
120
100
80
3.7
60
40
34.6
36.4
5.6
37.7
7.1
40.6
39.0
40.2
8.7
10.9
64.0
67.0
71.6
75.0
71.6
2009
2010
2011
2012
2013
12.7
78.2
20
0
2014
Source: Ministry of Transport, CLSA
3 November 2015
99

China internet
Section 7: Travel
Chinas taxi industry was

worth an estimated
Rmb304bn in 2014 . . .
We estimate Chinas taxi industry was worth Rmb304bn in 2014, growing at

low single digits YoY. China has 1.37m taxis in operation, providing 20.7bn
rides per year (40.6bn passengers and average two passengers per ride).
This translates to 57m trips per day (41 trips per taxi per day or 5.4 trips per
urban resident per year). The numbers of taxis and passengers have both
been grown at 1-3% per year.
The average taxi fare per trip is about Rmb14.5, increasing at 1-3% per
annum. While average travel length per taxi trip (at 5.4km) is falling, taxi
fares are rising (Rmb8.58 flagfall and Rmb1.81/km in 36 cities surveyed by
the NDRC).
Figure 262
. . . growing at low single

digits YoY
Figure 263
Taxi market size

(Rmbbn)
350
Number of taxis in China

(%)
Taxi market
YoY (RHS)
300
250
2
246
263
284
296
304
2010
2011
2012
2013
2014
Figure 265
Average taxi fare per trip
Total number of taxi rides (%)

YoY (RHS)
20.7
19.9
14.8
14.6
17.8
17
2010
15.0
19
16
19.0
18
2011
2012
2013
1.25
Number of taxi rides
20
1.30
6
4
Figure 264
20.4
150
21
1.35
50
(bn)
1.40
200
100
22
2014
(Rmb)
Avg taxi fare (estimate)

14.7
YoY (RHS)
14.3
14.2
13.8
13.6
13.4
2010
1.15
1.10
1.05
1.00
1.23
1.26
1.30
1.34
1.37
2010
2011
2012
2013
2014
Average travel length per trip

(%)
14.5
13.8
1.20
Figure 266
14.4
14.0
(m)
13.8
2011
2012
2013
2014
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
(0.5)
(1.0)
7
6
(km/trip)
5.83
5.53
5.53
5.40
5.37
2011
2012
2013
2014
5
4
3
2
1
2010
Source: Ministry of Transport, NDRC, CLSA
Didi and Kuaidi Dache

merged in February 2015
There was a serious price war between taxi apps Tencent-backed Didi Dache
and Alibaba-backed Kuaidi Dache a year ago as Tencent and Alibaba used
them to acquire mobile-payment users. Both spent hundreds of millions of
renminbi subsidising drivers and consumers. This led to Didi and Kuaidis
merger in February 2015. The merged company has 1.35m-plus drivers in
360 cities nationwide, servicing about 4m orders per day.
Taxi hailing online penetration could increase from current 7% to 20% by
2010 and generate Rmb75bn GMV. Taxis app take rate will likely be low,
maybe 5% similar to air ticketing, but there could be upside as a Rmb3-5 fee
is currently charged on phone bookings.
Taxi app revenue

potential may remain
small
100
Taxi app revenue potential may remain small at Rmb3-4bn. However, taxis
app could generate additional revenue from advertising. Taxis app may only
be used to acquire and retain users. Didi-Kuaidi has launched other products
for monetisation.
3 November 2015

China internet
Section 7: Travel
Figure 267
Taxi model
Number of taxis (reported, m)
Net add number of taxis
Urban taxi service distance (bn km)
% empty ride (%)
Average length per trip (km)
Avg taxi fare, 36 cities (flagfall)
Avg taxi fare, 36 cities (Rmb/km)
Avg taxi fare (estimated per trip)
% YoY
Nationwide total number of taxi rides (bn)
% YoY
Nationwide taxi market (Rmbbn)
% YoY
Taxi online/offline
Daily number of rides booked online (m)
Daily number of rides online+offline (m)
Online penetration (%)
Taxi online GMV (Rmbbn)
% YoY
Take rate (%)
Revenue potential (Rmbbn)
% YoY
2014
1.37
30,100
161.8
31.2
5.37
8.58
1.81
14.69
1.3
20.7
1.5
304.3
2.9
15CL
1.40
30,000
16CL
1.43
30,000
17CL
1.46
30,000
18CL
1.49
30,000
19CL
1.52
30,000
20CL
1.55
30,000
14.91
1.5
21.2
2.4
316.2
3.9
15.13
1.5
21.7
2.2
327.8
3.7
15.36
1.5
22.1
1.9
339.2
3.5
15.59
1.5
22.5
1.7
350.2
3.2
15.82
1.5
22.8
1.5
360.9
3.0
16.06
1.5
23.1
1.3
371.1
2.8
2.2
56.8
3.9
11.8
4.0
58.1
6.9
21.8
84.2
0.0
0.0
5.9
59.4
9.9
32.4
48.9
2.5
0.8
7.5
60.5
12.4
42.0
29.6
5.0
2.1
159.3
9.2
61.6
14.9
52.1
24.1
5.0
2.6
24.1
10.9
62.5
17.4
62.7
20.3
5.0
3.1
20.3
12.6
63.3
19.9
73.8
17.6
5.0
3.7
17.6
0.0
0.0
Source: Ministry of Transport, NDRC, CLSA
Proprietary online study - Taxi hailing

Our proprietary study in Section 2 showed that about 72% of respondents
have used a taxi-hailing service. Each takes an average of four rides per week
and average waiting time is about 10 minutes.
Figure 268
Key metrics of taxi hailing
On average, our panel

take four rides per week
and average waiting time
is about 10 minutes
Weekly usage (x)

20.0
3.9
3.0
1.0
2.7
Max
Average
Median
Min
Standard deviation
Avg waiting time (min)

31.0
10.9
10.0
1.0
5.1
Source: CLSA
Didi and Kuaidi have built strong traction, with 87% and 55% of respondents
using their services, respectively. Didi is more successful as a standalone app,
but Kuaidi users access the service through Alipay more frequently. Uber is
not a taxi app but a substitute. While the adoption rate is lower, Ubers user
experience is on par or slightly better than its competitors. However, the
difference in user experience is not significant among these apps.
Didi and Kuaidi have built

strong traction
Figure 269
Figure 270
Figure 271
% of people
who used app
Usage frequency (from 1-5,

5 being the most frequent)
User experience (from 1-5,

5 being the best)
Didi
Didi
87
Kuaidi
55
Uber
28
Kuaidi on Alipay
24
Didi on Weixin
18
Baidu Map
Others
(%)
20
40
60
80
100
4.24
Kuaidi on Alipay
4.11
Uber
4.23
Didi on Weixin
4.04
Didi on Weixin
4.22
Uber
3.96
Kuaidi on Alipay
Kuaidi
3.96
Kuaidi
Baidu Map
Didi
4.21
Baidu Map
3.48
Others
1
3.62
Others
3.00
4.17
4.00
3.33
Source: CLSA
3 November 2015
101

China internet
Section 7: Travel
Since their merger, Didi and Kuaidi have lowered subsidies, per 42% of
respondents. However, 21% of respondents still see an increase in subsidies,
mostly in tier-2/3 cities (to encourage adoption and compete with Uber).
Responses on Uber are mixed, with 27% of respondents seeing an increase in
subsidies and 21% seeing a decline.
Figure 272
Subsidies generally
declined for Didi-Kuaidi,
while response on Uber
was mixed
Figure 273
In the past six months, Didi-Kuaidi subsidy
In the past six months, Uber subsidy
Didn't
notice
11%
Decrease
21%
Increase
21%
Didn't
notice
31%
Decrease
42%
Increase
27%
Same
26%
Same
21%
Source: CLSA
Taxi apps have successfully hooked users to their service. About 34% of
respondents will maintain or increase usage without subsidies, while 51% will
slightly decrease usage frequency. Only 15% expect to significantly reduce
usage. However, subsidies are crucial for competition. Most users shop around
for subsidies.
Only 15% expects to
significantly reduce usage
without subsidies
Figure 274
Figure 275
Without subsidies, how will you change

your usage frequency?
Without subsidies, how will you change

your usage behaviour?
Increase
8%
Significantly
decrease
15%
Same
26%
Use and
stick to
most used
app 25%
No longer
use 3%
Use less
27%
Slightly
decrease
51%
Use but
swich to app
with more
subsidies
45%
Source: CLSA
Private-car hailing
Private-car hailing offers

much bigger revenue
potential than taxi
Private-car hailing offers much bigger revenue potential. Uber pioneered the
sharing-economy concept. Didi-Kuaidi and Uber optimise the matching of
private cars/drivers with customer travel bookings, improving car utilisation
and reducing traffic jams. This service is possible because of smartphones.
Mobile apps integrate car location, booking information and payments.
Competition is intense, but the industry has consolidated to two main players:
Didi-Kuaidi is the market

leader in private-car
booking with around 1.5m
orders per day
Didi-Kuaidis private car service currently covers 61 cities across China with
over 400,000 drivers. The private car booking service was launched in 2014,
operating under multiple brands including Kuaidi ONE (), Didi Car
( ) and low-end carsharing Didi Express ( ). Peak orders
reached 1.5m per day in June 2015, while daily orders of Didi Express were
3.85m during a free-ride promotion.
Uber currently covers 60

countries and 360 cities
Uber currently covers about 360 cities in 60 countries. In China, it first

launched in Shanghai a year ago. It now covers 20 cities in China and plans
to cover 100 cities in the next 12 months. Uber first launched Uber Black, a
premium service, followed by Uber People and then Uber Pool (car-sharing).
102
3 November 2015

China internet
Section 7: Travel
Uber had about 30-35% market share in Chinas private car segment in
September 2015, according to CEO Travis Kalanick. Orders reached almost
1m per day. Guangzhou, a tier-1 city in southern China, is already the world
No.1 city in terms of number of Uber trips, where the waiting time is only
four minutes.
Private-car hailing market
could generate Rmb10bn
GMV in 15CL
We estimate the private-car-hailing market could generate Rmb10bn GMV in

2015:
We forecast 700,000 private vehicles to sign up Didi-Kuaidi or Uber by

end-2015, a 0.5% penetration of Chinas 163m passenger vehicles.
There will be 2.7m trips per day in 2015 if each driver takes four orders
per day. This is consistent with Didi-Kuaidis disclosed 1.5m orders per day
and Uber Chinas 1m orders per day.
Revenue per ride is about Rmb10, assuming an average 5.4km per trip
(same as taxis) and Rmb2/km (Didi-Kuaidi charges Rmb0.99-1.99).
By 20CL the market could

generate Rmb100bn GMV
By 2020, we forecast the market to generate Rmb100bn GMV; and at a 20%

take rate this could be a Rmb20bn revenue opportunity:
Didi-Kuaidi and Uber are likely to coexist. Cash subsidies are likely to be
cut back, but companies will continue to recruit drivers aggressively, at 1m

drivers per year.
The average number of trips per driver will rise due to network effects and
improving matching algorithms, which make each driver more efficient.
Fare per km will fall over time, but revenue per driver will increase as
drivers become more efficient.
Figure 276
Private-car booking forecasts

No. of passenger vehicles nationwide (m)
% YoY
Driver users (m)
Net adds (m)
Driver penetration (%)
Daily trips shared per day, per driver (x)
Daily number of trips (m)
% YoY
As % of taxi journeys online
As % of taxi journeys online+offline
As % of urban transport
Average length per trip (km)
Fare per km (Rmb/km)
Average fare per trip (Rmb)
Private-car booking GMV (Rmbbn)
% YoY
Take rate (%)
Revenue potential (Rmbbn)
% YoY
2014
123.3
16.7
15CL
142.4
15.6
0.7
16CL
163.0
14.4
1.7
1.0
17CL
184.8
13.4
2.7
1.0
18CL
207.8
12.4
3.7
1.0
19CL
231.7
11.5
4.7
1.0
20CL
256.5
10.7
5.7
1.0
0.5
4.0
2.7
1.0
4.4
7.3
175.0
125.0
12.4
1.9
5.4
1.72
1.4
4.8
12.9
76.0
172.2
21.3
3.2
5.4
1.63
1.8
5.3
19.5
51.3
213.1
31.7
4.7
5.4
1.55
2.0
5.9
27.3
40.0
251.6
43.7
6.3
5.4
1.47
2.2
6.4
36.5
33.6
290.0
57.7
8.2
5.4
1.40
9.2
24.7
161.3
16.0
4.0
178.7
8.8
41.4
67.2
17.0
7.0
77.7
8.3
59.4
43.7
18.0
10.7
52.1
7.9
79.0
33.0
19.0
15.0
40.4
7.5
100.3
26.9
20.0
20.1
33.6
66.7
4.6
0.7
5.4
1.81
9.7
9.5
15.0
1.4
Source: CLSA
Adoption of Didi privatecar hailing service is only

slightly below its taxis
3 November 2015
Proprietary online study - Private-car hailing

Private-car hailing is a good alternative to taxis. However, adoption has
been low: only 26% of our overall panel had used private-car hailing or
designated-driver services. For those who had, usage frequency and user
experience are comparable. Uber and Didi are the top-two private-car
hailing services. Didi is rated No.1 by users and usage frequency, while Uber
ranks No.1 on discount and service.
103

China internet
Section 7: Travel
Figure 277
Figure 278
Figure 279
% of people
who used apps
Usage frequency
(1-5, 5 being the most frequent)
Discount
(1-5, 5 being the cheapest)
Didi
Didi
79
Uber
42
Uber
Kuaidi ONE
41
Others
Shenzhou
Yidao
Shenzhou
Others
(%)
4.07
20
40
60
80
Kuaidi ONE
100
4.10
Didi
4.08
3.86
Yidao
3.86
Kuaidi ONE
4.00
3.89
Others
3.79
4.23
Shenzhou
4.00
Yidao
21
Uber
4.18
3.50
Source: CLSA
Shenzhou also offers high subsidies, but its small coverage and fleet limit
user acquisition. Kuaidi ONEs premium brand called No.1 Private Car (
) (differentiating from the heavily subsidised taxi app) has not managed
to attract customers due to unattractive subsidies and mediocre service.
Shenzhou and Kuaidi ONE

are not as sucessful
Figure 280
Figure 281
Figure 282
User experience
(1-5, 5 being the widest)
Frequency of private-car hailing vs

taxi hailing in past six months
Price compared
with taxi
Uber
4.21
Didi
4.21
Shenzhou
4.17
Others
4.00
Yidao
4.00
Kuaidi ONE
Decrease
11%
Same
45%
More
expensive
29%
Increase
44%
Cheaper
43%
Same
28%
3.89
Source: CLSA
Some 44% of private-car-hailing app users increased their usage over taxis in
the past six months, while 43% perceive private-car hailing services as
cheaper than taxis.
Easy-to-hail and subsidies are the top two reasons for using private-car
hailing. Driver quality and legal issues are the top two concerns.
Similar to taxi apps, 31% of respondents will maintain or increase usage
without subsidies and 48% will only slightly decrease usage. Only 21% will
significantly reduce usage.
Figure 283
Figure 284
Figure 285
If without subsidies, how will you

change your usage frequency?
Top-2 reasons for choosing a

private-car hailing service
Top-2 concerns about using privatecar hailing service

70
(%)
(%)
60
50
40
30
20
No
conern
Payment
security
Not fully
legal
0
Driver
quality
Others
Locationing
better
Easier
payment
10
Better
service
Slightly
decrease
48%
70
60
50
40
30
20
10
0
More
subsidies
Same
20%
Significa
ntly
decrease
21%
Easier
to hail
Increase
11%
Source: CLSA
104
3 November 2015

China internet
Section 8: Entertainment
Entertainment
Chinas movie box office expanded at a strong 31% Cagr over the past three
years. Total box office revenue reached Rmb30bn in 2014. We expect the
industry to sustain a 25% five-year Cagr and reach Rmb92bn by 2019, driven
by rising user penetration - especially in low-tier cities - better content supply
and promotions by online ticket sellers.
Chinas movie box office

expanded at a 31% Cagr
over past three years
Figure 286
Figure 287
Figure 288
Entertainment GMV
O2O Entertainment GMV
O2O penetration
100
(Rmbbn)
80
90
90
60
50
60
50
40
40
30
30
30
41
54
67
80
92
2014
15CL
16CL
17CL
18CL
19CL
18CL
19CL
46
30
20
14
25
38
50
64
74
2014
15CL
16CL
17CL
18CL
19CL
10
60
40
10
10
80
50
20
20
80
75
70
70
40% 5Y Cagr
60
70
(%)
80
70
25% 5Y Cagr
80
(Rmbbn)
0
2014
15CL
16CL
17CL
Source: CLSA
Figure 289
Figure 290
Quarterly box office revenue
Annual box office revenue

70
60
40
20
15
30
10
20
(10)
10
(20)
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
2014
20
2013
30
2012
50
10
2,000
70
25
2011
4,000
(%)
Box office revenue

YoY growth (RHS)
60
40
6,000
(Rmbbn)
30
50
8,000
35
2010
(%)
2009
10,000
Domestic movie revenue

Imported movie revenue
Total revenue YoY (RHS)
2008
(Rmbm)
2007
12,000
Source: CEIC, CLSA
Plenty of room to grow
Chinas movie market is still in an early stage. Only 830m movie tickets were
sold in China last year, versus 1.27bn in the USA and Canada. There were
only 130m moviegoers in China (versus 230m in the USA and Canada) and
23,600 movie screens (versus 40,100 in the USA).
The market potential is large. Chinese people love movies as much as their
US/Canadian peers. Each Chinese moviegoer watched 6.4 movies in 2014,
surpassing the USA and Canada (5.5 movies). However, the geographical
disparity for movie viewing is large in China. Entertainment consumption is
mainly concentrated in tier-1 or 2 cities and affluent areas. On average, only
0.6 movie tickets are sold per capita in China, c.16% of USA/Canada (3.7).
However, entertainment demand is seeing explosive growth.
On average, the gross ticket price is c.Rmb36 (US$5.8) in China, 30% lower
than the USA/Canada (US$8.2).
3 November 2015
105

China internet
Figure 291
Figure 292
Figure 293
Movie revenue per ticket
Movie tickets sold per capita
Number of screens
50,000
(US$)
China
USA/Canada
7
6
5
4
3
2
(tickets)
China
USA/Canada
40,000
30,000
20,000
10,000
1
0
2007 2008 2009 2010 2011 2012 2013 2014
(screens)
2007 2008 2009 2010 2011 2012 2013 2014
2010
China
2011
USA
2012
2013
2014
Source: Enfodesk, Motion Picture Association of America, CLSA

Figure 294
Chinese moviegoers on
average watched 6.4
movies in 2014
Figure 295
Annual moviegoers
900
(m)
800
Re/admission, No. of movies watched
Movie attendances
YoY growth (RHS)
(%)
50
700
600
40
500
30
400
300
20
200
10
100
0
60
2007 2008 2009 2010 2011 2012 2013 2014
50
45
40
35
30
25
20
15
10
5
0
(Rmb)
Revenue/admission
Movies/year (RHS)
(No.)
7
6
5
4
3
2
1
2007 2008 2009 2010 2011 2012 2013 2014
Source: Enfodesk, CLSA
Occupancy rate of
cinemas is low at
less than 20%
Oversupply of cinema
seats and screens likely
to keep ticket prices low
Occupancy rate of cinemas is low at less than 20%, which could be partly
attributed to the property bubble of the past decade. The oversupply of
cinema seats and screens is likely to keep ticket prices low. However,
popular cinemas such as Wanda Cinema could still make a decent profit
margin of close to 20%.
Figure 296
Figure 297
Cinema capacity growth
Occupancy rate
(% YoY)
50
45
40
35
30
25
20
15
10
5
0
2010
2011
100
(%)
Empty seats
Taken seats
80
60
40
Number of cinemas
Number of screens
2012
2013
20
2014
2011
2012
2013
2014
Biggest hurdle for

Chinas movie industry
is tight regulation
The biggest hurdle for Chinas movie industry is tight regulation from
State Administration of Radio, Film and Television (SARFT). Regulations
are strict and involve in the whole approval process:
Content censorship: Before production, movie scripts and content
proposals must be approved by SARFT. After the approved ideas are

produced, SARFT will review and delete content that is not permitted.
On average, around 600 domestic movies are produced a year and only
half are eventually published.
Movie import quota: Only 34 Hollywood movies can be imported via the
revenue-sharing model, of which 14 movies should be 3D/IMAX. The quota

will be revisited in 2016. Based on the agreement upon joining WTO in
106
3 November 2015

China internet
2000, such import quotas are set to be removed by 2017. However, SARFT
may not be willing to remove the quota completely, based on current
progress. Apart from import quota, the publishing timeframe for foreign
movies in China is also uncertain, with usually over a month delay.
Domestic movie protection: Although it is not stipulated in the rules,
domestic movies should contribute at least 50% of total box-office revenue

in China. During peak seasons such as the summer holiday, over 90% of
movies in cinemas are domestic.
Despite the regulatory issues, demand is strong - especially in low-tier cities.

We believe the industry will be driven by:
Nonetheless, demand is
strong, especially in lowtier cities
The serious crackdown on copyright infringement and online piracy of
movies online in the past few years. Movie lovers can only watch the latest
movies in cinemas.
Improving quality of domestic movies. Studios are incentivised by rising
content prices, which are bid up by online video players. The success of
growing paid-membership revenue enables online video players to pay
more for premium content.
Growing demand for entertainment, which also helps nurture movie

production. Watching movies in cinemas has become a popular social
activity among Chinese youngsters.
Around 63% of movie

tickets were sold online
as of 1Q15
Online ticketing taking off
Online movie-ticket sales have grown fast. Around 46% of movie tickets were
sold online as of end-2014, but the ratio rose to 63% by 1Q15. We expect
online movie-ticket sales to reach 80% in five years, implying c.Rmb74bn in
revenue by 2019.
Figure 298
Online movie-ticket sales

have grown fast
Figure 299
Online versus offline revenue

35
(Rmbbn)
30
Ticket buyer mix

140
Online revenue
Offline revenue
25
100
20
80
15
60
10
40
20
2013
2014
(m)
Online ticket buyers

Offline ticket buyers
120
1Q15
2012
2013
2014
Average spending per

online buyer is lower
than offline
Average spending per online buyer is significantly lower than offline, but the
gap is narrowing. Most cinemas offer loyalty membership cards to encourage
repeat visits, such as topping up Rmb200 for five movies or special discounts
only applicable to members.
Online movie-ticketing platforms subsidise on a per-visit basis, which make it
difficult to attract repeat users. The subsidy mostly appeals to new and lessfrequent moviegoers who dont have a cinema membership. Baidu Nuomi has
revised its subsidy strategy by introducing a Membership Plus scheme,
where loyal customers enjoy more discounts and premium services. Online
movie ticketing is replacing the groupbuy movie-ticketing model. While the
discounts are similar on both platforms, groupbuy limits users choices of
movies and times.
3 November 2015
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China internet
Online movie ticketing

is replacing the
groupbuy model
Figure 300
Figure 301
Annual revenue per buyer
Ticket volume breakdown (1Q15)
500
(Rmb/person)
Online revenue
450
Offline revenue
400
350
Online
groupbuy
21%
434
Offline
ticketing
37%
352
300
250
200
Online
ticketing
42%
150
146
100
50
76
2013
2014
Discounts worry the

movie industry, but
are permitted
Baidu, Alibaba and

Tencent have invested
heavily in the
entertainment industry
The heavy subsidies by online players have aroused concern in the industry.
In July 2015, Chinas movie association released a new sales regulation on
movie-ticket pricing, which mandates that the retail price of a movie ticket
cannot be lower than the agreed price in the release contract. Discounts
offered should be borne by whoever initiates the promotion. The retail price
should be made clear on the movie ticket. This is to prevent moviegoers from
perceiving movie tickets as being as cheap as the discounted price. However,
the new rule does not discourage heavy promotions.
Digital entertainment is a core strategy for BAT
Baidu, Alibaba and Tencent (BAT) have invested heavily in the entertainment
industry, from online movie-ticket distribution to content production. Meituan
is a formidable player in movie-ticket sales, but does not have enough capital
to go upstream. Gewara was an early player in O2O movie-ticket sales and
has built a movie-review database, but its market share has been dwindling
due to the entrance of the big internet players.
Figure 302
Meituan is a
formidable player
in movie-ticket sales
Cinema coverage of major online players

Meituan Maoyan
Dianping
Gewara
Baidu
Taobao
Weixin
Cinema coverage
4,000
3,000
2,000
4,500
2,500
4,100
City coverage
408
300
300
418
244
420
Source: CLSA
Alibaba Pictures has

already produced a few
successful movies
Alibaba announced a full

buyout of Youku Tudou at
US$26.6/sh
108
Alibaba
Alibabas 60%-owned Alibaba Pictures has already produced a few successful
movies since 2014, such as Dearest () and Breakup Buddies ();
and it has acquired several popular movie copyrights. It has also entered into
film-cooperation agreements with several famous directors, such as Chan Ho
Sun (), Chai Zhi Ping () and Wong Kar Wai (), sponsoring
them in exchange for their movie proposals.
Alibaba has a 20% stake in Youku Tudou, but it announced a full buyout at
US$26.6/sh in October 2015. Youku has struggled to make money on a
standalone basis, given intense competition from Tencent and Baidu. This
transaction fits Alibabas media and user acquisition strategy. Apart from
3 November 2015

China internet
traffic, the integration enables Alibaba to distribute content across multiple

screens and integrate Alibaba and Youkus data fully for targeted marketing.
Youku also has production unit - Heyi Pictures - and participated in the
production of a few popular titles in 2014, such as The Continent ()
and Fleet of Time (). It plans to turn several popular online-video and
TV-drama intellectual properties (IP) into movies in 2015.
Ali Pictures acquired a
major software developer
for online movie-ticket
system
In April 2015, Alibaba Pictures acquired a 100% equity interest in Guangdong

Yueke Software Engineering (), a company providing
connecting software systems for more than 30 mainstream third-party movieticketing e-commerce platforms, for Rmb830m. Its partners include major
offline cinemas and online distribution channels (WeChat, Maoyan, Alipay,
Dianping and Gewara). The acquisition enables Alibaba Pictures to own a core
piece of backbone infrastructure for online movie ticketing - likely the order
and transaction flow data.
Figure 303
Alibaba's selected entertainment & media investments

Company
Name
Company description
Holding
(%)
Value
(US$m)
Youku Tudou
Alibaba Pictures
Wasu Media
Date invested
Internet TV and video-content provider
18.3
1,090
Formerly ChinaVision. Producer of movies and TV programmes
60.0
806
Mar 2014
Digital media broadcasting and distribution
20.0
1,045
Apr 2014
Huayi Brothers
Film production, record label and talent agency
4.5
250
Xiami.com
Music content provider
na
na
Enlight Media
Producer of TV shows and movies
8.8
382
May 2015
Evergrande FC
Guangzhou-based soccer club
50.0
193
Jun 2014
Yicai
Financial TV & news. Formally known as China Business News
30.0
200
Jun 2015
Apr 2014, Oct 2015
Nov 2014, Aug 2015

Jun 2013
Shareholding and investment value are estimates. Through a loan to Simon Xie and a PRC limited partnership. Jack Ma also owns 3.6% stake
in Huayi Brothers. Source: Media reports, CLSA
Tencent set up two movie

groups in Sep 2015
Weixin and QQ are key

promotional channels for
movie producers
Tencent
In September 2015, Tencent set up two movie operations - Penguin Pictures
under its Online Media Group (OMG) and Tencent Pictures under its
Interactive Entertainment Group (IEG). Penguin Pictures is an affiliate of
Tencents online-video business, mainly engaging in investment, promotion
and distribution of movies in cooperation with offline studios. Tencent Pictures
will focus on developing its internal gaming, animation and literature IP. The
two teams will complement each other in strengthening Tencents overall
presence in the movie industry. Tencent also joined Alibaba in investing in
Huayi Brothers, a major player in movie-making and entertainment, with a
c.8% equity stake.
Weixin and QQ are promotional channels for movies. Moviemakers can
purchase in-feed ad slots on both platforms. Weixin has also started
promoting movie content to users via Moments. QZone even inserts short
movie preview clips in Friends Timelines.
Movie-ticketing services are mostly for mobile-payment user acquisition. The
movie-ticketing functions on both Weixin and QQ are on a tertiary level under
the wallet tab. Users can only access the function after two clicks. Dianping
is also embedded in Weixin and QQ, providing online ticket sales and seat
selection, but the function is less visible.
3 November 2015
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China internet
Figure 304
Figure 305
Figure 306
Dads Holiday ad on Moment
Fast and Furious 7 ad on Moment
Terminator 5 ad on QZone
Source: Weixin, QQ, CLSA
Baidu is using movie

ticketing service to ramp
up O2O users.
Baidu
Baidu is using its movie-ticketing service to ramp up O2O users. Users can
purchase movie tickets on Baidu through: mobile Baidus Life+ tab; the
Nuomi app; and Baidu Map. It has the widest cinema coverage among peers
thanks to its extensive offline sales force.
Baidu-backed iQiyi has seen good traction in its self-produced content
strategy, which has given it a unique edge amid intense competition in
content bidding. The established IPs could be used for future movie
investment. iQiyi is also building up its foreign-movie database. In July 2015,
iQiyi and Paramount formed a partnership to distribute Paramount content in
China.
iQiyis self-produced
content strategy has seen
good traction
iQiyis IPO plan may be delayed due to the volatile market. The companys
chief content officer, Ma Dong, has also left the firm to start up his own
studio, taking one of the most popular professionally-generated-content titles
that he led, U Can U Bibi () - which may no longer be exclusively
distributed by iQiyi. Future partnership between Mas studio and iQiyi is
uncertain.
In June 2015, Baidu, Hopu Investment and Tian An Insurance jointly invested
HK$450m in SMI, an integrated movie group engaging in movie production,
investment and distribution. Baidu is also an investor in Huace Media Group,
one of the major TV-drama producers in China.
About 81% of
our respondents have
used online movieticketing services
110
About 81% of respondents in our proprietary study in Section 2 have used

online movie and performance ticketing services, the highest penetration
among all O2O services. Our study showed that mobile apps generally offer a
26% discount on the movie-ticket price (Rmb35/ticket). About 76% of tickets
are purchased on mobile. Free movie tickets are distributed during
promotional periods.
3 November 2015

China internet
Figure 307
How much do you pay for movie tickets?

Ticket price (Rmb)
Discount (%)
% of purchase on mobile
Average
35
26
76
Median
31
20
80
Max
100
100
100
Min
14
18
24
Standard deviation
Source: CLSA
Meituans Maoyan movie app is the most popular, followed by Baidus

Nuomi, which has launched various aggressive promotional campaigns in
2015. Gewala is an independent movie-booking app and one of the first
players in the space, but the entry of big players such as Meituan and
Baidu has almost wiped out its early-mover advantage. Wanda leverages
on its offline cinema network to promote its mobile app, but it is still far
behind the major movie-booking apps. Its offline network doesnt seem to
provide a competitive edge.
Meituans Maoyan movie

app is the most popular,
followed by Nuomi
Figure 308
Figure 309
Figure 310
% of respondents
who have used the app
Usage frequency
(1 = lowest, 5 = highest)
User experience
(1 = worst, 5 = best)
Meituan/Maoyan
Meituan/Maoyan
77
Nuomi
53
Taobao
43
Gewala
28
Douban
23
Wanda
19
Others
20
40
60
80
4.23
3.98
Douban
4.09
Taobao
3.93
Gewala
4.08
Douban
3.88
Taobao
4.05
Gewala
3.87
Nuomi
4.00
3.82
Wanda
Wanda
(%)
Meituan/Maoyan
4.21
Nuomi
Others
0
100
3.94
Others
3.57
3.64
Source: CLSA
Subsidy encourages
people to watch more
movies
Subsidies encourage people to watch more movies. About 35% of

respondents do not expect any change in their movie-watching frequency
without subsidies and 41% might slightly reduce the number of times
they go to the movies. Only 12% will significantly decrease ticketpurchase frequency.
Wide coverage is key for movie apps. As the choice of where to watch a
movie is usually random, the apps with the best coverage provide users
with more convenience whenever they feel like watching a movie.
Some 35% expect their

watching frequency to
stay the same even
without subsidies
Figure 311
Figure 312
If without subsidies, how will you

change your usage frequency?
Top-2 concerns in choosing

a movie-ticket booking platform
Increase
12%
Significantly
decrease
12%
70
(%)
60
50
40
Same
35%
Slightly
decrease
41%
30
20
10
0
Wide
coverage
Big subsidies Get used to
Convenient
payment
Source: CLSA
3 November 2015
111

China internet
Section 9: Housekeeping & beauty
Nathan Snyder
nathan.snyder@clsa.com
+1 617 295 0136
Elinor Leung, CFA

Internet Research
+852 2600 8632
Man Ho Lam
+852 2600 8732
Housekeeping & beauty

O2O home services are growing in China. Users can book housekeeping,
nanny, hairdressing and massage services through their smartphones. Service
providers are professionals from the offline stores and we find service quality
is comparable or better than in the stores. Home services are individually
small O2O markets led by one-stop platforms such as 58 Home and Meituan.
Small individual players also exist, including eJiaJie (housecleaning), eDaixi
(laundry) and Heilijia (massage), but most of these are also available on big
O2O service platforms for traffic.
Who are leading players in China?

Competition in the home services segment is significant and we have yet to
see consolidation within the industry. A large variety of services are provided
by various O2O platforms and specialists, such as housekeeping
(housecleaning, nannies and laundry), beauty (including manicure and
makeup) and other services (moving, car-washing, etc).
Competition
remains fierce
58.com is betting big on

O2O dominance
The segment is led by two major platforms - 58.com and Meituan - but
neither is dominant. Differentiation between them is limited, according to
consumers we surveyed. Both platforms also face competition from numerous
O2O startups. Competitors in cleaning include Ayibang, whose founder
specifically discussed challenging 58.com and Ganji.com as far back as 2013;
and eJiajie, which has raised over US$4m from Tencent. In beauty services,
Helijia and Meirong Zongjian are significant competitors for 58 Daojia.
One-stop shop: 58.com through 58 Daojia brand
58.com operates under the 58 Daojia brand (58 or 58 Home), with a
focus on housecleaning, beauty and moving services. For these core services,
58.com hires, trains and provides guaranteed minimum wages to its O2O
workers. 58 Daojia also works with third-party partners for other services
such as nanny, makeup and car-washing. Our proprietary consumer survey
and product tests show that 58 Daojia provides a quality service and is
gaining traction in most categories.
Figure 313
Figure 314
Figure 315
58 Daojia (58 Home) app
Housecleaning options
Beauty options
Source: 58.com
112
3 November 2015

China internet
Figure 316
Figure 317
Figure 318
Massage options (body, head, etc)
Choose your masseuse
Carwash service
Source: 58.com
Meituan currently
not monetising
One-stop shop: Meituan Shangmen

Meituan Shangmen ( or Meituan to your door) is a platform where
services are provided by a network of third-party service providers rather
than Meituans own team. Housecleaning is provided by eJiajie and
Yunjiazheng, beauty from Dudumeijia and carwashes from Ganji (although we
expect the Ganji carwash to be removed soon). As of August 2015, Meituan
reportedly did not charge a commission or take rate for traffic provision as
the company is attempting to gain scale. We anticipate a take rate will be
implemented in the future if the platform achieves scale. The timing of
implementation and level is unclear, but is likely to be around 10%.
Figure 319
Figure 320
Figure 321
Meituan app with Meituan Shangmen
Meituan Shangmen local services
Meituan Shangmen local services
Source: Meituan
3 November 2015
113

Three leading O2O

cleaning competitors
Ayibang seed capital from

Tencent
China internet
Cleaning specialists
We highlight three major competitors, including Ayibang, whose founder
specifically discussed challenging 58.com and Ganji.com as far back as 2013,
and eJiajie, which has raised more than US$4m from Tencent:
Ayibang, which translates to maid help is an O2O app focused on
providing hourly cleaners. The goal is to provide a trusted and branded

service. Employees are sourced from staffing agencies and trained to
provide consistent and dependable cleaning from a recognised brand.
Founder Wan Yong specifically referenced 58.com and Ganji as
competitors in 2013. The cleaning service offerings are significantly
greater than those offered by 58 Daojia, including window cleaning and
air-conditioning maintenance. Ayibang has raised US$11.2m in four
rounds, according to media reports. Tencent provided seed capital in
2010, although the company has not invested since and subsequently
invested significantly in 58.com.
Figure 322
Figure 323
Ayibang main app: Cleaning options
Schedule a cleaning (Rmb25/hr, minimum two hours)
Source: Ayibang
Two rounds of investment

from Tencent
114
eJiaJie, which translates roughly as No.1 housecleaning or e-
housecleaning, provides workers for cleaning and housekeeping services.

Pricing is a flat hourly rate and options include appliance cleaning and
other special cleaning services. The company allows housekeepers to be
selected and rated separately, with higher-rated housekeepers reportedly
able to receive a greater portion of the price from the platform. The annual
fee for housekeepers is about Rmb300-600. The company has raised more
than US$4m, including two rounds from Tencent, most recently in
September 2014. The company is featured on Meituan Shangmen.
3 November 2015

China internet
Figure 324
Figure 325
Figure 326
eJiajie startup page
Cleaning options from eJiajie
Select areas and appliances to clean
Source: eJiajie
Yunjiazheng integrated
into Meituan Shangmen
Yunjiazheng. Founded in 2010, Yunjiazheng (translated as Cloud
housekeeping) is another company providing cleaning services as well

as babysitting and elderly care. The company had raised over US$10m
as of end-2014 according to media reports, and is one of the cleaning
services on Meituan Shangmen.
Beauty specialists
58.com provides a suite of beauty-related services, including nails,
makeup and eyelash treatments, as well as hand, foot and full-body
massage. Helijia and Meirong Zongjian are significant competitors:
Helijia is the most
significant beauty
competitor
3 November 2015
Helijia translates as beavers house, but sounds like a reasonable
price. Founded in April 2013, Helijia provides beauty services including

nails, eyelashes and makeovers. The app provides a portfolio of work
for each artisan, and users can book an appointment with artisans of
their choice. Prices are lower than offline stores due the lack of fixed
rental fees. Sina Tech reports that the company has more than 2,000
artisans working on nails and the app processes more than 4,000
orders per day, with the average order size exceeding Rmb150. Makeup
is still a focus for the company, with c.100 makeup experts. Helijia has
raised US$55m in two rounds, the most recent in February 2015.
115

China internet
Figure 327
Figure 328
Figure 329
Helijia services: Nails, hair,

makeovers, art, yoga
Select your
nail style
Yoga instructor
details and reviews
Source: Helijia
Meirong Zongjian recently

raised funds
Meirong Zongjian translates roughly as Beauty Director and provides a
range of services including massage, facials and hair removal. Beauticians

within the service are screened and trained and use high-end French
cosmetics brands. The company reportedly raised US$15m in May 2015.
Figure 330
Figure 331
Figure 332
Meirong Zongjian beauty options
Hair removal at your house
Fat reduction
Source: Meirong Zongjian
58.com massages
provided by Diandao
116
Diandao is a standalone massage app, but is now partly owned by 58.com

and has been integrated into the 58 Daojia mobile app. In April 2015 the
company reportedly received US$5m in funding from Banyan Capital and
58 Daojia. The massage function in 58 Daojia is identical to Diandaos
standalone app.
3 November 2015

China internet
Figure 333
Figure 334
Figure 335
Diandao main page
Choose a masseuse
Choose type of massage
Source: Diandao
Market size
Total addressable market

at Rmb120-240m in 15CL
We estimate the addressable market of O2O services GMV for housecleaning,

beauty, moving and carwashes to be around Rmb120-240m in 2015. There
are many variables at play, particularly online penetration and the eventual
take rate of the business. If online penetration increased to 20%, with a
reasonable take rate of 15%, the market would be worth around Rmb1,700m
or more. However, uncertainty around the take rate is high given the
competitive landscape and newness of the business model.
Past studies back

our estimate
We base our housecleaning estimate on urban households in China and

assume a 10% penetration rate for domestic helpers. We assume weekly
cleanings and Rmb90 per three-hour visit, which is in line with app pricing.
We assume online market penetration of 5% and a 10% take rate, which is
half that of international peers. We see a relatively high probability of
platform disintermediation for regular cleanings.
Figure 336
Housecleaning a nearRmb55m market in 15CL
Home cleaning
Urban population (m)
Urban households (m)
Service penetration (%)
Households with cleaners (m)
Cleanings per month per household
Total cleanings per year (m)
ASP per visit (Rmb)
GMV (Rmbm)
Online cleaning GMV (Rmbm)
Take rate (%)
Net revenue potential (Rmbm)
15CL
749
242
10
24.2
5
120.8
90
10,875
5
544
10
54.4
Source: CLSA
3 November 2015
117

Online GMV for beauty

services could be about
Rmb220m in 2015
China internet
We base our beauty-service estimate off the urban female population and
assume an 80% penetration rate for beauty services. We assume two services
are purchased per month (hair, nails, etc) at Rmb500 per visit, 2% online
penetration and a 10% take rate which is lower than international peers. We
see a relatively high probability of disintermediation off the platform, but less
so than housecleaning, as haircuts and nails require lower levels of trust and
quality relative to cleaning.
Figure 337
Beauty a Rmb22m
market in 15CL
Beauty services
Female population (m)
Urban females (m)
Service penetration (%)
Urban individuals buying beauty services (m)
Services purchased per month
Total services provided per month
ASP per visit (Rmb)
GMV (Rmbm)
Online industry GMV (%)
Take rate (%)
15CL
667
367
30
110.1
2
220.1
50
11,006
2
220
10
22.0
Source: CLSA
For moving services, we assume 4% of urban households move on an annual

basis, given the national primary property completion rate of around 7.5m
units and the secondary market accounting for around 30% of the primary
market, for a total of nearly 10m units sold per year. We assume the average
cost per move is relatively large at Rmb250, which is toward the high end of
in-app pricing. We assume a 2% penetration (in line with beauty services)
and a low 5% take rate as moving-business gross margins are relatively thin.
Figure 338
Moving services a
relatively small market
Moving services
Urban population (m)
Urban households (m)
Annual % moves
Households moving on annual basis (m)
ASP per move (Rmb)
GMV (Rmbm)
Take rate (%)
15CL
749
242
4
9.7
250
2,417
2
48
5
2.4
Source: CLSA
Car-washing is likely to
be a loss-leader category
to attract traffic
118
We view car-washing as likely to be a loss-leader category to attract traffic

given the relatively small market, low average purchase price, high frequency
of purchase and our expectation of thin margins compared to other ondemand services. We use the current number of passenger vehicles in China
and assume each car is washed once every two months at a cost of Rmb20.
Online penetration should be low at perhaps 0.5%; and given the loss-leader
nature, we see price competition at Rmb0-1 per wash.
3 November 2015

China internet
Figure 339
Carwashes likely to
be a loss leader for
traffic acquisition
Carwashing
15CL
Passenger vehicles (m)
123
Annual washings per vehicle
Cost per wash (Rmb)
20
GMV (Rmbm)
14,792
0.5
74
Take rate (%)
0.7
Source: CLSA
58 Daojia is competing
for the top spot with
Meituan Shangmen
Proprietary online study - Which app do users like most?
To test housekeeping and beauty O2O services, we surveyed 527 consumers

on O2O services generally, of which 224 had used moving and cleaning apps
and 228 had used beauty and massage apps. In both categories we found 58
Daojia to be competing for the top spot with Meituan Shangmen, but
significantly ahead of other competitors.
In housecleaning and services, usage of 58 Daojia and Meituan Shangmen
were relatively similar. Consumers rated Meituan Shangmen slightly higher
overall, although the two apps were similar in terms of both pricing and
service experience. The relative scale of competitors eJiajie and Yunjiazhen is
understated because Meituan Shangmen provides them with traffic through
its app and consumers associate the brand with Meituan.
Figure 340
Meituan slightly beats 58

Daojia in overall ranking
Housecleaning and moving: Top-ranked apps
200
(No.)
Votes (LHS)
Average rating
5.0
180
160
140
4.0
4.2
3.9
4.0
4.0
4.1
4.5
4.2
4.0
120
3.3
100
80
3.5
3.0
60
40
2.5
20
Other
LinkCare
Yunjiazheng
eDaixi
eJiajie
Ayibang
Meituan
Shangmen
2.0
58 Daojia
Source: CLSA
Consumers rate
58 Daojia and Meituan
Shangmen similarly
3 November 2015
There is little difference between 58 Daojia and Meituan Shangmen in our

respondents minds. The apps seem to provide a similar cleaning experience
at a similar or lower price than traditional offline services. Overall, cleaning
quality is rated as the same or higher than that offline competitors.
119

China internet
Figure 341
Figure 342
Pricing: App versus offline cleaning service
Service quality: App versus offline cleaning

Lower
5%
Higher
11%
Higher
24%
Lower
44%
The same
45%
The same
71%
(% of total respondents)
Source: CLSA
Prices competitive with

traditional equivalents
As expected, prices for O2O cleaning services are similar or slightly

cheaper than offline cleaning, partly due to subsidies provided by the
platforms to gain market share. We found half of users expected their
usage of the service would be slightly lower if subsidies were cut or prices
increased. However 34% suggested their service usage would be the
same. The primary reason for using the O2O service was transparency of
service delivery and pricing, rather than lower prices.
Figure 343
Figure 344
Your usage would be ___ if subsidies were eliminated?
Why do you use the app rather than offline services?

70
(%)
63.8
60
50
The same
34%
40
Slightly
lower
50%
30
40.6
44.2
23.7
20
10
Significantly
lower
16%
7.1
Subsidies Higher-quality Transparent Easy receipt

reduce the
service
service and and payment
price
pricing
Habit
Source: CLSA
Meituan brand
helps in beauty
120
We found 58 Daojia lagged Meituan Shangmen more in beauty and

massage services. Experiences between the two apps were similar, but
79% more consumers reported using Meituan versus 58 Daojia, likely
due to brand awareness and using the core Meituan groupbuy app. As
with housecleaning services, we found pricing and overall service quality
were similar between the two. No other app brand came close to 58
Daojia and Meituan Shangmen, which shows the power of the Meituan
brand since it is simply outsourcing to the same smaller players.
3 November 2015

China internet
Figure 345
58 Daojia lags
Meituan in beauty
and massage usage
Beauty and massage services: Overall ranking of O2O service apps
200
(No.)
Votes (LHS)
Average rating
5.0
180
160
4.1
4.2
4.1
140
4.0
4.1
4.1
4.1
4.0
3.8
120
4.5
100
3.5
80
3.0
60
40
2.5
20
Master Li
Rongmeme
Meirong
Zongjian
Xiaomei
Daojia
Kungfu Bear
Helijia
Meituan
Shangmen
2.0
58 Daojia
Source: CLSA
Users like receiving

beauty treatments and
massages at home
Pricing and quality of beauty and massage services is competitive with

traditional offline parlours. Pricing was viewed as the same or lower by
the majority of consumers, with 65% ranking quality the same as offline
services and only 7% ranking the quality as lower. Given users
preference for receiving beauty services and massages in their own
homes, we expect the market share of these on-demand O2O services to
continue to grow.
Figure 346
Figure 347
Pricing: App versus offline beauty and massage
Service quality: App versus offline beauty and massage

Lower
7%
Higher
14%
Higher
28%
Lower
43%
The same
43%
The same
65%
Source: CLSA
Consumers expect
elimination of subsidies
to have a slight
negative impact
3 November 2015
The majority of consumers expect elimination of subsidies to have a

slight negative impact on purchasing habits, compared to 33% of
consumers who expect their purchasing habits to remain the same.
121

China internet
Figure 348
Figure 349
Your usage would be ____ if subsidies were eliminated?
Why do you use the app rather than the offline service?
70
(%)
61.4
60
50
The same
33%
44.7
46.1
38.6
40
Slightly
lower
44%
30
20
Significantly
lower
23%
10
0
5.7
Subsidies Higher-quality Transparent Easy receipt

reduce the
service
service and and payment
price
pricing
Habit
Source: CLSA
Consumers preferred to
receive services at home
The majority of consumers preferred to receive beauty and massage

services at home primarily due to comfort, control and cleanliness.
Figure 350
Figure 351
Where would you prefer to receive beauty services?
Why do you prefer receiving beauty services at home?

Other
0.8%
At a shop
44%
No sales
pressure
21%
Prefer to be
at home
38%
More control
and cleaner
40%
At home
56%
(% of respondents)
Source: CLSA
58.coms service was

largely similar to
competitors in our tests
122
Proprietary checks - Who offers the best user experience?
We tested housecleaning and beauty services from 58 Daojia, Helijia and

Meituan Shangmen in Chengdu, Shanghai and Shenzhen. We found 58
Daojia to be as promised: good service from dedicated workers at
reasonable prices. Similar to our consumer survey work, our testers were
generally willing to consider using all of the apps again due to
convenience of the service, particularly in terms of cleaning. Relative to
Meituan Shangmens service offerings, 58 Daojias quality is more
standardised and perhaps slightly higher, but not significantly so. In
general, we see these services as still relatively undifferentiated.
3 November 2015

China internet
Figure 352
Housekeeping services
Location
Service
Price and subsidy
Service and staff overview
Meituan Shangmen
Chengdu
5-star cleaning
Rmb70 (Rmb35/hr)
50% off
Male, 35 years old. Had
business card.
Xianxiangzhijia shirt.
Brought cleaning
equipment. Spoke
Sichuan dialect
Employment company
Training
Xianxiang Zhijia ()
Remuneration
Salary + Rmb3 per

Rmb10 spent = Rmb21
for a Rmb70 job
14/week (6-8 hours/day)
Weekly orders from

platform
Other platforms used?
None
Taobao, Xianxian zhijia

(phone service)
Pros or cons of O2O versus More flexible hours;
can arrange cleaning
traditional service from
time directly with
service-provider
customer by phone
perspective
Relatively busy (good
business)
Service evaluation from

consumers perspective
(difference with offline
service; whether user
would continue to use the
app)
Other comments
58 Daojia
Chengdu
Window cleaning
Rmb100 in total
Rmb10/m of window
Female, around 25 years
old. No business card;
wore an old T-shirt that
read "58 Daojia". Did not
bring house slippers, but
did bring cleaning tools.
Spoke Sichuan dialect.
58 Daojia
Had training. Have to
prove they can clean well
before being allowed to
service customers. Must
be under 40 years old
No salary. Cleaner takes
80%. If rated >=80%,
cleaner keeps 100%
14/week (2/day). Orders
limited because 58 Daojia
is new
Ayibang
Chengdu
Leather sofa maintenance
Rmb320
Paid Rmb295
Male, 25 years old. No
business card. T-shirt with
Ayibang logo. No house
slippers but brought
cleaning tools. Spoke
Sichuan dialect
58 Daojia
Shanghai
Standard cleaning
Rmb30/hr
Ayibang
No training. Switched
from another cleaning
company
58 Daojia
Yes, two days training
No salary. Keeps 60%.

Makes c.Rmb7,000-8,000
Not allowed
Ayibang
No salary; 100% cleaning

fee. If rated poorly, loses
Rmb10
Experienced
workers >30/week &
Rmb10,500. Less
experienced Rmb3,0004,000
Not allowed
Reasonable pay. No
Work more; make more
salary, but the more

you clean the more you
are paid. Flexible
hours. Can connect
with customers directly
by phone
58.com does not
currently charge the
cleaners anything.
Other agencies tend to
charge employees a
deposit to reduce staff
turnover. But there is
no formal employment
contract and no
insurance
Two hours of cleaning for Good attitude. The
the kitchen, restroom and cleaner worked hard,
main living area. Excellent although she made a
cleaning, good staff
mistake on a window and
attitude and service.
when it was pointed out
Overall it was excellent
she fixed it and worked
value for money and will
even harder. Provided
consider using the app
free branded cleaning tool
again. Half an hour after
gift at the end
the cleaning, there was a
service call to check the
quality.
No dry-cleaning service,
The Rmb10 fee was an
but pickup service for
estimate, not a
curtains (Rmb15 per bag measurement by the
including installation)
cleaning person. The
customer was able to
bargain about the price
(window size) somewhat
c.15/week, 2-3/day
Can select if customer

wants to use their own
cleaning spray or 58
Daojia's for Rmb5
Higher wages than

traditional companies
Very pleased with the

Good service. Can
leather cleaning outcome. standardise offline
Average service attitude. traditional service
Felt the price was
expensive. However, will
use the app again as it is
an easy way to do price
comparisons. Using this
sort of large cleaning
company put my mind at
ease
User can call and make
reservations, which offer
services that are not in
the app (dry cleaning).
Becoming a member
provides price
advantages: prepay
Rmb1,000 or 2,000 and
save 10%; or prepay
Rmb5,000 and save 16%
The worker was worried

about a developing
monopoly
Source: CLSA
3 November 2015
123

China internet
Figure 353
58 Daojia window cleaning
Meituan Shangmen housecleaning
Ayibang leather cleaning
58 Daojia shower cleaning
58 Daojia cleaning toolkit
Meituan Shangmen housecleaning
Source: CLSA
124
3 November 2015

China internet
Figure 354
Beauty services
58 Daojia
Helijia
Meituan
58 Daojia
Location
Shanghai
Shanghai
Shanghai
Shenzhen
Service
Massage
Haircut
Foot massage
Manicure
Price and subsidy
Rmb158;
Paid Rmb78 after subsidy
Rmb98;
Paid Rmb48 after subsidy
Rmb79
Rmb89
Service and staff overview
Male. Very clean and tidy.

Portable bed. Good
attitude. Comfortable
experience with no
distinction relative to a
physical location
Female. Good overall. But Male. Very professional

worth noting the hair
and high quality.
stylist felt it is easier to
Complete tools and oils
promote O2O nails than
hair which is lowerfrequency and also lowpriced. For hair colouring,
must go to a physical
location (Helijia has 30
participating locations in
Shanghai).
Female. Good service, but

during the process
another app Meilidoor was
promoted
Employment company
Diandao ()
Helijia ()
Yisheng Daojia ()
58.com
Training
Recruited as an
experienced masseuse so
no need for additional
massage training; but did
receive training on inhome service process
None. Joined as a senior

hair stylist
Yes; not from Meituan but Yes, trained by 58.com on

from the company that
how to use the mobile app
employs him
and platform rules.
Training not given on
manicure skills
Remuneration
80% of the payment
Keep 100%; make

c.Rmb6,000
No salary; 70% of service 100% of payment plus

price
Rmb20 for transport
Weekly orders from

platform
Depends on skill level. 15- 7-21/week (1-3/day)

25/week; more on
weekends
14-21/week (2-3/day)
Varies. More order when

weather is bad.
Other platforms used?
Not allowed
Not allowed. Can work at

traditional shop
Not allowed
Meilidoor ()
Pros or cons of O2O versus

traditional service from
service-provider
perspective
Higher wages (can be

Rmb10,000 per month);
more flexible time. But no
provision of food or
accommodation and no
compensation for
transport. Payment terms
can be longer
Compared to opening her

own store, can find a lot
of customers and time is
more flexible. More
difficult to clean homes;
won't necessarily make
more through O2O. Hair
styling prices tend to be
lower in O2O
Flexible time and

relatively high wage. No
provision of food,
accommodation. Difficult
commute
Internet platform provides

large subsidies. They also
provide insurance for
service personnel
Service evaluation from

consumers perspective
(difference with offline
service; whether user
would continue to use the
app)
Will continue to use the

app
Other comments
Still a lot of promotions to

get consumers to accept
in-home massage with
platforms providing
duelling subsidies to gain
scale
Platform provides a
complete set of tools,
allowing customers to
choose the style. Will
consider repeat purchase
if discount is provided
Must provide a deposit of Only drawback is using
Rmb2,000 or Rmb4,000
your own couch rather
for entry into the platform than a store recliner
and use of the Helijia
tools
Source: CLSA
3 November 2015
125

China internet
Figure 355
58 Daojia massage
58 Daojia massage
Helijia haircut preparation
Meituan foot massage preparation
58 Daojia manicure
58 Daojia manicure toolkit
Source: CLSA
O2O services must work

to stop disintermediation
126
Who are the overseas peers?
We studied international examples of on-demand O2O services in the

cleaning, beauty and moving categories. In general, we view the move to ondemand services positively as online companies can consolidate the market
with a branded, standardised service. However, the threat of
disintermediation is high for repeat consumers of services requiring high trust
and quality; and there limited returns to scale.
3 November 2015

China internet
Figure 356
Platform
disintermediation
most likely for repeat
users of high-trust,
high-quality services
Trust-quality matrix
High
Cleaning
Massage
Moving
Beauty services
Quality
Taxi
Food delivery
Carwashing
Low
Trust
Source: CLSA
One of the most significant issues for platforms is the potential for
disintermediation. In our view, platforms providing repeat services where
trust and quality requirements are high, such as massages, cleaning, or
haircuts, are at the greatest risk of disintermediation by repeat or recurring
users. The result is consumers moving off the platform and loss of revenue
for the service provider. One option for dealing with this problem is illustrated
by TaskRabbit, which allows its take rate to be discounted to 0% if a customer
consistently uses the same individual, to keep the customer and worker in
hopes of cross-selling other new services.
Cleaning
valuations
rising
Cleaning
The big three international on-demand cleaning services players are Helpling,
Handy and TaskRabbit, with companies segmented primarily by geography.
Consolidation is occurring in the housecleaning market, with Handy having
purchased two competitors for marketshare and geographic expansion.
Handys most recent fundraising round valued it at US$500m, while Helpling
was valued at US$172m.
Helpling is a cleaning-only on-demand app backed by Rocket Internet. In July
2015, Helpling acquired Hassle to become the largest global housecleaning
marketplace, with a focus on Germany and many emerging economies.
Figure 357
US$500m valuation
for Handy
On-demand cleaning/home services funding

Firm
Helpling
Valuation
(US$m)
Funding
(US$m)
VC rounds (US$)
172
62
na
6.8
500
60.7
Series A US$2m October 2012. Series A US$10m October 2013.

Venture US$3.7m January 2014. Series B US$30m June 2014.
Series B US$15m March 2015
TaskRabbit
na
37.7
Angel US$25k May 2009. Seed US$1m October 2009. Seed

US$850k August 2010. Series A US$5m May 2011. Series B
US$17.8m December 2011. Series C US$13m July 2012
Homejoy
na
39.7
Seed undisclosed for May 2010 and 2012. Seed US$1.7m March
2013. Series A undisclosed October 2013. Series B US$38m
December 2013
Hassle.com
Handy
Series A US$17m December 2014. Series B US$45m March 2015

Seed US$23k April 2012. Seed US$400k April 2013. VC 255k
April 2013. Series A US$6m May 2014
Source: CLSA
3 November 2015
127

China internet
Handy offers housecleaning as well as handymen, plumbing, electrical and

interior painting services. The company has scaled geographically through the
acquisitions of Mopp and Exec and offers services in 37 locations in the USA,
the UK and Canada.
Figure 358
Handy and Helpling

consolidating the market
Acquisitions of on-demand cleaning/home services

Acquirer
Helpling
Target
Date
Amount (US$m)
Hassle
2015
35.5 (all stock)
Handy
Mopp
2014
Undisclosed (multimillion)
Handy
Exec
2014
Under 10 (all stock)
Source: CLSA
Figure 359
Take rates around 20%

for home services
On-demand cleaning-service take rates

Company
Rate
Helpling
20%
TaskRabbit
20% (FT); 30%-15% (TaskRabbit)
Homejoy
20-25%
Handy
20%
Handy take rate is estimated based on lowest hour rate charged/highest wage paid to cleaners.
Source: CLSA, companies
Top player charging

20% take rate
Beauty
Beauty services are rapidly moving into on-demand services. The sites and
apps connect consumers to third-party beauty professionals. The industry is
just beginning to grow and evolve, with most major companies founded
within the past two years. The largest player we could find, Rocket Internets
Vaniday, has raised US$16.5m in funding and is valued at perhaps US$20m.
Vaniday has a 20% take rate.
Figure 360
A new industry
On-demand beauty-service founding dates

Beautified
2013
Priv
Mar 2014
Stylebee
Jul 2015
Vaniday
Mar 2015
Glamsquad
Jan 2013
Figure 361
Limited US-based funding

for O2O beauty services
On-demand beauty-service funding

Companies
Funding
(US$m)
Rounds
Investors
Beautified
1.2
Seed US$1.2m August 2014
Carmen Busquets, Mansanita

Capital and New Enterprise
Associates
Priv
4.0
Seed from exec chairman Alain

Schibl US$1m before launch.
Angel US$3m November 2014
Exec chairman Alain Schibl and

other Angels
1.0
Venture July 2015
Y Combinator
Seed July 2015
Rocket Internet
Seed US$2m January 2014.

Series A US$7m October 2014
Softbank, BBG Ventures, Lerer

Hippeau Ventures and Montage
Ventures
Stylebee
Vaniday
Glamsquad
16.5
9.0
Source: Companies
128
3 November 2015

China internet
Figure 362
Figure 363
Figure 364
Priv menu
Priv stylist selection
Priv stylist bio
Source: Priv
USA has Unpakt

and Bellhops
Moving
The USA has two significant moving platforms: Unpakt and Bellhops. Unpakt
operates as a pure third-party platform, whereas Bellhops is a mix, with
movers recruited and trained by Bellhops but employed on an independentcontractor basis, similar to Uber.
Founded in 2012, Unpakt is a third-party platform that allows consumers to
compare price quotes from different moving companies based on details of the
consumers move. Unpakt reportedly raised US$3m of seed funding in 2013.
Figure 365
Figure 366
Unpakt pricing process
Comparing and booking movers
Source: Unpakt
Unpakt is a third-party
platform, while
Bellhops is a mix
3 November 2015
Founded in 2011, Bellhops is a niche moving service focused on college towns

and small-to-medium-sized moves. It contracts college students as the
movers, with users charged US$40 per hour and staff paid US$13-15 per
hour. The company reportedly has 9,000 movers, with 15,000 moves in 2014
and revenue growth of around 4-5x YoY.
129

China internet
Section 10: Healthcare
Healthcare
Healthcare services
adopting O2O model
slowly due to regulation
The healthcare industry is adopting the O2O model at a gradual pace due to
complex regulations, but the potential is large. The government is under
growing pressure to liberalise the industry and promote private healthcare to
cope with rapidly rising demand from an ageing population, increasing health
awareness and pollution.
Currently there are two main O2O services: online pharmacies and doctor
appointments. Alibaba leads in online pharmacy services and providing
cloud-based IT and payment solutions to connect public hospitals. Tencent
and Baidu focus more on consumer-end healthcare and doctor
appointments. Doctor appointments are the start of other healthcare
services such as consultation, prescription-drug sales, followup checkup and
ongoing health monitoring.
Main healthcare O2O

services are online
pharmacy and doctor
appointments
Figure 367
Figure 368
Online healthcare revenue
Online healthcare revenue mix
20
18
16
14
12
10
8
6
4
2
0
(Rmbtn)
100
(%)
Product sales
Advertising
User VAS
80
104% 5Y Cagr
60
40
78
11
17
2009
2010
2011
2012
2013
2014
15F
94
95
2013
2014
15F
52
43
20
89
31
0
2009
2010
2011
2012
Online pharmacies
Chinas online-pharmacy
GMV has grown rapidly
to Rmb7.8bn in 2014
Chinas online-pharmacy GMV has grown rapidly, from Rmb400m in 2011 to

Rmb7.8bn in 2014. However, online penetration is still low at less than 1%
versus 30% in the USA, due to significant challenges:
Purchase of prescription drugs is restricted to hospitals in most cases.

Pharmaceutical sales contribute c.40% of hospitals revenue, as they
generally mark up the retail price by over 15%. The government has
issued policies to remove the markup, but progress could be gradual due
to hospital resistance.
Online prescription-drug sales have been banned since 1999. There are
plans to issue new licences to allow online sales, but the timeline is
unclear. Prescription drugs represent a large c.40% of total drug sales
in China.
Figure 369
Figure 370
China annual medicine retail sales
B2C pharmaceutical e-commerce
250
(Rmbbn)
200
Chinese medicine
Prescription
OTC
10
18.2
15.9
(Rmbbn)
(%)
B2C pharma e-commerce

YoY (RHS)
9
8
9.5
100
200
150
100
0.4
1.6
4.3
7.8
2011
2012
2013
2014
0
2011
2012
2013
2014
350
250
400
3
50
Online pharmacy GMV breakdown
300
12.7
150
Figure 371
50
0
100
80
(%)
Offline pharmacy B2C

3rd party marketplace
51.8
56.1
56.8
55.2
48.2
43.9
43.2
44.8
2012
2013
2014
15F
60
40
20
0
Source: Pharmnet, CLSA
130
3 November 2015

China internet
Government has granted

16 online marketplace
licences and 319
B2C licences
Medical insurance settlement remains fragmented. Each city and province

has its own independent system.
Some medical deliveries require a high level of care such as temperature

control and protection for fragile packaging.
However, the government has granted 16 online-marketplace licences and

319 B2C licences to encourage the development of online healthcare. Internet
companies could disintermediate the pharmaceutical supply chain, although
government policy is key to driving changes in the industry.
Figure 372
Types of online medicine-transaction service licences

Licence scope
No. of licences granted
(as of July 2015)
Governing entity
Approved business model
Internet companies with licences
Type A
Online service platform for
pharmaceutical companies
16
Type B
Wholesalers' online trading
service
98
Type C
Direct sales of OTC medicines
State Food & Drug

Administration
Marketplace
Alibaba Health, JD.com,
Yihaodian
Provincial bureau
Provincial bureau
B2B
na
B2C
Alibaba Health
329
Source: CFDA, CLSA
Low online penetration in

pharmaceutical purchases
due to their nature
The low online penetration in pharmaceutical purchases is also a result of

their nature - low-frequency but with strong purchase intention. Patients only
purchase drugs when they are sick; and they only purchase drugs for their
specific illness. Unlikely other products, medicines cant be promoted through
push advertising or cross-selling. Trust is another critical issue online, as
patients with acute diseases prefer reputable offline pharmacies with long
operational histories.
Successful online
pharmacy model is likely
to be a partnership
A successful online-pharmacy model is likely to involve partnerships between

established pharmaceutical distributors/retailers and e-commerce operators.
Offline pharmaceutical companies would secure the product supply and lastmile delivery, while e-commerce companies would provide online platforms
and a broad user base, eliminating unnecessary middlemen and lowering
prices for end consumers.
Medical staff
are scarce
in China
Doctor appointments
were the first popular
online healthcare service
3 November 2015
Doctor appointments
Medical staff are scarce in China. The country only had 1.6 doctors per 1,000
people in 2014, above Indias 0.8 but far behind developed-market peers.
Healthcare facilities are also inadequate. There are just 0.4 inpatient beds per
1,000 people in China, the lowest level among BRIC countries and only 13%
that of the USA and 3% of Japan. Making a doctor appointment is a timeconsuming process: well-known doctors are hard to see without a relationship.
Doctor appointments were the first popular online healthcare service provided
by internet companies, with low resistance from hospitals. Some local
healthcare bureaus also set up websites or call centres to take appointments.
The result is a highly fragmented market. One hospital could partner with
multiple online platforms and only offer limited time slots to each platform.
Tencent-backed Guahao.com and Shenzhen government-backed 91160.com
are two relatively big online players, but combined they account for less than
1% market share. Baidu Doctor is a latecomer, but works directly with
hospitals nationwide. It has partnered with 700 hospitals (25,000 doctors) out
of Chinas 24,000 hospitals.
131

China internet
Doctor appointment is the starting point for other services. Appointments can
lead to doctor consultation, drug prescription, followup operations and
checkups, rehabilitation and ongoing health monitoring. This expands online
services such as selling OTC and prescription drugs, sending reminders of
checkup appointments and sending heartrate and health data for chronic
patients to doctors regularly or during emergencies. Baidu and Tencent are
building open platforms to connect third-party smart devices and send health
data to doctors and hospitals.
Doctor appointments are

the starting point for
other healthcare services
Figure 373
Figure 374
Doctors per 1,000 people
Inpatient beds per 1,000 people
(No.)
(No.)
14
12
10
China
India
Brazil
UK
Canada
Spain
USA
Italy
France
Japan
India
China
Brazil
Japan
USA
Canada
Spain
Russia
UK
France
Germany
Italy
Germany
Russia
Payment settlement
Alipay and Tenpay support online payment of doctor appointment fees (Rmb9
for an ordinary visit). A few hospitals are also trailing full settlement with
mobile payment. Feedback from patients has been highly positive as waiting
times are significantly shortened. However, large-scale adoption may take
time as Alipay and Tenpay have to negotiate with each hospital individually.
However, there should not be many technical challenges if the hospitals
already accept credit or debit cards.
Alipay and Tenpay

support online payment of
doctor appointment fees
Figure 375
Figure 376
Healthcare expenditure by segment
100
Medical expenditure mix
Individual cash expenditure

Social expenditure
Government budgetary expenditure
(%)
100
90
(%)
Commercial insurance
Govt medical insurance
Individual cash expenditure
80
80
70
60
60
50
40
40
20
30
20
Source: CEIC, CLSA
132
Germany
France
UK
USA
Japan
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
China
10
3 November 2015

China internet
Online consultation
Online diagnosis
is banned
But consultation on
general health matters
is allowed
PC-based medical-information portals have extended their services to online

doctor consultation. This service has gained traction due to the low doctorpatient ratio in China. In April 2015, the Ministry of Health banned online
diagnosis: only consultation on general health matters is allowed. However,
the distinction between diagnosis and consultation is unclear.
Quality of online doctor

consultation is low
The quality of online doctor consultation is low as most such services are free
and generally provided by medical students. Experienced doctors are
unwilling to answer online queries for free. More credible doctors charge a low
fee and online platforms have to subsidise the doctors to provide quality
online consultations. Some platforms have also introduced phone-call doctor
consultation service and click-to-call services.
We tested two online

doctor appointment and
consultation sites
We tested two online doctor appointment and consultation sites - Chunyu

Doctor and Gaohao. The concept is good, but quality of service still has plenty
of room to improve.
Figure 377
Chunyu Doctor charges

Rmb12 per consultation
Chunyu Doctor: Online consultation

Price
Rmb12 per consultation
Experience
1)
2)
3)
4)
Payment
Alipay
User comment
Unlikely to use the service for serious disease. However, doctors

from top-tier hospitals are available for online appointments
The doctor is patient, but not detailed enough

Voice messages and photos are allowed
Photos might not be clear enough for accurate diagnosis
Quite responsive when the doctors status is shown as online
Figure 378
Workflow of Chunyu Doctor

Doctor background and
patient feedback
Text and photo messaging for diagnosis
Alipay, Tenpay and bank

card payment available
Source: CLSA
3 November 2015
133

China internet
Figure 379
Guahao charges Rmb30

for five minutes of phone
consultation
Guahao.com: Phone consultation

Price
Rmb30/5 minutes. Rmb10 cash rebate if users write comments within

three days
Experience
1) The conversation is not clear enough in a limited time

2) Available time slots are generally 17:00-21:00 for doctor's
convenience; hence less flexibility for patients
Payment
Alipay
User comment
Too expensive and low value-added. Prefer to go to community

hospital and small clinics
Figure 380
Workflow of Guahao.coms phone consulting

Brief description of
symptoms
Doctor appointment
confirmation
Cash rebate
notification
Doctor calls on phone
Source: CLSA
Electronic health records
Lack of electronic health

records could also limit
online doctor consultation
Online doctor consultation could also be limited by the lack of electronic

health records (EHR), which his far from ready in China. An EHR contains an
individuals health data (such as patient notes, electronic prescription and
clinical results) which can be accessed by different healthcare providers. This
helps consultation especially when doctors and patients move between
hospitals, which is increasingly the case given the scarcity of doctors and
medical staff in China. The government encourages doctors to work at
multiple medical locations - public, private and community hospitals.
EHR adoption likely

to be slow in China
EHR has not been widely adopted globally. Only eight countries, mainly in
Europe, have implemented EHR nationwide. Adoption in China is likely to
be slow. Only top-tier hospitals have digitalised clinical records, but most
hospitals do not share their databases. However, a few cities are
pioneering the EHR initiative. For example, Hangzhou has completed an
EHR network linking nine hospitals, 45 community medical centres and
276 medical service stations. The government must be the driving force
for hospitals to change and upgrade their systems. Meanwhile, the
authorities can enforce patients rights to obtain their own records for
visiting other doctors for second opinions.
134
3 November 2015

China internet
Alibaba has big onlinehealthcare ambitions
BAT competing for healthcare share
Alibaba has big online-healthcare ambitions and has invested most

extensively across various segments, from IT solutions to service providers.
Tencent focuses more

on consumers and
general healthcare
Tencent focuses more on consumer and general healthcare/wellness services

as Chinas dominant social networking platform. It has been most active in
acquiring minority stakes in both domestic and foreign online medical service
providers to build up its online healthcare presence.
Baidu partners directly

with quality hospitals
Baidu partners directly with quality hospitals by leveraging on its longstanding

relationships in its search business. It further expands its healthcare service
platform through acquisitions.
Figure 381
Baidu, Alibaba and

Tencent have all
invested into healthcare
BAT's investments in online healthcare

Device/hardware
Pharmacy
Doctor appointments
Consulting
Clinic software solution
Hospital solution
Healthcare information
Alibaba
nm
Tmall Pharmacy
Alibaba Health
Huakang Mobile
Healthcare
XYWY.com
Tencent
Doctor Tang
WeChat Sports
Scandu
Picooc
JD Pharmacy
Baidu
DuLife
Guahao.com
DXY.com
Baidu Doctor
Yihu.com
Haodaifu.com
Yihu.com
nm
Zhuojian China
DXY.com
nm
Baidu Health
Tissue Analytics
Huakang Mobile
Healthcare
nm
XYWY.com
Baidu Waimai
Source: CLSA
Alibaba leads in
healthcare services
Alibabas healthcare ambitions

Alibaba leads in healthcare services through Alibaba Health (Tmall Pharmacy),
Aliyun (cloud computing) and Alipay (payments). It has established the
widest partnerships throughout the industry, from upstream to downstream.
Figure 382
Startups
IT solution
providers
Medical equipment
manufacturers
Hospitals/clinics
Aliyun - cloud computing
Medical service
providers
Hospitals/clinics
Alibaba Health - full-service platform
Startups
Alipay - payment
Hospital management
Drug PIATS
Mobile pharmacy
Electronic health
records (EHR)
Hospital Information
System (HIS)
Doctor appointment
Cloud and big-data

infrastructure
Data-management
services
Online consulting
Business (2B)
Online
merchants
Offline pharmacies
Service accounts
Doctor appointment
Medical reports
Key platforms
Online
merchants
Business
partners
Alibabas healthcare ecosystem
Payment service
Consumer (2C)
Source: CLSA
3 November 2015
135

China internet
Online pharmacy is a
natural extension of
Alibabas e-commerce
business
Online pharmacy is a natural extension of Alibabas e-commerce business. Its

acquisition of Citic 21CN, the countrys sole medicine tracking system, has
strengthened and differentiated Alibabas online-pharmacy service. Alibaba
injected Tmall Pharmacy into Citic 21CN and rebranded the company Alibaba
Health, which has become its healthcare investment arm. Alibaba and Alibaba
Health have signed strategic agreements with various healthcare players.
Aliyun, the cloud-computing service, collects healthcare data and provides IT
support to participants in the medical field. Alipay supports medical payments
in hospitals. Jack Mas Yunfeng Capital has also invested in a wide range of
healthcare services.
Alibaba and Yunfeng

acquired stake in Citic
21CN in January 2014
Alibaba Health owns the

countrys sole medicine
tracking system
Alibaba Health leads in online-pharmacy services

In January 2014, Alibaba and Yunfeng Capital jointly acquired a 54.3% equity
interest in Citic 21CN for HK$1.3bn and renamed it Alibaba Health. As a result
Alibaba Health owns the countrys only drug product identification,
authentication and tracking system (PIATS), endorsed by the China Food and
Drug Administration (CFDA).
The CFDA requires all medicines produced and sold in China to be on the
system for monitoring purposes. PIATS involves bar codes and serial numbers
attached to products. Customers can check detailed info on products on the
CFDAs website (www.drugadmin.com), such as production/expiry date,
producer and approval number.
Figure 383
Figure 384
Bar code provided by Citic 21CN-backed PIATS
Product information provided on drugadmin.com
Source: CLSA
Transfer of PIATS faced

resistance from some
companies
136
The transfer of PIATS to Alibaba faced resistance from some pharmaceutical

companies. The concern was that Alibaba Health could access all businesssensitive information throughout the supply chain from production to final
sales. But, most firms are less worried as the current data on PIATS is only
basic information which is already publically available. Alibaba Health also
argues that the data belong to the government and it is merely a manager
and operator.
3 November 2015

China internet
Figure 385
Alibaba Health is
lossmaking in 2015
Alibaba Health financial summary

Year-end 31 March
PIATS business
System integration and software development
2014
2015
YoY (%)
24,920
37,180
49
2,567
Total revenue
27,487
37,180
Cost of revenue
(13,923)
(17,225)
24
13,564
19,955
47
Gross profit
Other income and gains
35
4,580
109,047
(6,476)
(67,517)
943
Administrative expenses
(35,318)
(73,688)
109
Product development expenses
(16,877)
(42,663)
153
(882)
(67,801)
Sales and marketing expenses
Other expenses
Share of profit and losses of JV/associate
Losses before tax
Income tax expense
Loss for the year
7,786
18,695
(33,623)
(103,972)
(960)
(1,159)
(34,583)
(105,131)
Alibaba transferred
Tmalls online pharmacy
business to Alibaba
Health
In April 2015, Alibaba transferred Tmall pharmacy to Alibaba Health for

HK$19bn. Alibaba Health issued shares worth HK$15.6bn and HK$2.2bn in
convertible bonds to Alibaba, as well as HK$1.7bn worth of shares to an existing
shareholder. The deal increased Alibabas stake in Alibaba Health to 54.6%.
The transaction effectively transferred the online pharmacy sales licence to
Alibaba Health. Alibaba Health also acquired a 100% stake in Beijing Chuanyun
Logistics Investment, which was 90%-owned by Alibaba. Beijing Chuanyun owns
an Internet Drug Transaction Service Qualification Certificate (Type C), which is
necessary to sell OTC medicines directly to consumers online.
Figure 386
Alibaba Health shareholding structure (assuming convertible bonds are fully converted upon maturity)
Wholly owned by Chen Xiao Ying,

ex-CEO of Citic 21CN
Brother of Chen Xiao Ying
Wholly owned sub of Alibaba

Alibaba Health
Beijing Chuanyun Logistics Investment
Hebei Huiyan Medical

Technology
Note 1: A subsidiary of Alibaba Holding and Innovative Tech each holds above 20% of voting rights in Perfect Advance. Innovative Tech is an
investment vehicle which is 100%-controlled by Yunfeng Fund II LP. The Alibaba subsidiary, Innovative Tech and Ali JK Investment are presumed
to be acting in concert under Hong Kong Takeover Code. Source: Company
3 November 2015
137

China internet
Alibaba has 50% share of

medical sales revenue
Under a Technical Service Agreement between Alibaba Health and Alibaba,

Alibaba Health will pay Tmall 50% of the commission revenue from online
pharmacy as Tmall will bear marketing expenses, traffic-acquisition costs and
colocation and bandwidth costs of the sales. Tmall will also provide related
software and technical services to Alibaba Health. Under a Renewed Cloud
Computing Services Agreement, Alibaba Health will also pay a fee not
exceeding HK$10bn to Alibaba.
Tmall had 186 pharmacies

with total GMV of
Rmb4.74bn in FY15
Tmall had 186 pharmacies with total GMV of Rmb4.74bn in FY15,

representing c.0.6% of Tmalls GMV or less than 0.2% of Alibabas China
GMV. OTC drugs and medical devices contributed close to 60% of Tmall
Pharmacy-related GMV. The government plans to open up online sales of
prescription medicines, but the timeline is unclear.
OTC drugs and medical

devices contributed close
to 60% of Tmall
Pharmacy
Figure 387
Figure 388
Tmall Pharmacy GMV
Tmall Pharmacy GMV breakdown
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
General
healthcare
products
Sexual 5%
(Rmbm)
health
products
16%
FY14
Contact
lenses
20%
FY15
OTC drugs
21%
Medical
devices
38%
Source: Alibaba Health, CLSA
During 2015, Alibaba Health stepped up promoting the implementation of

PIATS, resulting in high marketing spending. Alibaba Health is likely to remain
lossmaking near-term after paying 50% of its commission revenue to Alibaba.
Alibabas future healthcare-related investment could be under Alibaba Health.
Currently Alibaba Health has a JV and an investment associate, both in
healthcare IT infrastructure, which were invested by former Citic 21CN.
Figure 389
Alibaba Health summary financials

Year ending March
Old business
(Rmbm)
FY14
A
1H15
B
22
30
(47)
(31)
(142)
(36)
(164)
(146)
(122)
(415)
(130)
(441)
GMV
Revenue
Take rate (%)
Technical Services Agreement
Operating expenses
Ebitda
Ebitda margin (%)
Ebit
Ebit margin (%)
Target business
Proforma
Proforma, with
Technical
Services
Agreement
FY15
FY14
C
2,548
58
2.3
FY15
D
4,740
103
2.2
FY14
A+C
FY15
B+D
80
132
132
(11)
46
80
46
80
(21)
82
80
81
79
(58)
22
27
10
13
(167)
(35)
(26)
(49)
(37)
(51)
(146)
(65)
(49)
(100)
(76)
Source: CLSA
Aliyun and Alibaba Health

are jointly offering IT
solution to hospitals
Aliyun provides IT solutions to hospitals

Alibaba is ahead of competitors in digitising healthcare information. Aliyun
and Alibaba Health are jointly promoting hospitals in the cloud. Aliyun offers
various cloud-computing solutions to healthcare providers at the backend,
while Alibaba Health promotes its hospital information system (HIS).
The hospitals in the cloud service is at the initial database-buildup stage. By
offering IT solution to hospitals, Alibaba can digitise prescriptions, allowing
patients to purchase medicines outside of hospitals system. Next is to enable
138
3 November 2015

China internet
doctors to access patients information regardless of the institution they work

for. Patients will be able to manage their health records online, regardless of
the hospitals/clinics they visit. Alibabas ultimate goal is to consolidate
healthcare information across the country and digitise most of procedures
when people need healthcare services.
Online pharmacy will help
patients purchase
medicine when electronic
prescriptions are allowed
In the meantime, its online pharmacy will help patients to purchase medicine
when electronic prescriptions are allowed. Small institutions welcome Alibaba
for the initiative as local clinics and community hospitals might not have all
medicines in stock. Sharing information will help match patients to the
nearest sellers. Public hospitals may not join the system any time soon given
their vested interest in the existing regime.
Since 2015, Alibaba Health has signed multiple strategic partnerships with
healthcare players in rolling out its hospitals in the cloud initiative:
Partnerships with hospitals and clinics:

Alibaba Health and Alipay
have both been
proactively signing up
hospitals
Since the beginning of 2015, Alibaba Health and Alipay have been
proactively signing up hospitals to the hospitals in the cloud initiative. As
of end-May 2015, 82 public and private hospitals across 21 provinces and
41 cities had formed partnerships with Alibaba Health or Alipay, although
these represent less than 0.5% of all hospitals in China.
The partnership with Alibaba Health could be deeper than Alipay. Alibaba
Health provides EHR and HIS, where data are stored in Alibabas cloud.
Currently only small clinics are willing to build and share databases with
Alibaba Health.
Alipay has less integration with hospitals. Hospitals could simply open a
service account on Alipay without integrating their own systems. Services
available on Alipays service accounts include doctor appointments, online
payments and online medical reports on app. Big public hospitals are
willing to partner with Alipay to demonstrate their digitisation efforts as
requested by hospital management, while limiting risk.
According to Alipays one-year business review, users can save c.50% of
waiting time with the app (average waiting time is 26.4 mins, down from
43.3 mins). Since Alibaba partnered with Guangzhous Women and Children
Medical Center, 40% of the patients have made appointments online.
Besides partnering with existing hospitals, Alibaba is also experimenting
with building a brand new hospital, as building a new hospital system could
be cheaper and faster than upgrading existing ones. In April 2015, Aliyun,
Xian International Medical and DHC Software (another major hospital IT
system solution provider) jointly announced the construction of a smart
hospital named Xian International Medical Center. Capital commitment to
the new hospital amounts to Rmb2.7bn, with gross floor area of
470,000m and hospital beds of 1,500. The hospital is expected to
complete by the end of 2017.
Partnerships with medical service providers:

Alibaba Health also
partners with Dian
Diagnostics and Yuwell
Technology
3 November 2015
In April 2015, Alibaba Health signed strategic agreement with Dian

Diagnostics, a third-party medical-diagnosis service provider with over
8,000 hospitals as its customers.
In the same month, Alibaba also signed strategic agreement with Yuwell
Technology. Yuwell develops and produces medical equipment and
devices. Beijing 301 Hospital, Shanghai Huashan Hospital and Nanjing
Gulou Hospitals are the first three hospitals on trial.
139

China internet
Partnerships with pharmacies:

Alipay has partnered with
over 20 major offline
pharmacy chains
Since 2014, Alipay has formed partnership with over 20 major offline
pharmacy chains to promote its mobile payments offline, as well as
prepare for Tmall Pharmacys delivery service.
However, its three-hour delivery service is only available for certain
products in certain districts in eight cities. Our channel checks suggest
service quality has yet to match the advertised three-hour delivery.
Partnerships with IT solution providers:

Alipay also works with
Chinasoft, Kingstar and
DHC Software
In June 2014, Alipay partnered with Chinasoft, which provides enterprise

resource planning (ERP) systems to offline pharmacies to synchronise data
with PIATS. This can give Alipay access to the latest data of pharmacies
using Chinasoft, depending on the detailed terms of the agreement.
In January 2015, Alibaba Health signed an agreement with Kingstar,
engaging mainly in digitising medical information with 1,600 hospitals.
Aliyun is working with DHC Software to digitise health records of Haidian
District residents, which will be completed by end-2015. If it is successful
in expanding coverage, data in different districts of Beijing can be shared.
Case study: Pharmacy delivery

Our consumers tested Tmall Pharmacy in Beijing,
Shanghai and Chengdu (the service is not yet available in
Shenzhen). Results were inconsistent. Service in Chengdu
was the best, but feedback in Shanghai was highly
negative. Service quality seems to depend on the
partnered offline pharmacies.
Tmall Pharmacys three-hour speedy delivery service does
not cover Shenzhen and Beijing yet. Instead, we ordered
medicine from Dingdang Kuaiyao () in Shenzhen, a
subsidiary of major pharma firm Renhe Pharmacy. The

medicine was delivered in 30-60 mins. The delivery person
said that he was from the local pharmacy and came over
immediately after the online order was received.
We ordered medicine from Kuaifang Songyao () in
Beijing, a standalone niche player in medicine delivery. It
vastly outperformed Tmall Pharmacy and delivered the
order within one hour. Similar to Dingdang, the delivery
person was staff of the offline pharmacy.
Workflow of Dingdang Kuaiyao

Product category
Mobile phone
verification
Coupons granted for

successful sharing
Logistics status update
Source: CLSA
140
3 November 2015

China internet
Alipay expanding services to hospitals

Alipay has been proactively providing payment solutions to hospitals,
although among the 82 future hospitals in the cloud, adoption of payment
services is low and patients adoption is lower.
Alipay is providing
payment solutions
to hospitals
Guangzhou Women and Children Medical Center, Guangzhou Overseas

Chinese Hospital, Zhejiang Sir Run Run Shaw Hospital and Shanghai First
Women and Children Hospital are among the first to accept Alipay to settle
the self-paid part of medical expenses. All four are public hospitals. However,
according a representative from Zhejiang Sir Run Run Shaw Hospital, while
about 13% of patients used the doctor-appointment service on Alipay, only
2.6% of patients used online payments in the past year.
Alipay is competing head-to-head with Weixin mainly in online doctorappointment services. Like Weixin, Alipays doctor-appointment function is
available under the local life service tab. It covers 16 provinces, slightly
more than Tencent (nine provinces). The service is mainly provided by
Yunfeng Capitals investee Huakang Mobile Healthcare and Tencents investee
Guahao.com. The service account on Alipay is similar to Weixins public
account; and users can make doctor appointments and online consultations
after following a hospital or an online healthcare-service account on
Alipay/Weixin. However, Alipays service accounts are not yet as widely
subscribed as Tencents public accounts. Huakang was also established later
than Tencents investee Guahao.com.
Alipay is competing headto-head with Weixin

mainly on online doctor
appointment service
User experience test: Tmall Pharmacy
Beijing
Waiting
time
2 days
Shanghai 3 days
Delivery
company
Third-party
courier
Third-party
courier
How to dispatch
order
Merchant contacted
courier as usual
Merchant contacted
courier as usual
Observations
na
Extremely bad experience. Merchant was unaware of Tmalls speedy delivery
Chengdu
1.5 hours Third-party Tmall Pharmacy's

courier
orders will be
arranged with priority
service. Although the ad slogan claimed 3-hour delivery, the merchant

misinterpreted this as 3-hour delivery after the parcel is sent. The merchant
further said it would take three days for the parcel to be dispatched.
Hotline of Tmall Pharmacy could not be reached. Tmalls general service rep was
unaware of the service.
The external packaging was broken.
Online complaint filed against the offline pharmacy, but no response received.
Speedy delivery is only available in central Chengdu;
Rmb10 charged for intracity medicine delivery, higher than ordinary fee (usually
Rmb7)
Workflow of Tmall Pharmacy

Tmall Pharmacy ad promising 3-hour delivery
Same ordering process as e-commerce
Source: CLSA
3 November 2015
141

China internet
Most of the partnerships

are formed via strategic
agreements instead of
direct investments
Establishing extensive strategic partnerships

Most partnerships in healthcare are formed via strategic agreements instead
of direct investments. Only Jack Mas private fund Yunfeng Capital has made
direct investments in A-share-listed and private healthcare companies. Jack
Ma has been highly passionate about the healthcare sector.
Figure 390
Alibaba and Yunfeng Capital's healthcare investments

Investor
Investee
Date
Amount
Est
year
Product/service
Yunfeng
Capital
CR Wandong
Medical
(600055 SH)
Jun 2015
US$32m
1997
Medical device and equipment maker
Yunfeng
Capital
Baiyunshan
Pharma
(600332 SH)
Jan 2015
US$81m
1973
Pharmaceutical manufacturer
Yunfeng
Capital
Huakang
Mobile
Healthcare
Apr 2014
US$32m
(Round B)
2012
Doctor appointment system and online

consulting service
Alibaba
Citic 21CN
21
Jan 2014
US$119m
2005
Tracking system for pharmaceutical and

medical products
Yunfeng
Capital
Hangzhou
American-Sino
Hospital
Feb 2013
Undisclosed
2013
Private hospital focusing on paediatrics

and ob-gyn
Yunfeng
Capital
XYWY.com
Sep 2011
Undisclosed
2004
One-stop healthcare platform including

online diagnosis, hospital/doctor search,
online forum, etc
Alibaba Health aims

to be a large platform
We met a senior investment strategy officer in Alibaba Health, who told us

that the company aims to be a large platform of various focused and niche
players because:
It is difficult for any offline or online player to be well-rounded in the

medical sector due to the inherent complexity of each and every disease.
Traffic is less important than service quality. User acquisition will not be
the main focus. Most online healthcare players come from an internet
background, but the traditional idea of monetising traffic does not apply
to online healthcare.
While internet companies are disrupting or even replacing certain service

providers (such as food delivery and housecleaning), online players are
unlikely to replace or overturn offline healthcare providers due to the
high professional skills required. They can only help improve efficiency.
Alibaba Health prefers specialised healthcare companies. It will work with

many of these specialist service providers to build an ecosystem.
Tencent has made

aggressive investments
in online healthcare
142
Tencent building online healthcare through acquisitions
Tencent has made aggressive investments in online healthcare, venturing to

every major subsegment and going overseas. Its healthcare portfolio
includes both long-standing companies and newly founded startups. As early
investor, Tencents total investment is less than US$300m in aggregate.
3 November 2015

China internet
Figure 391
Tencents healthcare
portfolio includes both
longstanding companies
and startups
Tencents online healthcare strategy

Shopping
record
Tencents
social
network
JD.com
Body
metrics
Smart hardware
devices
Health
record
Offline pharmacies
Official accounts
Weixin Sports
Local service
channel
Large public hospitals
Figure 392
Tencent's healthcare investments

Investee
Tissue Analytics
Date
May 15
Investment amount
US$750k (Angel round)
Est. year Product/service

2014
Remote patient evaluation for chronic wounds
Scandu
Apr 15
US$35m (Angel round)
2011
Zhuojian Technology
()
Jan 15
US$24m (Round B)
2011
Doctor Tang ()
Jan 15
Unknown (Tencent
incubator)
2014
Blood-glucose tracking device
Guahao.com ()
Oct 14
US$107m (Round C)
2010
Online doctor-appointment system
DXY.com ()
Sep 14
US$70m (Round C)
2007
Online academic portal for Chinese healthcare professionals
Picooc ()
Jun 14
US$21m (Round B)
2014
Smart weight scale that measures a variety of body metrics;

investment jointly with JD
A medical device that could check heart rate, blood pressure

and body temperature
Hospital solution providers, offering design for mobile apps,
public accounts on Weixin and Alipay
Source: CLSA
Doctor appointments are the key starting point

Doctor appointments are a main investment area for Tencent due to large
demand. Its well-established official account infrastructure allows hospitals and
small players in various subsegments to offer healthcare services easily online.
Weixin recently created
Level 3 access
for city services
Weixin recently created Level-3 (three clicks from main menu) access for city
services in nine provinces and provincial cities, where doctor appointments
are available in certain areas. The service is powered by Tencents investee
Guahao.com (), a company focused on online doctor appointments. It
has also invested in Zhuojian Technology (), a solution provider that
helps hospitals to build Weixin public accounts. Currently around 25 hospitals
have opened public accounts with Zhuojian.
Figure 393
Guahao is an appointment
app with mobile payment
User experience test: Guahao.com's doctor appointment

Location
Shenzhen
Coupon
No direct subsidies, but red packet available for promoting Guahaos Tui Na
(Chinese-style massage) service
Payment
Mobile payments allowed for the doctor appointment fee only (c.Rmb10 for ordinary
appointment, Rmb20-30 for specialist appointment)
Waiting time
10 mins for collecting ticket, 10-20 mins for waiting for the doctor
Other
observations
1) Waiting time depends on how crowded the hospital is. Online appointment could
only save the queuing time for collecting the ticket.
2) Online cancellation is allowed, but a limit applies
Source: CLSA
3 November 2015
143

China internet
Figure 394
Workflow of Guahao.coms doctor appointment

Hospital homepage
Doctor homepage
Weixin/QQ login
Basic medical
background check
Source: Guahao.com, CLSA
Hospitals are signing up

to third-party payment
platforms like Tenpay
Expanding payment services

Like Alipay, Tenpay is also signing up hospitals to provide payment services. It
lags Alipay, but hospitals that accept one online payment service provider
tend to open to others as well. For example, both Guangdong Women and
Children Hospital and Shanghai First Women and Children Hospital accept
Alipay and Tenpay. Alibaba and Tencent will be helping each other to expand
payment coverage.
Figure 395
Doctor appointment on Weixin (powered by Guahao.com)

City services
Choose hospital
Choose doctor
Doctor appointment
Medical services
Separate account needed
with real ID verification
Source: Weixin, CLSA
144
3 November 2015

Smart hardware another

key focus of Tencent
US-based Tissue Analytics

and Scandu received
angel investments from
Tencent in 2015
China internet
Promoting smart hardware

Smart hardware is another key focus for Tencent. The company has seen
early success with Weixin Sports, where data from smart bracelets can be
synchronised on the Weixin platform. Friends can see how many steps a user
walks in one day and like each other. Currently over 10m users have
connected to Weixin Sports. Weixins smart hardware platform has also
connected with the products of 2,400 manufacturers; and over 2.5m devices
had been activated as of August 2015. Weixins open platform could become a
centralised portal for different smart devices. Unlike Alibaba, which builds
databases for hospitals, Weixin is building a database for end users.
Tencent has also been investing in smart hardware, including overseas. Tissue
Analytics and Scandu are US-based companies that received angel
investments from Tencent in 2015. Tencents investment portfolio includes
both niche players in specific healthcare segments and companies targeting
the mass market.
Tissue Analytics only focuses on chronic wound care like bedsores and
diabetic ulcers, a small subsector that is not prioritised in hospitals but can be
served well enough via checking photos and communicating online. Doctor
Tang is a mini glucose measuring device, the first product from Tencents
inhouse incubator. However, the device is still invasive and could be of
hygienic concern, whereas western counterparts have already started to
adopt noninvasive ways like using ultrasonic and thermal technology.
Scandu, Doctor Tang and Picooc are body measurement devices that collect
data for customising health advices. With the investments in health data
collectors, Tencent could upgrade Weixin Sports with more functionalities.
JD is also investing in
smart hardware
Tencent leaves online

pharmacy to JD
JD acquired 12.5% of
Shanghai Pharmas online
healthcare subsidiary
3 November 2015
JD.com (20% owned by Tencent) is also investing in smart hardware. Key

projects include the JD+ incubator platform and Super App for end users.
The business is still in early stage, but achieved over 5m unique buyers and a
c.3-4x increase in sales in 2014.
JD is building an online pharmacy
Tencent leaves online pharmacy to JD.com, but there have been some road
bumps. JD ended its partnership with Jointown Pharma after two years. The
plan of opening an online pharmacy jointly with Jointowns e-commerce
platform, eHaoyao.com () was a failure. JD received a Type-A online
pharmaceutical sales licence from the CFDA in December 2014, which enables
it to operate a marketplace for pharmaceuticals. Unlike Alibaba Healths TypeC licence, which allows direct sales, JD needs to partner with offline
pharmacies that have the appropriate licences for online pharmacy. Currently,
JDs pharmaceutical mall (yao.jd.com) is still not fully operational.
In August 2015, JD acquired 12.5% of Shanghai Pharmas online healthcare
subsidiary for Rmb151.5m during its Round A financing. Shanghai Pharma is
one of the largest pharmaceutical companies in development, distribution and
retail. Its retail sales were Rmb3.3bn in 2014, among the top five
pharmaceutical retailers in China.
145

China internet
Baidu search engine has

the most health-related
queries and data
Baidu leverages on search to grow online healthcare
Baidus search engine has the largest number of health-related queries and
data. The company also has longstanding relationships with existing hospitals
from its search business. The lack of a unified login is a disadvantage. As of
4Q14, 180m MAU logged into Baidu products, fewer than Weixins 600m MAU
and Alipays 300m-plus. Baidus cloud service, social products such as Tieba,
personalised search page and O2O services are designed all to encourage
users to log in.
Baidu operates two main healthcare platforms, Baidu Doctor and Baidu Health.
Baidu Health is a PC-based information portal where content is provided by
third-party online healthcare players. Baidu Doctor has become its flagship
healthcare mobile app, providing an online doctor-appointment service.
Figure 396
Baidus two main

healthcare platforms
are Baidu Doctor
and Baidu Health
Baidus online-healthcare strategy
Baidu Health
Health
related
search
queries
Third-party health info

providers
Baidu Doctor
Large public hospitals
DuLife
Health
record
Browsing
data
Smart hardware devices
Body
metrics
Source: CLSA
Baidu Doctor adopts a

differentiated approach
Baidu Doctor adopts a different approach from Alibaba and Tencent:
Direct partnership versus marketplace. Alibaba and Tencent both
allow all hospitals and clinics to use service accounts to connect users,
while Baidu signs up large public hospitals directly. Baidus coverage
expansion could be slower, but with higher quality hospitals.
Finding the right doctors. Users can only search for hospitals or
doctors names on Alibaba and Tencents platforms and make

appointments. Baidu offers an online self-diagnosis function to help in
finding the right doctor.
Payment. Baidus payment infrastructure is less robust than Alibaba and

Tencents. However, Baidu could catch up as most hospitals have not
accepted online payments at the moment.
146
3 November 2015

China internet
Figure 397
User experience test result on Baidu Doctor

Coupon
Payment
Waiting time
Other user observations
Beijing
Rmb10 if leaving a
comment in 3 days
Bank card; mobile

payment not allowed
30 min
Regardless of whether visiting the hospital or not, the
Shanghai
Rmb10 if leaving a
comment in 3 days
Cash only (likely due

to small amount).
Mobile payment not
allowed
0 min as no one was

waiting on the testing
day
transaction is marked as completed by default
Shenzhen
Chengdu
Rmb10 if leaving a
comment in 3 days
Rmb10 if leaving a
comment in 3 days
Mobile payment not

allowed
Bank card; mobile
payment not allowed
Still need to get the appointment ticket at the clinic lobby

as usual
Location information received via text message was
partially wrong
Limited appointment slots available online. In reality more
slots are available if making an appointment on the spot
5-10 min
Still need to wait to collect the doctor appointment ticket
40 min
No change or cancellation function available

Still need to get the appointment ticket at the clinic lobby
and no need to wait for the doctor
as usual
Only covers 13 hospitals in Chengdu, not including the

biggest one locally
Source: CLSA
Figure 398
Workflow of Baidu Doctor
Available slots
Appointment details
SMS confirmation
Reminder: Still need

to collect ticket at the
usual spot
Source: Baidu Doctor, CLSA
Baidu has been active

in online-healthcare
direct investment
Baidu has been active in online healthcare direct investment. Yihu.com

() and Haodaifu.com () are two similar companies providing
doctor-appointment services and online consultation. The investment could be
more about acquiring the existing hospitals signed up by Yihu and Haodaifu,
which entered the market earlier.
Baidus smart-hardware strategy is positioned somewhere between Alibaba
and Tencent. Like Alibaba, Baidu has launched a cloud-service platform for
big-data analytics; and like Tencent, the service targets consumers. The plan
is to consolidate different health data collected by wearable devices and make
personalised solutions.
Baidus open platform

in smart hardware has
yet to gain traction
3 November 2015
DuLife, Baidus open platform connecting smart hardware, has not yet gained
strong traction. Currently, wearable devices are mostly for personal rather
than medical use. Users on Weixin mainly use the data (such as the number
of steps they have achieved) for social purposes (such as races with friends).
DuLife is more of a long-term vision.
147

China internet
Section 11: Education
Education
Figure 399
Figure 400
China online education revenue
Online education-revenue breakdown
120
19% 5Y Cagr
2009
2010
Language
Primary/secondary
80
80
60
60
40
40
20
41
49
58
70
84
100
119
2009
2010
2011
2012
2013
14F
15F
0
2011
2012
2013
Figure 401
Figure 402
Online education users
Average spending per user
(m)
1,400
90
15% 5Y Cagr
80
14F
15F
4% 5Y Cagr
1,200
1,000
70
60
400
20
39
45
52
59
67
78
91
2009
2010
2011
2012
2013
14F
15F
200
1,310
600
30
1,280
40
1,186
800
50
10
(Rmb)
1,108
100
1,098
Higher education is the

biggest segment, but
vocational and language
study is fast growing
Higher-education
Vocational
Others
100
100
20
(%)
1,250
140
(Rmbbn)
1,066
Online education market

saw 19% five-year Cagr
to Rmb100bn in 2014
Chinas online education market saw a 19% five-year Cagr to Rmb100bn in

2014, according to iResearch. Growth is strong but not spectacular. Pureonline business models are difficult to implement as people lack selfdiscipline. We believe online+offline models will work better and accelerate
growth. Higher education is currently the biggest education segment online,
but demand is growing fastest in vocational training and language study,
given the economic changes in China.
981
Chinas online education

market saw a 19% fiveyear Cagr to Rmb100bn
14F
15F
2008 2009 2010 2011 2012 2013
Online education can be taught through broadcasting (one way), two-way

communication and online + offline model. There are self-operated (B2C) and
pure platform (marketplace) models.
Figure 403
Online education business models in China

Business model
B2C
Marketplace
Service format
Broadcasting
model
Profit model
Content cost
Examples
China Distance Education (), Hujiang
Online School (), VKO.cn ()
Two-way
communication
model
Online+offline
model
Tuition, VAS fee, membership
100.com (100 ), 51Talk (), IMOOC.com

()
Tuition
New Oriental Education (), Tarena (),

TAL (), Qingqing Tutor (), EntStudy
()
Broadcasting
model
Take rate on tuition
Taobao Edu (), Tencent Edu (), Baidu

Chuanke ()
Two-way
communication
model
Online+offline
model
Advertising fee, VAS fee
17zuoye.com (), Yuantiku ()
Take rate on tuition
Genshuixue (), Laoshihao ()
Source: CLSA
148
3 November 2015

China internet
Online education
a small part of Chinas
education spending
Sohus annual education survey in 2014 based on 150,000 samples showed

that online education contributes a small part of Chinas education spending.
Over 43% of users spend less than 30 minutes daily and over 65% spend less
than Rmb500 annually in online education. The lack of self-discipline is a big
issue behind the pure-online education model, leading to low completion rates
and subpar learning results. Close to 60% of users who had registered for an
online course did not start the course or had only completed a small portion
of the content.
Figure 404
Figure 405
Daily time spent on online education
Annual spending on online education
Figure 406
Rmb3-5k
Rmb2-3k 5%
5%
>2hrs
12%
1-2hrs
16%
Completion of online education
Rmb510k
3%
All
completed
16%
Rmb1-2k
8%
<30min
43%
Rmb500
-1k
14%
30min1hr 29%
<Rmb50
0
65%
Registration
only 13%
Mostly
completed
26%
Small
portion
completed
45%
Source: Sohu Education, CLSA
Education remains
mostly offline
Education remains mostly offline as school history, brand name,

grade/licence/certificate, alumni network, interactions with peers and
teachers are equally important in the learning process. As a result, O2O
education models work better than pure-online. Currently, Chinas O2O
education comes mainly in two forms:
Offline institutions moving online to recruit more students and improve

operating
training.
efficiency,
mostly
adopted
by
online-to-offline
vocational
Door-to-door tutoring services using O2O models, mostly adopted by K12

tutoring.
Figure 407
Figure 408
Online training market size
K12 after-school tutoring market
300
(Rmbbn)
250
1,000
Others
Higher education online training
Vocational online training
Enterprise online training
(%)
After-school tutoring market

YoY growth (RHS)
800
25
20
700
200
600
150
+16%
5Y Cagr
100
15
500
400
10
300
50
0
(Rmbbn)
900
+21%
5Y Cagr
200
100
0
2014
15F
16F
17F
18F
19F
Source: IDC, CLSA
Vocational training
the fastest to
adopt O2O models
3 November 2015
09F
10F
11F
12F
13F
14F
15F
16F
17F
18F
Vocational training
The vocational-training segment has been the fastest to adopt O2O education
models. Adult students face less peer pressure and urgency to study as most
courses are taken on a voluntary basis. Pure online courses offer flexible
times for them to take the courses, but deliver poor results.
149

China internet
Online courses offer

flexibility, but deliver
poor results
Figure 409
Figure 410
Online vocational training (2014)
Online voc training spending (2014)
MOOC
18%
Face-toface
35%
Rmb810k
9%
Online
course
purchase
19%
Face-toface +
online 28%
>Rmb10k
8%
Rmb1-5k
55%
Rmb5-8k
28%
Note: MOOC=massive online open course.

IT training the fastestgrowing vocational

education segment
IT training has grown fastest among vocational training courses, due to the
burgeoning internet industry in China. The countrys total IT spending
amounted to Rmb130bn in 2014 and IDC forecasts a 13% five-year Cagr. IT
training is a Rmb6bn market, representing c.5% of total IT spending. IDC
expects the market to expand at a 10% Cagr for the next five years.
IT training is easy to
move online as the
study is based on
computer and internet
IT training is easy to move online as the study is based on computer and

internet. The industry is changing fast, so as the course content. Study
material in traditional textbook becomes outdated quickly. The mismatch of
material studied in school and on-the-job skill represents a big opportunity for
IT training institutions. Given the better career path and salary, IT training
has become one of the most popular career-changing springboards.
Figure 411
Figure 412
China IT spending
IT education and training spending
300
12
(Rmbbn)
250
Support and training services

Outsourcing
Project-oriented services
150
100
50
15F
16F
17F
18F
(Rmbbn)
19F
(%)
IT education & training
YoY (RHS)
10
200
2014
Figure 413
12.0
11.5
IT training market share (2013)

Tarena
8%
ChinaSoft
2%
Neusoft
1%
11.0
10.5
10.0
9.5
9.0
ApTech
4%
Others
85%
8.5
2014
15F
16F
17F
18F
19F
8.0
Source: IDC, CLSA
Tarena has adopted an

O2O model
While most IT training takes place purely online or offline, Tarena, a leading
IT-training provider in China, has adopted an O2O model. The companys goal
is to bridge the knowledge gap between academic study and real-job skills. It
operated as a pure offline institution for its first three years (2003-06), but
reached a bottleneck of recruiting qualified teachers to meet the huge
demand from tier-2 and tier-3 cities. It then decided to change to a webcastplus-local instructor model.
Lectures are broadcast online and there are assistant instructors in the study
centres to help out students. Each assistant instructor can cover over 500
students. This improves the teacher recruitment as it allows good teachers to
make more money with a smaller teaching burden. The teacher retention rate
is high at 80-90%. The company insists on an offline classroom model to
ensure students go to class from 9am to 5pm daily to complete all the classes
and obtain a job placement afterward.
150
3 November 2015

China internet
Tarena has trained c.200,000 students since its inception and achieved a 95%
job-placement ratio with 50,000 employers. The company currently has 128
physical-learning centres in 38 cities, located mostly in tier-2 cities. It expects
to open another 12 centres in 2H15.
Tarena has trained

about 200,00 students
since its inception
Tarenas O2O model is profitable with an operating margin of c.15% due to

strong pricing power and its high placement record. The company charges
Rmb17,000 for its four-month programme, compared to pure online courses
at Rmb200 per year. It does not expect the pricing gap between online and
O2O to close due to the big difference in education quality. Operating at full
capacity, its operating margin can reach c.35%.
Figure 414
Figure 415
Figure 416
Tarena student enrolment
Tarena students per instructor
Tarena student enrolment by city
Student enrollment
YoY (RHS)
70,000
60,000
(%)
50,000
40,000
30,000
20,000
10,000
0
2011
2012
2013
2014
110
100
90
80
70
60
50
40
30
20
10
0
(No.)
700
Beijing 17%
600
Others 33%
500
Shenzhen 8%
400
Shanghai 8%
300
Zhengzhou 3%
200
Hangzhou 6%
Chongqing 4%
100
Guangzhou 6%
Wuhan 4%
Chengdu 5%
2011
2012
2013
2014
Nanjing 6%
Figure 417
Figure 418
Figure 419
Tarena annual net revenue
Net revenue per course enrolment
Tarena non-Gaap margins
160
(US$m)
Net revenue
YoY (RHS)
140
(%)
140
120
120
100
100
80
80
60
60
40
40
20
20
2011
2012
2014
2013
3,000
80
(Rmb)
(%)
70
2,500
60
2,000
50
1,500
40
Gross margin
Operating profit margin
Net margin
30
1,000
20
500
10
2012
2013
0
2011
2Q15
2014
2012
2013
2014
2Q15
Language studies
Language studies were the fastest to go online. Language-oriented vocational

and higher-education programmes contribute most of Chinas Rmb19bn online
education market due to high tuition fees. Annual spending per online
education user was c.Rmb1,300 in 2014, slightly higher than offline.
Language programmes also have the highest penetration on mobile as they
can be studied at random times. Over 80% of online-education users have
smartphones and 40% use tablets to study languages. Over half study a
foreign language for over 30 minutes per day.
Language programmes
were fastest to go online
Figure 420
Figure 421
Figure 422
How do you learn foreign language
Terminal use
Daily time spent
Smartphone
Mobile app
<5min
4%
Laptop
PC
Tablet
Textbook/exercises
5-10min
6%
1015min
9%
Desktop
In-class study
>30min
51%
E-dictionary
Offline salon
MP3
(%)
Offline training
0
20
40
60
80
1520min
30%
(%)
TV
0
20
40
60
80
100
3 November 2015
151

China internet
Figure 423
Figure 424
Online language study market size
Online language study users and annual spending
(Rmbbn)
40
35
22% Cagr
Overseas study
Vocational education
Higher education
Primary/secondary school
Pre-school
30
25
(m)
30
Online language study users

Spending/user (RHS)
25
20
15
(Rmb)
1,400
1,350
20
1,300
15
1,250
10
1,200
1,150
10
5
0
2008 2009 2010 2011 2012 2013 2014
15F
16F
17F
2008 2009 2010 2011 2012 2013 2014 15F
16F
17F
1,100
Intense online competition has forced offline language education institutions

to cut prices and transform their business model. Since mid-2014, New
Oriental Education, the leading offline language-education institution, has
launched several O2O initiatives to defend market share:
Intense competition has

forced offline language
schools to cut prices
It has launched online education modules to support classroom teaching,

after-class self-learning and interactions among students, teachers and
parents on both mobile and PC. Its secondary school "U-Can Visible
Progress Teaching" system, which enables class management, material
sharing and homework assignments, is now used in more than 40 cities.
The companys online education website Koolearn.com has over 2,000
video lectures on a wide range of subjects. Koolearn.com also offers oneon-one services to students, including video/phone-based verbal English
practice with foreign teachers and consulting services.
New Oriental Edu and Tencent jointly launched a mobile app uDA ()
featuring a question bank and interactive online tutoring. However, the

app competes in a hypercompetitive sector.
New Oriental Edu also has a game-based mobile learning app for children
called Donut. The app was the top ranking educational-app download for
kids aged 6-8 between October 2014 and Jan 2015, but now rank around
No.20.
The online initiatives have had little success. New Oriental Edus revenue
growth remains subdued and profit declined YoY in FY15.
Figure 425
Figure 426
Figure 427
New Oriental Edu Annual revenue
Profit margin
Annual growth rate
30
Net margin
20
30
10
20
0
(10)
10
(20)
FY15
FY14
FY13
FY12
FY11
FY10
(30)
FY09
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
40
Operating margin
40
Net profit growth
FY08
200
Operating profit growth
50
Gross margin
FY15
400
50
FY14
600
Revenue growth
60
FY13
800
(%)
70
60
FY12
1,000
80
(%)
FY11
1,200
70
FY10
Total revenue
YoY (RHS)
60
55
50
45
40
35
30
25
20
15
10
5
0
FY09
(%)
FY08
(US$m)
FY07
1,400
Note: Fiscal year end 31 May. Source: Company, CLSA
152
3 November 2015

China internet
K12 tutoring
K12 is the largest educational market. China had c.180m K12 students (52%
primary and 48% secondary school) in 2013. The lack of good teachers and
intense competition to enter a good college result in huge demand for afterschool tutoring.
K12 is the largest

educational market
Figure 428
Figure 429
K12 population in China

250
Number of students/teacher
Senior high students
Junior high students
Primary school students
(m)
(No.)
30
Primary school
Senior high
Junior high
College
25
200
20
150
15
100
10
50
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
1992
Source: Ministry of Education, Wind, CLSA
Tencent Educations report on the K12 education market showed that 57% of
these students attend after-class tutoring for an average 1.5-2.0 hours a day,
while 40% of K12 parents spend over Rmb5,000 per year on after-class
tutoring and 15% spend over Rmb100,000 per year.
Some 57% of K12

students attend afterclass tutoring for 1.5-2.0
hours daily
Online education plays a role. Some 57% of K12 students use PCs and 33%
use mobile for studying. About 46% pay for online programmes. The online
market is still nascent, with over 81% of users in tier-1 cities and provincial
capitals.
Figure 430
Figure 431
Figure 432
Use of online education
Willingness to try online education
K12 paid user/online education users
60
(%)
Not
willing to
try 19%
57
50
40
30
Willing
to try
81%
33
20
22
Not paid
54%
Paid
46%
10
0
Mobile
PC
Both
Source: Tencent Education, CLSA
Competition in K12 afterclass tutoring is fierce

among O2O startups
Competition in K12 after-class tutoring is fierce among O2O startups:
Light model: This O2O platform validates teachers and facilitates

students to find the right teacher online. The provider does not hire the
teachers directly and only charges a take rate on the tuition fee.
Examples: Genshuixue (), 5Teacher ().
Inbetween model: This platform validates teachers and hires teaching

assistants to join the first few classes to ensure that the teacher matches
the students needs. Example: Qingqing Tutor ().
3 November 2015
153

China internet
Heavy model: This O2O platform hires teachers directly to ensure best
service quality. Example: EntStudy ().
Most O2O education startups are still at Series C or earlier financing. The
profitability outlook remains uncertain given the oversupply in question banks
and homework helpers. The failure rate is relatively high and funding for this
market slowed last year.
Profitability of O2O
education startups
is uncertain
Figure 433
Figure 434
Bankrupt online education platforms (2014)
Online education primary market investment composition

50
(%)
45
2014
40
Preschool
19%
Others
22%
2013
35
30
Service
providers
8%
25
K12
20%
20
15
Overseas
study
7%
10
Vocational
training
9%
5
Language
study
15%
Source: Jiemodui, iResearch, CLSA
Internet companies are

all eyeing the large
education market
Alibaba, Baidu and

Tencent have all invested
into education platforms
Preschool Language
edu
K12
edu
Vocational
edu
Interest
Others
Source: CLSA
Online education initiatives by leading internet companies
Internet companies are all eyeing the large education market. Alibabas
Taobao Classmate platform provides strong online education content. Tencent
has invested most in the K12 market due to its large base of teenage users.
Its investment is complementary to its internal education activities on QQ
chat groups. Tencent indicated that over 300,000 class groups use QQ to
submit homework daily. In addition, over 9,000 institutions offer 50,000
courses on Tencent Class. Among the three internet giants, only Tencent is
investing in education O2O, EntStudy.
Baidus investment focuses more on language study, likely based on search
demand. Baidu has fully integrated Chuanke.com and rebranded it Baidu
Chuanke, which competes with Taobao Classmate and Tencent Class. NetEase
is a partner of Coursera, a leading massive open online courses platform.
However the partnership has not gained much traction in China, probably due
to the language barrier of English-based courses. NetEases Youdao offers
an online dictionary and cloud-based notetaking, which are popular in China.
Figure 435
Internet companies' investments in online education

Tencent
Tencent Class ()
Baidu
Baidu Chuanke ()
Language study
Alibaba
Taobao Classmate
()
VIPABC
na
Question bank
na
Tutoring
Higher education
TutorGroup
na
uDa ()
Yitiku ()
EntStudy()
Kuakao ()
Hujiang.com ()
SmartStudy ()
InnoBuddy ()
na
Social
Super.cn ()
na
Content platform
na
Universal Education Group
()
na
NetEase
NetEase Cloud Class
()
Youdao Dictionary
()
na
na
na
na
154
3 November 2015

China internet
Company profiles
58.com.......................................................................................... 157
Alibaba ........................................................................................... 163
Baidu .............................................................................................. 169
Ctrip ............................................................................................... 177
JD.com ........................................................................................... 183
Qunar ............................................................................................. 189
Tencent .......................................................................................... 195
Covered by CLSA Americas. All prices quoted herein are as at close of business 29 October 2015, unless
otherwise stated
3 November 2015
155

China internet
Notes
156
3 November 2015

58.com
US$52.31 - SELL
Lacking clarity
Nathan Snyder
Lack of details creates challenge in classifying its value
+1 617 295 0136
China classified-ads leader 58.com is helping to consolidate the online

segment, which should improve user monetisation and margins. However
we forecast a core margin half that of global peers due to competition
from verticals and online-to-offline (O2O) firms. We await progress on
the integration of about US$3bn in mainly equity-funded M&A. While 58
Home O2O is gaining traction, we believe this unit will cannibalise the
core business and recommend SELLing with a US$48 target.
Elinor Leung, CFA

Internet Research
+852 2600 8632
Core margins lower than peers

After its April 2015 merger with Ganji, 58.com has emerged as Chinas online
classified-ads leader. Traffic is insignificant but its US$1.50 monetisation per
user is low compared to peers. Revenue per user upside is likely to be driven
by upselling ads to merchants, particularly new Ganji customers. However, we
expect a 27% long-term Ebitda margin, roughly half that of mature global
peers, due to rising competition from verticals and on-demand O2O services.
3 November 2015
China
Internet
Reuters
Bloomberg
WUBA.N
WUBA US
The ultimate O2O investment

58 Daojia (58 Home) provides online-to-offline services, with 58.com
providing hefty subsidies to attract consumers. Its new O2O offerings are
likely to cannibalise yellow pages services, which make up about one-third of
revenue. Our on-the-ground work shows the firm is gaining O2O traction, but
we find no evidence of a significantly better O2O experience through 58.com.
Competition remains fierce, particularly with Meituan in home-cleaning and
beauty services. The timeline and level of profitability are unknown.
Priced on 29 October 2015

HS CEI @ 10,439.4
12M hi/lo
US$81.80/37.35
12M price target

% potential
US$48.00
-8%
Shares in issue
Free float (est.)
112.8m
59.6%
Market cap
US$8,874m
M&A: Wait and see

Aggressive use of equity financing has seen 58.com spend more than US$3bn
in M&A YTD in 2015, up 58% YoY. We are concerned about potential
integration risk, given that at least 15 deals were completed over the past 12
months, including its merger with Ganji. We expect M&A to continue, given
managements suggestion of wanting to invest in 100 O2O companies.
3M average daily volume
US$61.0m
(US$61.0m)
Foreign s'holding 58.9%

Major shareholders
Tencent 26.4%
Jinbao Yao (CEO) 14.0%
Stock performance (%)

Absolute
Relative
Abs (US$)
90
80
(US$)
1M
3M
12M
19.2
5.4
19.2
(12.7)
(5.7)
(12.7)
40.7
44.5
40.7
58.com (LHS)
Rel to CEI
(%)
270
250
230
70
210
60
190
50
170
150
40
130
30
20
Nov 13
Jul 14
Source: Bloomberg
www.clsa.com
110
Mar 15
90
Oct 15
Trading above fair value

We recently initiated with a SELL rating with a US$48 target, based on a
SOTP methodology using DCF and PE analyses. Our target equates to 5.9x
16CL EV to sales and 44.0x 17CL earnings. We forecast negative earnings
over 2015-16, primarily due to discretionary brand-building expenditure and
subsidies for the O2O business. We await progress of the Ganji merger, a
move to integrate the assets purchased and clarity on O2O monetisation.
Financials
Year to 31 December
Revenue (US$m)
Net profit (US$m)
EPS (US$)
CL/consensus (5) (EPS%)
EPS growth (% YoY)
PE (x)
Dividend yield (%)
FCF yield (%)
PB (x)
ROE (%)
Net debt/equity (%)
13A
146
12
0.38
nm
138.2
0.0
3.7
8.2
11.6
(27.5)
14A
265
29
0.34
(9.8)
153.2
0.0
1.5
9.0
7.9
(22.0)
15CL
670
(202)
(1.81)
82
(629.8)
nm
0.0
(2.3)
5.2
(24.5)
47.3
16CL
1,041
(57)
(0.50)
134
nm
nm
0.0
(0.8)
5.8
(5.2)
56.4
17CL
1,384
122
1.05
96
nm
49.6
0.0
2.0
5.7
11.5
43.0
Source: CLSA

China internet
58.com - SELL
58.com has made

aggressive investments
via M&A
The ultimate O2O investment
The company has made aggressive investments through M&A and is building
an on-demand O2O services unit. It is expanding into the O2O business
through the 58 Daojia brand, which provides consumers with instant in-app
access to services which match those offered in the yellow pages listings
segment. Tailored to limited screen space on mobile devices, 58 Daojias O2O
services offer an easy and efficient way to book services from select providers.
However, 58.com effectively competes with 58 Daojia when providing services
such as moving (the original category for 58.com), home cleaning and beauty.
58 Daojia screenshots
Main page
Home cleaning options
Beauty options
Beauty options
Choose your masseuse
Source: 58 Daojia, CLSA
We expect 58.com to continue to spend heavily in O2O, with an expected

US$150m in losses in 2H, with a similar amount in 2016. It will put capital
towards geographic expansion, marketing spend and consumer subsidies as it
gains scale. Furthermore, management has suggested a plan to invest in 100
O2O startups, leading to continued M&A and spending.
Fierce competition
in O2O
US$48 target price

implies 5.9x forward
price to sales
Competition in the O2O segment is fierce, particularly with Meituan

Shangmens app, which acts as a third-party marketplace for select service
providers. Our tests did not find significant differences between Meituan
Shangmen and 58 Daojia, with a relatively even split between consumer
recognition in cleaning and beauty. We are uncertain on the timeline to
profitability and the long-term margins of the O2O businesses. However, we
expect narrower margins relative to the classified-ads business, which
translates into a lower long-term return on capital.
Trading above fair value
Given a lack of meaningful earnings over 2015-16CL due to high sales and
marketing spending as 58.com acquires users and builds the O2O 58daojia
business, we value the company at US$48/ADS using a sum-of-the-parts
analysis, which utilises DCF and PE analyses. We also use the EV-to-sales
ratio as a backcheck. Our target equates to 5.9x forward EV/sales. We
assume Ebitda margins of 27% from 2018 and value the core classifieds
business at US$42/ADS, and the 58 Daojia unit at US$700m or US$6/ADS.
In the end, we view 58.com as a concept stock: one must believe the core
classified-ads business will turn profitable with reasonable margins and the
company will ultimately win in O2O as either the No.1 or No.2 app with
158
3 November 2015

China internet
58.com - SELL
relatively high margins. We prefer to see evidence of good integration of its

acquisitions well before recommending the stock and view the shares as
above fair value.
Valuation of US$42
for classifieds and
US$6 for O2O
58.com valuation details

(US$m)
Ebitda, non-GAAP
Taxation
2012
2013
2014
15CL
16CL
17CL
(25.7)
22.1
19.6
(182.8)
(5.2)
211.8
0.0
0.0
(2.3)
7.0
0.0
(29.9)
Change in working capital
19.0
39.8
26.3
184.6
17.1
(10.3)
Capex
(5.2)
(4.2)
(32.5)
(145.3)
(52.0)
(41.5)
(11.9)
57.7
11.1 (136.5)
(40.1)
130.1
(0.8)
(5.8)
(0.8)
(0.7)
(4.2)
FCF
YoY (%)
Sum of present value
(13.3)
2,295
PV of terminal value
2,805
DCF enterprise value
5,100
Net debt (cash)
309
Equity value
4,791
Share outstanding (m)
113
58.com core classifieds value per share (US$)
42
Add O2O 58 Daojia (58 Home) per share (US$)
Equity value per share (US$)
48
Total equity value
6,109
Source: CLSA
O2O difficult to value
The O2O business is probably the most challenging piece of 58.com to assess,
but was valued at US$1bn with a US$300m capital raise from Alibaba, KKR
and Ping An in October 2015. Transaction volume remains low, but growing,
with a reported 100,000 daily peak volume in May. Revenue remains limited
and take rates are low, given high subsidies as the company tries to build
scale. In addition, the long-term potential is relatively murky, given the early
stage of the business and competitive environment.
We value 58.coms 70% stake in the 58 Daojia O2O business at US$700m, or
US$6 per ADS, which may prove conservative should traction and
monetisation improve. A US$1,000m total valuation equates to 25x 18CL
earnings, based on revenue of US$250m from nearly one million transactions
in 2018, assuming an Rmb58 average order size and an 8% take rate.
We value the 58daojia

O2O business at US$1bn,
or US$6/ADS for
58.coms stake
58 Home (58 Daojia) valuation

(US$m)
15CL
16CL
17CL
18CL
Revenue
13
100
249
320
20
180
540
810
1,013
Daily transactions ('000)

YoY (%)
19CL
800
200
50
25
62
65
68
70
73
0.5
2.0
5.0
8.0
8.0
Operating expense
(201)
(250)
(250)
(200)
(250)
Operating income
(201)
(237)
(150)
49
70
18
20
(201)
(237)
(150)
40
56
16
18
25
18
Average order size (Rmb)

YoY (%)
Average effective take rate (%)
Tax rate (%)

Net income
Net margin (%)
Total valuation
1,000
58.com portion @ 70%
700
Per ADS value (US$)
Implied PE multiple (x)

Source: CLSA
3 November 2015
159

58.com - SELL
China internet
Valuation details
We value 58.com using a sum of the parts based on DCF and price to sales.
We value the core 58.com business using a DCF and backcheck with an
implied price-to-sales multiple relative to peers and history. We have
incorporated the acquisitions of Ganji, Anjuke, ChinaHR and AutoComment
into our numbers. Our DCF inputs are a 4% risk free rate, 1.35 beta (from
Bloomberg), 6% equity risk premium, 100% equity, which results in a 12%
WACC, and 4% terminal FCF growth. We value the online-to-offline services
58daojia (58Home) unit separately using a 20x earnings multiple, and
discount back using a 15% WACC to adjust for the higher risk profile.
Investment risks
58.com is dependent on private merchants and individuals paying for

advertising across categories. Any significant slowdown in economic activity
or advertising in core categories (housing, jobs, autos, services) could
negatively impact the business. The company is in the midst of a merger with
Ganji.com, which was purchased in 1H15. The Ganji.com founder is now coCEO and co-chairman of 58.com. Any material disagreement between the two
founders, who are now joint CEO and chairmen, could negatively impact
integration and financial results. Visibility into this relationship is relatively
low as integration truly began in August 2015. 58.com is aggressively
pursuing on-demand O2O services for consumers. This is an early stage
venture and a very competitive market. If 58.com were to spend to gain
market share, but is unable to achieve one of the top two spots in any
category pursued, this might result in the 58daojia (58Home) business being
worth significantly less than expected. 58.com is 26% owned by Tencent.
While we doubt Tencent would be willing to take control of the company and
consolidate the business, any split in the relationship with Tencent could be
detrimental to traffic direction. Additionally, Tencent has made some
investments in 58.coms competitors in certain categories including autos
(Renrenche, Bitauto through JD) and cleaning (Ayibang, ejiajie). 58.com has
increased the ADS count by 58% from the end of 2014 to August 2015,
primarily to pay for acquisitions. It is possible the company will continue to
issue equity and that these ventures will be less successful than expected,
diluting existing shareholders.
160
3 November 2015

China internet
58.com - SELL
Summary financials
Year to 31 December
Profitability to turn
around slowly
Negative FCF in
2015-16CL
Net debt
No dividend expected
2013A
Summary P&L forecast (US$m)

Revenue
146
Op Ebitda
22
Op Ebit
17
Interest income
3
Interest expense
0
Other items
0
Profit before tax
21
Taxation
Minorities/Pref divs
(9)
Net profit
12
Summary cashflow forecast (US$m)
Operating profit
17
Operating adjustments
Depreciation/amortisation
5
Working capital changes
40
Net interest/taxes/other
4
Net operating cashflow
66
Capital expenditure
(4)
Free cashflow
62
Acq/inv/disposals
(226)
Int, invt & associate div
Net investing cashflow
(230)
Increase in loans
0
Dividends
0
Net equity raised/other
213
Net financing cashflow
213
Incr/(decr) in net cash
50
Exch rate movements
Opening cash
10
Closing cash
60
Summary balance sheet forecast (US$m)
Cash & equivalents
60
Debtors
4
Inventories
Other current assets
251
Fixed assets
6
Intangible assets
0
Other term assets
11
Total assets
333
Short-term debt
Creditors
34
Other current liabs
79
Long-term debt/CBs
Provisions/other LT liabs
0
Minorities/other equity
0
Shareholder funds
220
Total liabs & equity
333
Ratio analysis
Revenue growth (% YoY)
67.3
Ebitda growth (% YoY)
nm
Ebitda margin (%)
15.2
Net profit margin (%)
8.3
Dividend payout (%)
0.0
Effective tax rate (%)
0.0
Ebitda/net int exp (x)
Net debt/equity (%)
(27.5)
ROE (%)
11.6
ROIC (%)
26.3
EVA/IC (%)
12.3
2014A
2015CL
2016CL
2017CL
265
13
13
9
0
14
35
(6)
0
29
670
(183)
(204)
0
0
(1)
(205)
7
(4)
(202)
1,041
(5)
(42)
0
(12)
0
(53)
(4)
(57)
1,384
212
166
0
(12)
154
(28)
(4)
122
13
0
26
59
99
(32)
66
(273)
(305)
0
0
257
257
51
60
111
(204)
21
185
10
12
(145)
(133)
(917)
(1,062)
700
0
400
1,100
49
111
160
(42)
36
17
(8)
4
(52)
(48)
(52)
0
0
0
0
(48)
160
112
166
46
(10)
(36)
166
(42)
124
(42)
0
0
0
0
124
112
237
111
6
499
18
0
69
704
58
139
0
0
507
704
161
33
271
142
294
1,528
2,429
86
491
700
14
(4)
1,143
2,429
113
52
266
157
294
1,562
2,444
106
583
700
14
(4)
1,045
2,444
237
69
266
153
294
1,520
2,540
118
630
700
14
(4)
1,081
2,540
81.8
(42.1)
4.8
10.9
0.0
17.7
(22.0)
7.9
4.1
(9.8)
152.7
(1,526.9)
(27.3)
(30.2)
3.4
47.3
(24.5)
(68.6)
(82.5)
55.4
nm
(0.5)
(5.5)
0.0
(0.5)
56.4
(5.2)
(20.9)
(34.8)
33.0
nm
15.3
8.8
0.0
18.0
17.8
43.0
11.5
81.9
68.0
Source: CLSA
3 November 2015
161

58.com - SELL
China internet
Notes
162
3 November 2015

Alibaba
US$82.22 - BUY
Investing through affiliates
Elinor Leung, CFA
Lags in restaurant & travel; leads in healthcare & payments

Internet Research
+852 2600 8632
Alibaba is slower and more selective in O2O investment than Baidu and
Tencent, lagging in restaurants and travel. It has a minority stake in
Meituan, but there is no direct collaboration. Instead, Alibaba and Ant
Financial have established a JV, Koubei, to offer O2O services. However,
Alibaba leads in O2O healthcare and financial services through affiliates
Alibaba Health and Alipay. Earnings were strong in 3Q15 and
monetisation beat expectations, and we believe 4Q15 should benefit from
Double-11 and a monetisation-rate rebound. Valuation is cheap: BUY.
Man Ho Lam
+852 2600 8732
3 November 2015
Koubei
In 2015, Alibaba and Ant Financial established 50:50 joint venture Koubei (a
Dianping/Yelp-like platform) to offer O2O services. Each injected Rmb3bn
(c.US$1bn in total). Alibaba transferred its online takeout-delivery service
Taodiandian to the JV and Alipay will connect its offline merchants to expand
O2O services on Koubei. But Taodiandian was only established in December
2013 with a 5% share in takeout delivery, and Koubei has not performed well.
China
Internet
Reuters
Bloomberg
BABA.N
BABA US

HS CEI @ 10,439.4
12M hi/lo
US$119.15/57.39
12M price target

% potential
US$100.00
+22%
Shares in issue
Free float (est.)
2,337.0m
14.8%
Market cap
US$203,891m
US$1,280.5m
(US$1,280.5m)

Major shareholders
Softbank 32.4%
Yahoo 16.3%

Absolute
Relative
Abs (US$)
130
1M
3M
12M
42.2
25.7
42.2
2.4
10.6
2.4
(17.5)
(15.3)
(17.5)
(US$)
(%)
Alibaba (LHS)
Rel to CEI
120
110
180
160
100
90
140
80
120
70
100
60
50
Sep 14
200
Jan 15
Source: Bloomberg
www.clsa.com
Jun 15
80
Oct 15
Alitrip is small; but Alibaba leads in healthcare

Alitrip is a marketplace for travel-service providers, but it is relatively smallscale compared to Ctrip and Qunar. Alibaba-backed Didi-Kuaidi is Chinas
monopoly taxi-hailing app, but it competes intensely with Baidu-backed Uber
in private-car hailing. Alibaba leads in online pharmacy: it acquired Citic
21CN, the sole drug-tracking system in China, injected its Tmall Pharmacy
into the service and renamed it Alibaba Health. It is the only B2C platform
with an online OTC drug-sales licence.
Building a one-stop O2O platform
Alibaba also wants to build a one-stop O2O service platform. It added TaoLife
on Mobile Taobao, which is a marketplace for merchants to provide local
services. Alipays main menu also offers O2O services, including air/train
tickets, local city services, Koubei takeout delivery, Alitrip and Didi taxi.
Valuation is cheap
Our US$100 target is based on a DCF valuation with a 12.7% WACC and
4.0% terminal growth. The stock has corrected on macro concerns, but
Alibaba is still the largest e-commerce site in China and we believe its
valuation is cheap, with a high FCF yield of 5.0% for FY17CL. It is not immune
to the macro slowdown, but it should be more resilient than offline retailers.
Financials
Year to 31 March
Revenue (Rmbm)
Net income (Rmbm)
EPS (fen)
EPS growth (% YoY)
PE (x)
Dividend yield (%)
FCF yield (%)
PB (x)
ROE (%)
Net debt/equity (%)
14A
52,504
23,076
1,061.0
189.6
48.0
0.0
1.9
37.8
157.4
19.7
15A
76,204
24,149
1,033.3
(2.6)
50.9
0.0
2.7
8.5
27.6
(35.2)
16CL
98,751
68,671
1,699.1
105
64.4
31.0
0.0
7.5
6.2
38.4
(31.7)
17CL
127,264
38,604
1,547.0
74
(9.0)
34.0
0.0
5.0
4.9
16.0
(48.3)
18CL
161,356
52,763
2,114.3
79
36.7
24.9
0.0
6.5
3.8
17.1
(61.8)
Source: CLSA

China internet
Alibaba - BUY
Investing through affiliates
Alibaba is behind Baidu

and Tencent in catering
and travel segments
Alibaba is slower and more selective in O2O investment than Baidu and
Tencent, lagging behind them in the restaurant and travel segments. In June
2015, Alibaba and Ant Financial established Koubei to offer O2O services, with
each injecting Rmb3bn to the JV (c.US$1bn in total). Alibaba transferred
online takeout-delivery platform Taodiandian to the JV and Alipay will connect
its offline merchants to expand Koubeis O2O services. Koubei now covers
about 15 cities and plans to expand to another 200 cities over 2016. The first
wave is to recruit 1m restaurants in 123 cities by end-2015.
Online travel is conducted

in-house by Alibaba
Alitrip is the travel arm of Alibaba. It is a marketplace for travel-service

providers, but its scale is relatively small compared to Ctrip and Qunar.
The company has a stake

in taxi app Didi-Kuaidi
Alibaba-backed taxi-hailing app Kuaidi Dache was merged with Tencentbacked Didi Dache in February 2015, becoming the monopoly taxi-hailing app
with a 90% share. However, Didi-Kuaidi faces new competition from Baidubacked Uber in private-car hailing services.
Alibaba acquired Citic

21CN and renamed it
Alibaba Health
Alibaba Health is Chinas leading online pharmacy. Alibaba acquired Citic

21CN, the sole drug-tracking system in China, in 2014 and injected its Tmall
Pharmacy (yao.tmall.com) into the company, renaming it Alibaba Health. It is
the only B2C platform with an online OTC drug-sales licence.
Alibaba has minority

stakes in many
O2O companies
Alibaba has also invested extensively in O2O companies. The most notable is
Meituan, but there is little collaboration. Alibaba also promotes O2O models to
offline retailers through its investments in Intime and Suning.
Alibaba's O2O investments

Holding1
US$m1
est <20%
100+
est 10%
100
Oct 2015
O2O logistics service provider in 10 cities.
na
millions
Aug 2015
O2O logistics service focusing in Hangzhou and Shanghai
na
millions
Sep 2015
Intime
Local department store operator
Suning
Leading offline electronics and appliance retailer
Company
Name
Company description
Meituan
Leading groupbuy platform, to merge with Dianping
58 Daojia
58
Subsidiary of 58.com focusing on home O2O services
Swbj.com
Dianwoba.com
Date invested
Local services
Jul 2011 to present
Retail-related
10%
700+
Mar 2014
1999%
4,600
Aug 2015
Healthcare-related
Citic 21CN
21
Drug tracking system, rebranded as Alibaba Health
543%
119
Jan 2014
XYWY.com2
Online diagnosis, hospital/doctor search, online forum.
na
na
Sep 2011
Huakang2
Doctor appointment system and online consulting service
na
32
Apr 2014
Kuaidi Dache
Taxi hailing app, subsequently merged with Didi
AutoNavi
Ddigital map, navigation and location-based solutions provider
Qyer.com
Online travel agent and forum
Travel-related
est 20%
395
100%
1,326
na
na
2013 to present
May 2013
Jul 2014
Shareholding and investment value are estimates. Invested through Yunfeng Capital, not Alibaba Group. Source: Media reports, CLSA
Alibaba embedded O2O

services into Mobile
Taobao and Alipay Wallet
164
Taobao and Alipay as O2O service platform
Alibaba also wants to build one-stop O2O service platform. It added TaoLife
() to its Mobile Taobao app, which is a comprehensive marketplace for
merchants to provide local services. Alipays main menu also offers O2O
services, including air/train tickets, local city services, Koubei takeout
delivery, Alitrip and Didi taxi hailing. In our proprietary O2O user study, Alipay
was the top choice among respondents as a one-stop O2O service platform,
while Taobao was No.3.
3 November 2015

China internet
Alibaba - BUY
O2O services on Mobile Taobao and Alipay Wallet apps

Taobao main menu
TaoLife menu
Alipay main menu
Alipay menu (continued)
O2O services are scattered across the Alipay

main menu, including (from left to right)
air/train tickets, local city services, Koubei
takeout delivery, Alitrip and Didi taxi
Entry points to
O2O services on
Taobao
O2O services are organised

in nine categories including
home, food, entertainment,
autos, education and health
Source: Taobao, Alipay, CLSA
Our US$100 target is

based on DCF valuation
Cheap valuation
We value Alibaba at US$100, based on a DCF valuation with a 13% WACC

(4.0% risk-free rate, 1.5 beta, 6.0% equity-risk premium) and assumes 4.0%
terminal growth (or 10.3x terminal EV/Ebit). The share price has corrected on
macro concerns, but Alibaba is still the largest e-commerce site in China,
riding on rising consumption.
We believe the valuation is cheap with a high 5.0% FCF yield for FY17CL.
While Alibaba is not be immune to the macro slowdown, it should be more
resilient than offline retailers. We expect the changes on Tmall to help
improve user experience and GMV growth. Alibaba has also announced a
US$4bn share buyback plan for two years, which shows managements
confidence in its outlook.
DCF valuation
Discounted to Sep 16
FY17CL
FY18CL
FY19CL
FY20CL
FY21CL
FY27CL
Cagr (%)
FY1822CL
FY2327CL
Revenue growth (%)
28.9
26.8
21.1
20.7
20.1
17.7
21.6
18.3
Ebitda growth (%)
33.5
32.3
27.3
26.1
20.9
18.0
25.0
18.3
Ebitda margin (%)
37.1
38.6
40.6
42.5
42.8
42.5
8.0
7.0
6.0
5.0
5.0
5.0
Capex/sales (%)
WACC (%)
Terminal growth rate (%)
Implied terminal EV/Ebit (x)
Enterprise value (US$bn)
13.0
4.0
10.3
226.4
Net cash (US$bn)
23.2
Equity value (US$bn)
250
Equity value (US$/sh)
100
Source: CLSA
3 November 2015
165

China internet
Alibaba - BUY
Valuation details
We value Alibaba based on DCF. Our DCF model uses a 13% WACC (4.0%
risk-free rate, 1.5 beta, 6.0% equity-risk premium and zero debt-to-capital
ratio) and assumes 4.0% terminal growth.
Investment risks
Mobile monetisation is likely to lag mobile traffic and GMV growth. Aggressive
acquisitions may continue and investors might not share the same vision on
certain deals. Market sets high expectations on growth despite the already
large size of the group. The groups equity ownership in Ant Financial is
subject to the final execution of the shareholder agreement. The success of
its logistics network buildup is not guaranteed.
Stock price (US$)
Recommendation history of Alibaba Group Holding Ltd BABA US

Elinor Leung, CFA
Other analysts
No coverage
140
BUY
U-PF
N-R
O-PF
SELL
120
100
80
60
Nov 14
Date
28 Oct 2015
13 Aug 2015
09 Jun 2015
Jan 15
Rec
BUY
BUY
BUY
Mar 15
Target
100.00
90.00
125.00
May 15
Jul 15
Date
30 Jan 2015
12 Nov 2014
29 Oct 2014
Sep 15
Rec
BUY
BUY
BUY
Target
130.00
138.00
120.00
Source: CLSA
166
3 November 2015

China internet
Alibaba - BUY
Summary financials
Year to 31 March
Alibaba has been

emphasising quality
GMV growth
Alibaba will continue to

invest in cloud, digital
entertainment, mobile OS
and set-top boxes
Company is controlling
headcount increases and
hopes to run a more
efficient model than peers
Alibaba maintains 4850% non-Gaap Ebitda

margin guidance for FY16
2014A
2015A
Summary P&L forecast (Rmbm)

Revenue
52,504
76,204
Op Ebitda
26,574
27,550
Op Ebit
24,920
23,135
Interest income
1,648
9,455
Interest expense
(2,195)
(2,750)
Other items
2,429
2,486
Profit before tax
26,802
32,326
Taxation
(3,196)
(6,416)
Minorities/pref divs/affils
(530)
(1,761)
Net income
23,076
24,149
Summary cashflow forecast (Rmbm)
Net income
23,076
24,149
239
112
1,654
4,415
(4,493)
6,066
Non-operating adjustments
5,903
6,475
26,379
41,217
Capital expenditure
(4,776)
(7,705)
Free cashflow
21,603
33,512
Acq/inv/disposals
(28,221)
(45,749)
(32,997)
(53,454)
Increase in loans
5,623
26,044
Dividends
(208)
0
3,949
61,453
9,364
87,497
2,746
75,260
Exch rate movements
(97)
(112)
Opening cash
30,396
33,045
Closing cash
33,045
108,193
Summary balance sheet forecast (Rmbm)
Cash & equivalents
33,045
108,193
Debtors
4,679
12,978
Inventories
10,587
14,148
Fixed assets
7,241
12,244
Intangible assets
13,699
48,508
Other term assets
42,298
59,363
Total assets
111,549
255,434
Short-term debt
10,364
1,990
Creditors
2,659
0
Other current liabs
24,361
37,682
Long-term debt/CBs
30,711
50,603
2,636
7,088
11,480
12,632
Shareholder funds
29,338
145,439
111,549
255,434
Ratio analysis
52.1
45.1
127.4
3.7
Ebitda margin (%)
50.6
36.2
Net income margin (%)
44.0
31.7
Dividend payout (%)
0.0
0.0
11.9
19.8
48.6
Net debt/equity (%)
19.7
(35.2)
ROE (%)
157.4
27.6
ROIC (%)
105.1
42.7
EVA/IC (%)
90.7
28.4
2016CL
2017CL
2018CL
98,751
35,311
29,094
48,956
(1,946)
2,034
78,138
(7,807)
(1,659)
68,671
127,264
47,152
39,133
10,510
(1,946)
2,509
50,207
(10,543)
(1,059)
38,604
161,356
62,362
52,975
13,115
(1,946)
2,720
66,863
(14,041)
(59)
52,763
68,671
0
6,217
17,939
14,872
107,699
(8,888)
98,811
(66,008)
(74,896)
0
(17,384)
(17,384)
15,419
0
108,193
123,612
38,604
0
8,019
9,521
19,149
75,292
(10,181)
65,111
(10,181)
0
0
65,111
0
123,612
188,723
52,763
0
9,387
11,254
22,649
96,053
(11,295)
84,758
(11,295)
0
0
84,758
0
188,723
273,481
123,612
4,961
14,148
17,915
45,508
126,580
332,723
1,990
0
48,681
50,603
7,220
11,974
212,256
332,723
188,723
6,393
14,148
23,577
42,008
128,108
402,957
1,990
0
60,996
50,603
7,386
11,974
270,009
402,957
273,481
8,106
14,148
28,984
38,508
129,936
493,163
1,990
0
75,590
50,603
7,585
11,974
345,420
493,163
29.6
28.2
35.8
69.5
0.0
10.0
(31.7)
38.4
52.5
38.1
28.9
33.5
37.1
30.3
0.0
21.0
(48.3)
16.0
79.9
65.6
26.8
32.3
38.6
32.7
0.0
21.0
(61.8)
17.1
137.2
122.8
Source: CLSA
3 November 2015
167

Alibaba - BUY
China internet
Notes
168
3 November 2015

Baidu
US$168.99 - BUY
Aiming high
Elinor Leung, CFA
Ambition to be Chinas leading O2O service platform

Internet Research
+852 2600 8632
Baidu aims to be Chinas largest one-stop platform for O2O services,

which are an extension of search and enable expansion to e-finance. It
has an edge in capital, traffic, technology, costs and mobile payments and
can leverage its large salesforce compared to Meituan-Dianping. Despite
costly upfront user acquisitions, O2O could be a new revenue source and
generate good margins. But its O2O initiative has unfairly hurt the share
price in our view. We rate it a High-Conviction BUY to a US$225 target.
Man Ho Lam
+852 2600 8732
Big O2O ambition

Baidu aims to create Chinas biggest one-stop O2O platform. Its new Baidu
app has a Life+ tab which centralises O2O services ranging from restaurant
reservations to doctor appointments. It has opened up its IT support and
traffic to merchants who can create light apps on Baidu Connect, plug in their
native apps on Baidu search/map, or set up a storefront on Nuomi to offer
O2O services. Apart from deep pockets, Baidu is the only player with
substantial user traffic, an offline salesforce and advanced technology.
3 November 2015
China
Internet
Reuters
Bloomberg
ADR
BIDU.O
BIDU US
BIDU.O

HS CEI @ 10,396.6
12M hi/lo
Growing market share

Baidu doubled its O2O market share to 20% in the first seven months of
2015. Like Alibaba, it uses big single-day promotions to grow GMV and users.
Baidus O2O GMV ex-Qunar jumped 2.6x to Rmb14bn in 3Q15, while Nuomi
GMV doubled QoQ and food takeout GMV tripled QoQ, 3-4x the market
growth rate. Baidu is also a big winner in the Ctrip-Qunar deal. It has become
the O2O travel monopoly and turned O2O travel business profitable.
US$250.34/132.37
12M price target

% potential
US$225.00
+33%
Shares in issue
Free float (est.)
351m
84.0%
Market cap
US$59,401m
Rmb20bn O2O investment within the next three years

Baidu has built an O2O ecosystem through investments, partnerships and an
open platform. It makes direct investments in high-frequency O2O services,
which will total Rmb20bn within the next three years (front-end loaded).
Earnings were down 26.7% YoY in 3Q, but margin pressure will ease as it
stops recognising Qunar losses and starts recognising Ctrips profit instead.
The weak A-share market benefits Baidu as PE funding dries up. Competition
is not as bad as we expected and marketing spend was lower than guidance.
US$703.5m
(US$703.5m)

Major shareholders
Robin Yanhong Li 16.0%

Absolute
Relative
Abs (US$)
260
1M
3M
12M
23.6
11.9
23.6
(0.6)
6.5
(0.6)
(24.7)
(23.1)
(24.7)
(US$)
(%)
170
160
240
150
220
140
200
130
180
120
110
160
140
100
Baidu (LHS)
Rel to CEI
120
Nov 13
Jul 14
Source: Bloomberg
www.clsa.com
Mar 15
90
80
Oct 15
Valuation is cheap
Baidu trades at a 15% discount to our core search valuation of US$200,
based on 15x 16CL PE. We forecast a robust 30% core-search revenue Cagr
and a c.50% margin over the next three years. Our SOTP-derived target
values its Ctrip stake at US$13/share and Nuomi at US$10-15/share.
Financials
Year to 31 December
Revenue (Rmbm)
Net income (Rmbm)
EPS (fen)
EPS growth (% YoY)
PE (x)
Dividend yield (%)
FCF yield (%)
PB (x)
ROE (%)
Net debt/equity (%)
13A
31,944
10,519
3,006.6
0.5
34.6
0.0
3.0
9.5
32.6
(52.8)
14A
49,052
13,187
3,761.0
25.1
27.9
0.0
3.6
7.1
29.3
(63.4)
15CL
66,263
11,685
3,332.5
103
(11.4)
32.5
0.0
3.9
5.9
20.1
(72.7)
16CL
83,988
14,843
4,233.2
101
27.0
25.5
0.0
3.8
4.7
20.3
(75.3)
17CL
108,824
20,766
5,922.5
102
39.9
18.3
0.0
5.3
3.6
22.3
(77.6)
Source: CLSA

China internet
Baidu - BUY
Baidu aims to be Chinas

largest one-stop O2O
service platform
Connecting users to the right services
Baidu aims to be Chinas largest one-stop O2O service platform. Search

queries for services increased 133% in 2014 and are likely to be up
another 155% this year. The companys goal has changed from
connecting users to information to connecting users to the right
services. Baidu is creating an O2O ecosystem through direct
investments, partnerships and an open platform. It has invested in highfrequency services such as Nuomi takeout delivery and online travel
platform Qunar.
Baidu has three main

channels for merchants in
various verticals to join
its O2O ecosystem
The latest version of Baidus app features a new Life+ tab, which
centralises local services ranging from food delivery (Baidu Waimai), movie
ticketing (Nuomi), travel (Qunar), taxi hailing (Uber), massage, laundry
and doctor appointments. Baidu has opened up its tech and traffic
resources to merchants which in turn can offer their O2O services through
Baidu Connect, their own native app, and/or the Nuomi storefront.
Baidu Connect features

760,000 merchants
Baidu Connect is an open platform for light applications (ie, web-
based apps). It was introduced in 2014s Baidu World and now

features 760,000 merchants ranging from restaurants, travel, retailers
and providers of healthcare and education services. Examples include
@vanke (property developer) and @YL ticketing (movie ticketing).
Native app: Large merchants with a successful native app can now be
added onto the Baidu and Baidu Map apps, leveraging on their
monthly average users of 600 million and 300 million. Examples
include eDaijia (designated driver) and Uber.
Nuomi
storefront: Merchants can now also set up web-based

storefronts on Baidu. Examples include KFC and Zhuo Gang Kao Yu
restaurant.
Life+ tab on new version of mobile Baidu

Life+ main menu
Main menu continued
Redirect to Nuomi
Redirect to Takeout
Source: Baidu, CLSA
170
3 November 2015

China internet
Baidu - BUY
Baidus O2O GMV jumped

49% QoQ to Rmb60.2bn
in 3Q15
Nuomi GMV doubled QoQ
while takeout tripled QoQ
O2O business gaining share
Baidus O2O GMV jumped 49% QoQ to Rmb60.2bn in 3Q15. Excluding Qunar,
O2O GMV would be Rmb14bn, up 2.6x QoQ. Nuomi GMV doubled QoQ while
food takeout tripled QoQ. Both grew at 3-4x the market rate.
Baidu O2O GMV
(Rmbbn)
2Q15
3Q15
Qunar
35.0
46.0
Nuomi
4.1
8.6
Takeout delivery
1.4
5.6
40.5
60.2
Total
YoY (%)
Qunar
94.4
76.9
Nuomi
200.0
475.0
Takeout delivery
Total
1,100.0
109.0
119.0
Source: CLSA
Nuomis GMV growth rate

was 4x the market
Nuomi GMV doubled QoQ and the growth rate was 4x the market. The strong
growth was driven by big successful single-day promotion. For example,
movie tickets sold on Baidu accounts for c.15% of total in China (online and
offline). Nuomi has 700k merchants covering 400 cities. Transaction per user
is trending up.
Takeout deliverys GMV e

growth rate was 2-3x
the market
Food takeout delivery GMV tripled QoQ and the growth rate was 2-3x the
market. It has the highest ASP among peers. Baidu cover 63 cities targeting
high end working group. Its multiple-to-multiple point delivery outcompetes
its peers leveraging on Baidus data and technology.
Baidu is the big winner in

the Ctrip-Qunar deal
Baidu is the big winner in the Ctrip-Qunar deal. Baidu exchanged majority of
its Qunar stake for 25% voting right of Ctrip. It has become the largest O2O
travel distribution platform in China and has immediately turned its O2O
travel business profitable. Ctrip/eLong/Qunar controls 80% of online travel
revenue in China. All their travel products will be available on Baidu search,
map and life+ O2O platform. Users can also pay through Baidu Wallet. By
removing Qunar losses and adding 25% of Ctrips earnings, Baidu will record
6% uplift in earning in 2016. There will be more upside if Ctrip can improve
margin faster by reducing couponing and marketing spend.
Baidu Wallet continues to

grow at a steady pace
Baidu Wallet continues to grow at a steady pace. It added 10m new users in
3Q, bringing total users to 45m. Users are still less than Tencents >100m
and Alipays >300m. But, Baidu Wallet will grow along with the expansion of
Baidus O2O coverage.
Most questions focused

on O2O during investors
and analyst meeting
3 November 2015
O2O investment to depress earnings . . .
Baidu is committed to its O2O strategy, but will only directly invest in highfrequency services such as Nuomi and food takeout delivery. It will invest
Rmb20bn in Nuomi over the next three years. Meanwhile, food takeoutdelivery services have already raised outside private capital totalling
US$250m. Baidu will invest in O2O travel through Ctrip. Other O2O services
will be offered through direct partnerships (eg, healthcare, education and
finance), its open platform (Baidu Connect) and acquisitions.
171

China internet
Baidu - BUY
Nuomi is its biggest direct O2O investment, which could cost about Rmb5-6bn
in 2015, Rmb10bn in 2016 and Rmb4-5bn in 2017. The Nuomi investment
depressed Baidus 3Q operating margin. However, marketing spend was less
than we expected as competitors are struggling to raise money. We expect
3Q to mark the bottom as Baidu began deconsolidating Qunar losses on 26
October.
Margins to
contract
in 2H15 . . .
Quarterly margin
(%)
70
Annual margin
Gross margin
Ebit margin
60
70
64
Gross margin
61
Ebit margin
60
60
59
50
59.3
60.8
58.1
61.3
20.9
21.0
16.9
62.5
29.0
62.1
59.6
3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15
Quarterly Ebit
(%)
Ebit
YoY (RHS)
40
30
17
23
35
26
30
19
21
16CL
17CL
16
10
0
2013
2014
15CL
Annual Ebit
(Rmbbn)
40
20
13.7
29.7
10
25.0
37.5
20
61.6
30
28.8
65.4
40
30
(Rmbbn)
Ebit
YoY (RHS)
(%)
52
25
(12)
(9)
(2)
10
45
20
35
25
14
15
15
10
(20)
(36)
(10)
(30)
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q154Q15CL
(40)
(5)
5
0
65
55
40
20
(%)
60
50
. . . but could
improve
in 2H16
80
(15)
(16)
2013
2014
15CL
16CL
(25)
17CL
. . . but also provides good revenue upside
Baidu could generate Rmb236bn in O2O GMV by 19CL if it captures a 20%

share of the O2O market, with revenue in the segment reaching Rmb15bn
with a 6% take rate. Success in the O2O segment could boost our revenue
and earnings forecasts. It could also provide additional search and mobilepayment revenue.
Baidu could generate
Rmb236bn in O2O
GMV by 19CL
Baidu O2O GMV

250
Baidu O2O revenue

236
(Rmbbn)
(Rmbbn)
12
144
150
10.7
10
8
100
87
6.9
6
4
50
0
14.9
14
193
200
16
3.5
2
16CL
17CL
18CL
19CL
16CL
17CL
18CL
19CL
Source: CLSA
172
3 November 2015

China internet
Baidu - BUY
Our SOTP-derived
target is US$225
We expect 30% coresearch revenue Cagr over

next three years
Our target comprises

US$212 for Baidu and
US$13 for its Ctrip stake
Cheap valuation
Our SOTP-derived target price of US$225 comprises US$212/share for Baidus

business and US$13/share for its 25% stake in Ctrip. We value Baidus
business on DCF, using a 13% WACC (4% risk-free rate, 1.5x beta and 6%
equity-risk premium) and 4% terminal growth rate (terminal EV/Ebit of 7.0x).
Our Ctrip SOTP valuation is US$18.5bn (US$16bn for Ctrips business,
US$2.3bn for its stake in Qunar and US$0.2bn for its stake in eLong).
We view the stock as cheap, as it trades at a 15% discount to our core search
valuation. Core search is robust - we forecast a 30% revenue Cagr and c.50%
margin over the next three years. We estimate it is worth US$200/share,
based on 15x 16CL PE, while its Ctrip stake is worth US$13/share and Nuomi
should be worth another US$10-15/share.
Baidus SOTP valuation
Value
(US$bn)
Baidu
share (%)
SOTP
(US$bn)
Per share
(US$)
Baidu - DCF
74.3
100
74.3
212
Ctrip - SOTP
18.5
25
4.6
13
78.9
225
Total
Baidu shares (m)
351
Baidu DCF summary

16CL
17CL
18CL
19CL
20CL
26CL
Cagr (%)
17-21CL
22-26CL
Revenue growth (%)
26.7
29.6
26.3
23.1
20.6
15.5
23.6
16.4
Ebitda growth (%)
44.0
36.4
30.3
27.3
20.6
17.3
26.5
17.9
Ebitda margin (%)
28.4
29.9
30.8
31.8
31.8
Capex/sales (%)
10.5
10.8
10.8
10.8
10.8
WACC (%)
13.0
4.0
Implied EV/Ebit (x)
7.0

Net cash (US$bn)
67.7
8.9
74.3
Equity value (US$/sh)
212
We value core search

at US$200/share
Core search valuation

(Rmbbn)
15CL
16CL
Revenue
57
74
Operating profit
30
37
Operating margin
53
50
Net earning
24
30
Net margin (%)
43
41
352
352
11
14
Share (m)
EPS (US$)
PE (x)
Valuation per share
15
200
Source: CLSA
3 November 2015
173

China internet
Baidu - BUY
We value Baidu using

a DCF methodology
Valuation details
We value Baidu based on a DCF methodology, using a 13.0% WACC (4.0%

risk-free rate, 1.5x beta, 6.0% equity-risk premium) and assuming 4.0%
terminal growth (implied terminal EV/Ebit of 7.0x).
Investment risks
Business could be affected by users' migration to mobile, which could

pressure near-term revenue growth. Competition is intense in new businesses
such as online-to-offline services, groupbuy, location-based services, efinance and artificial intelligence. Financial results could also be adversely
impacted by loss-making subsidiaries including Qunar and iQiyi.
Stock price (US$)
Recommendation history of Baidu Inc BIDU US

Elinor Leung, CFA
Other analysts
No coverage
300
BUY
U-PF
N-R
O-PF
SELL
250
200
150
100
Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15
Date
30 Oct 2015
23 Sep 2015
28 Jul 2015
30 Oct 2014
04 Sep 2014
25 Jul 2014
13 Jul 2014
Rec
BUY
BUY
U-PF
BUY
BUY
BUY
BUY
Target
225.00
180.00
225.00
288.00
275.00
250.00
240.00
Date
25 Apr 2014
30 Oct 2013
26 Aug 2013
25 Jul 2013
26 Apr 2013
20 Feb 2013
09 Jan 2013
Rec
BUY
BUY
BUY
BUY
U-PF
U-PF
BUY
Target
220.00
210.00
170.00
150.00
100.00
105.00
175.00
Source: CLSA
174
3 November 2015

China internet
Baidu - BUY
Summary financials
Year to 31 December
Core search business is

highly cashflowgenerative and can
maintain a 50% margin
Large cash balance
Margins could start to

improve in 2H16
2013A
2014A

Revenue
31,944
49,052
Op Ebitda
13,844
16,776
Op Ebit
11,192
12,804
Interest income
861
1,364
Interest expense
0
0
Other items
132
307
Profit before tax
12,185
14,475
Taxation
(1,829)
(2,231)
163
944
Net income
10,519
13,187
Net income
10,519
13,187
2,652
3,972
967
3,249
(345)
(2,471)
13,793
17,937
Capital expenditure
(2,757)
(4,827)
Free cashflow
11,036
13,110
Acq/inv/disposals
(20,566)
(17,641)
(23,323)
(22,468)
Increase in loans
5,988
7,636
Dividends
0
0
9,549
16,213
15,537
23,849
6,007
19,318
Exch rate movements
(201)
80
Opening cash
32,880
38,686
Closing cash
38,686
58,084
Cash & equivalents
38,686
58,084
Debtors
2,221
3,664
Inventories
2,122
4,092
Fixed assets
5,370
8,705
Intangible assets
20,495
20,993
Other term assets
2,092
4,122
Total assets
70,986
99,662
Short-term debt
Creditors
Other current liabs
11,033
20,271
Long-term debt/CBs
17,229
23,507
2,058
1,378
2,240
2,980
Shareholder funds
38,425
51,526
70,986
99,662
Ratio analysis
43.2
53.6
10.2
21.2
Ebitda margin (%)
43.3
34.2
32.9
26.9
Dividend payout (%)
0.0
0.0
15.0
15.4
Net debt/equity (%)
(52.8)
(63.4)
ROE (%)
32.6
29.3
ROIC (%)
78.0
55.5
EVA/IC (%)
63.0
40.5
2015CL
2016CL
2017CL
66,263
15,335
10,731
1,456
0
510
12,697
(2,412)
1,400
11,685
83,988
22,076
16,289
1,409
0
194
17,892
(3,400)
350
14,843
108,824
30,123
22,848
1,839
0
605
25,291
(4,805)
280
20,766
11,685
4,604
3,495
1,458
21,242
(6,626)
14,616
(6,626)
0
0
14,616
0
58,084
72,699
14,843
5,787
664
1,848
23,141
(8,819)
14,323
(8,819)
0
0
14,323
0
72,699
87,022
20,766
7,276
1,261
2,394
31,697
(11,753)
19,944
(11,753)
0
0
19,944
0
87,022
106,966
72,699
4,950
5,288
12,476
19,245
4,122
118,781
26,247
23,507
1,378
2,980
64,668
118,781
87,022
6,274
6,519
17,256
17,496
4,122
138,690
29,467
23,507
1,378
2,980
81,358
138,690
106,966
8,130
8,244
23,482
15,748
4,122
166,692
34,309
23,507
1,378
2,980
104,518
166,692
35.1
(8.6)
23.1
17.6
0.0
19.0
(72.7)
20.1
49.1
34.1
26.7
44.0
26.3
17.7
0.0
19.0
(75.3)
20.3
72.7
57.7
29.6
36.4
27.7
19.1
0.0
19.0
(77.6)
22.3
88.4
73.4
Source: CLSA
3 November 2015
175

Baidu - BUY
China internet
Notes
176
3 November 2015

Ctrip
US$87.91 - UNDERPERFORM
Travel leader
Elinor Leung, CFA
Strong revenue growth plus margin improvement

Internet Research
+852 2600 8632
Ctrip has a near-monopoly in Chinas online travel market since becoming

the largest shareholder of eLong and Qunar. Ctrip/eLong/Qunar have an
80%-plus combined share in online travel revenue, a 60% share in air
ticketing and a 30% share in hotel reservations. Ctrip is still growing
volume and commission revenue at nearly 50% YoY. Margins are
recovering with improving profitability of baby-tiger projects, better
monetisation and less couponing. Non-Gaap Ebit margin could reach 30%
long term. Our US$96 target implies 9% upside and we maintain U-PF.
Man Ho Lam
+852 2600 8732
3 November 2015
Revenue growth accelerating

Despite a large base, Ctrip has accelerated revenue growth and marketshare
gains. It has upgraded its IT platform to penetrate the mass market faster
and more efficiently and opened its platform to third-party travel agents,
which now contribute over 60% of its air-ticket sales. It has also enriched its
outbound-travel products through partnerships with Priceline and Expedia,
setting up a local team overseas and investing in outbound-travel wholesalers
in China and SkySea Cruise.
China
Internet
Reuters
Bloomberg
ADR
CTRP.O
CTRP US
CTRP.O

HS CEI @ 10,439.4
12M hi/lo
Competition stabilising
Ctrip acquired a 48% voting right in eLong and a 45% voting right in Qunar
to help fend off competition from small players and new entrants. Ctrip and
eLong have reduced couponing at high-end hotels, which contribute 70% of
Ctrips total revenue, and Ctrip is shifting couponing to target low-end hotels
to grow mass-market share. Qunar is likely to follow a similar strategy.
US$90.78/41.16
12M price target

% potential
US$96.00
+9%
Shares in issue
Free float (est.)
131.7m
61.9%
Market cap
US$12,359m
Baby-tiger projects turning profitable

Hotel subsidies and heavy investment in new initiatives (baby-tiger projects)
depressed Ctrips earnings, but this is set to improve. Management expects
more than half of the projects to break even by end-2015 and most to be
profitable in 2016. Train ticketing is a huge success as it enhances Ctrips
one-stop-shop platform and helps cross-sell other products.
US$227.0m
(US$227.0m)

Major shareholders
Baidu Inc 25%

Priceline Group 9%

Absolute
Relative
Abs (US$)
100
90
80
1M
3M
12M
40.0
23.8
40.0
24.7
34.6
24.7
56.7
60.9
56.7
(US$)
(%)
Ctrip (LHS)
Rel to CEI
120
60
100
50
80
40
www.clsa.com
160
140
70
30
Nov 13
Jul 14
Source: Bloomberg
180
Mar 15
60
Oct 15
Upbeat on margins
Ctrip expects its non-Gaap Ebit margin to reach high single digits in 2015 and
return to a normalised level in 2017-18, due to strong volume growth,
improving baby-tiger profitability, innovation in customer analytics and falling
hotel couponing. Our US$96 SOTP-based target values the core business at
US$83/share on DCF, plus the Qunar and eLong stakes.
Financials
Year to 31 December
Revenue (Rmbm)
Net income (Rmbm)
EPS (fen)
EPS growth (% YoY)
PE (x)
Dividend yield (%)
FCF yield (%)
PB (x)
ROE (%)
Net debt/equity (%)
13A
5,717
998
758.5
45.4
71.3
0.0
2.5
8.3
13.3
(58.2)
14A
7,773
243
177.0
(76.7)
308.0
0.0
2.5
7.8
2.7
(9.2)
15CL
11,416
237
169.0
134
(4.5)
332.8
0.0
(0.4)
7.5
2.4
(5.6)
16CL
15,764
775
400.1
55
136.7
140.6
0.0
0.1
18.3
6.9
(6.1)
17CL
21,205
2,420
1,249.5
84
212.3
45.0
0.0
1.5
21.3
17.7
(15.6)
Source: CLSA

China internet
Ctrip - U-PF
Travel leader
Ctrip tops the download

ranking on Android,
according to CTCNN
Ctrip has a near-monopoly in Chinas online travel market with a wide lead on
mobile. As of 2Q15, mobile contributed about 80% of both ticketing and hotel
reservation volume. Currently about 70% of Ctrips traffic comes from mobile,
of which about 90% is organic from its own mobile app.
Mobile contributed 35%

of flights and 45% of
hotel bookings in 3Q14
Ctrip hotel bookings from mobile
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
(%)
1Q13
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
90
80
70
60
50
40
30
20
10
0
2Q13
1Q13
90
80
70
60
50
40
30
20
10
0
Ctrip flight bookings from mobile
(%)
Ctrips mobile app offers a wide variety of travel services, providing a onestop shop for travellers. The app even includes products outside of China,
allowing consumers to book overseas services in their native language.
Ctrips mobile app offers a complete suite of travel tools
Ctrip main menu
Trip management
(Left to right) Hotels (nearby

hotels, B&B), flights (booking,
flight status, check-in), train
tickets (China & intl)
Customer service
(Click to call)
Groupbuy (hotels, restaurants,

tickets), rental cars & taxis
(local & overseas), bus tickets
Weekend trips, attraction
tickets, restaurants & shopping
Packaged tours, Digital guides &
nearby places, gift cards, more
Switch between home, trip
management, customer services
Hotel reservation
Flight reservation & status
More services
(Top to bottom) Wealthmanagement products,

points redemption, visa,
insurance, golf, tour
guide, overseas Wi-Fi
178
3 November 2015

China internet
Ctrip - U-PF
Upbeat on margins
GPM (Gaap)
72
72
OPM (Gaap)
69
71
70
OPM (non-Gaap)
71
68
60
40
20
12
4
12
5
11
4
15
9
12
6
4Q15CL
3Q15CL
1Q15
3Q14
2Q14
1Q14
4Q14
(14) (8)
(21)
(40)
(1)
2Q15
(20)
90
80
70
60
50
40
30
20
10
0
(10)
(%)
GPM (Gaap)
74
75
26
16
OPM (Gaap)
71
70
70
24
16
5
OPM (non-Gaap)
70
16
11
20
15
(2)
17CL
(%)
72
16CL
80
15CL
100
Ctrip annual margins
2014
Ctrip quarterly margins
2013
OPM set to expand
Hotel subsidies, competition and heavy investments in new baby-tiger

initiatives depressed Ctrips margins in the past few quarters, but with strong
top-line growth, improved baby-tiger project profitability, better monetisation
through technology and reduced hotel couponing, we believe its margins are
set to expand. The company expects more than half of its baby-tiger projects
to break even by end-2015 and most to be profitable in 2016. Ctrip expects
its non-Gaap Ebit margin to reach high single digits for full-year 2015,
continue to improve in 2016 and return to a normalised level in 2017-18.
2012
Margins to improve on
top-line growth,
profitable baby tigers,
better monetisation,
less couponing
We value core business

at US$83/share
Stock has jumped since Qunar deal
Our DCF valuation yields US$83/share for the core business, using a 13%
WACC (4% risk-free rate, 1.5x beta, 6% equity-risk premium) and 4%
terminal growth (or 7.5x terminal EV/Ebit). Our sum-of-the-parts-derived
target of US$96 includes its stakes in eLong and Qunar and implies 9%
upside, as the shares have jumped 22% since the Qunar deal. The stock
trades at a high 89x non-Gaap 16CL fully diluted PE due to depressed
margins on baby-tiger projects and associates losses (eLong, Qunar). But we
believe earnings could see a 51% Cagr over 2017-19, with non-Gaap fully
diluted PE falling to 18.5x by 2019.
DCF valuation
Revenue growth (%)
Ebitda growth (%)
Ebitda margin (%)
Non-Gaap Ebit margin (%)
Capex/sale (%)
WACC (%)
Implied terminal value/Ebit (x)
Net cash (US$bn)
Equity value per ADR (US$)
Our SOTP valuation is

US$96, including eLong
and Qunar stakes
16CL
38.1
204.7
15.0
16.0
10.0
13.0
4.0
7.5
15.8
0.2
16.0
82.5
17CL
18CL
34.5
67.6
18.6
19.5
9.0
30.0
57.9
22.6
23.5
8.0
19CL
20CL
26.3
36.8
24.5
25.5
7.0
22.4
31.7
26.4
27.5
6.0
26CL
21.3
21.2
28.9
30.5
6.0
Cagr (%)
17-21CL
26.9
44.1
22-26CL
20.9
21.5
SOTP valuation
Ctrip
Qunar
eLong
Total
Shares (m)
Ctrip share
(%)
Business valuation
(US$bn)
SOTP (US$bn)
Per share (US$)
100.0
45.0
37.6
16.0
5.1
0.6
16.0
2.3
0.2
18.5
194
83
12
1
96
Source: CLSA
3 November 2015
179

China internet
Ctrip - U-PF
Valuation details
Our valuation is based on a sum-of-the-parts calculation comprising Ctrip's

core business and its stakes in Qunar and eLong. We value the core business
on a discounted-cashflow model, using a 13% WACC (4% risk-free rate, 1.5x
beta, 6% equity-risk premium, 0% debt/total capital) and 4% terminal
growth (or implied terminal value/Ebit of 7.5x).
Investment risks
The travel industry is inherently sensitive to global and Chinese economic

conditions. A slowing Chinese economy may have a negative impact on the
industry, but a rebalanced economic structure from investment-led to
consumption-driven should benefit it. A severe or prolonged downturn in the
economy, regional instability, calamities, etc, could affect the business.
Competition in the online travel industry in China is intense, characterised by
price wars. Ctrip also faces margin pressure from investments in new
businesses. Further, leisure travel and mobile migration are still at an early
stage. We believe the company will need to keep investing in new products
and technologies to maintain its leadership. Margin recovery could be slower
than we expect.
Stock price (US$)
Recommendation history of Ctrip.com International Ltd CTRP US

Elinor Leung, CFA
Other analysts
No coverage
100
BUY
U-PF
N-R
O-PF
SELL
80
60
40
20
Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14
Date
27 Oct 2015
23 Sep 2015
04 Aug 2015
22 May 2015
14 May 2015
05 May 2015
20 Mar 2015
16 Jan 2015
26 Nov 2014
07 Aug 2014
31 Jul 2014
Rec
U-PF
BUY
O-PF
O-PF
O-PF
O-PF
O-PF
U-PF
U-PF
BUY
O-PF
Target
96.00
85.00
85.00
83.00
76.00
70.00
55.00
51.00
60.00
78.00
71.00
Jan 15 May 15 Sep 15
Date
08 May 2014
13 Feb 2014
10 Jan 2014
06 Nov 2013
16 Sep 2013
13 Aug 2013
01 Aug 2013
09 May 2013
24 Apr 2013
04 Feb 2013
06 Nov 2012
Rec
O-PF
U-PF
U-PF
BUY
BUY
BUY
BUY
BUY
O-PF
O-PF
O-PF
Target
53.00
40.00
43.50
72.00
59.50
52.00
50.00
31.00
25.00
22.30
24.00
Source: CLSA
180
3 November 2015

China internet
Ctrip - U-PF
Summary financials
Year to 31 December
Strong revenue growth

with both hotel and
transport segments up
50% YoY in 2Q15
Issued US$1.1bn in
convertible notes in June
to beef up balance sheet
for competition
Large cash balance

following CB issue
Non-Gaap Ebit margin

could improve in 2016
and return to normalised
level in 2017-18
2013A

Revenue
5,717
Op Ebitda
1,270
Op Ebit
1,149
Interest income
143
Interest expense
0
Other items
Profit before tax
1,292
Taxation
(294)
Net income
998
Net income
998
121
1,069
265
2,453
Capital expenditure
(652)
Free cashflow
1,801
Acq/inv/disposals
(3,434)
(4,086)
Increase in loans
5,177
Dividends
0
2,336
7,514
5,880
Exch rate movements
34
Opening cash
5,598
Closing cash
11,513
Cash & equivalents
11,513
Debtors
1,518
Inventories
1,335
Fixed assets
1,413
Intangible assets
1,329
Other term assets
3,711
Total assets
20,818
Short-term debt
775
Creditors
1,638
Other current liabs
3,956
Long-term debt/CBs
5,657
63
200
Shareholder funds
8,530
20,818
Ratio analysis
29.7
34.8
Ebitda margin (%)
22.2
17.5
Dividend payout (%)
0.0
22.7
Net debt/equity (%)
(58.2)
ROE (%)
13.3
ROIC (%)
140.6
EVA/IC (%)
125.6
2014A
2015CL
2016CL
2017CL
7,773
476
231
142
0
0
374
(131)
243
11,416
702
305
80
0
385
(148)
237
15,764
1,677
1,086
102
0
1,188
(413)
775
21,205
3,840
3,008
106
0
3,114
(695)
2,420
243
245
1,913
346
2,746
(882)
1,864
(882)
2,409
0
(3,210)
(801)
1,063
0
11,513
12,576
237
397
(257)
480
857
(1,187)
(330)
(1,187)
8,364
0
0
8,364
8,034
0
12,576
20,610
775
591
(280)
544
1,630
(1,490)
140
(1,490)
0
0
140
0
20,610
20,750
2,420
832
(591)
820
3,481
(1,804)
1,677
(1,804)
0
0
1,677
0
20,750
22,427
12,576
1,827
2,674
5,221
2,561
6,433
31,291
3,560
2,304
6,850
8,066
133
849
9,529
31,291
20,610
2,683
3,837
6,010
2,561
6,433
42,133
3,560
3,173
7,743
16,430
133
649
10,446
42,133
20,750
3,705
5,224
6,910
2,561
6,433
45,582
3,560
4,425
8,620
16,430
133
449
11,966
45,582
22,427
4,984
6,960
7,884
2,561
6,433
51,249
3,560
5,618
9,852
16,430
133
269
15,388
51,249
36.0
(62.5)
6.1
3.1
0.0
35.0
(9.2)
2.7
7.1
(7.9)
46.9
47.4
6.1
2.1
0.0
38.4
(5.6)
2.4
4.2
(10.8)
38.1
139.0
10.6
4.9
0.0
34.8
(6.1)
6.9
12.7
(2.3)
34.5
129.0
18.1
11.4
0.0
22.3
(15.6)
17.7
33.7
18.7
Source: CLSA
3 November 2015
181

Ctrip - U-PF
China internet
Notes
182
3 November 2015

JD.com
US$27.69 - BUY
Groceries on demand
Elinor Leung, CFA
Focus on fresh-food delivery with JD Daojia

Internet Research
+852 2600 8632
JD launched its grocery-focused O2O brand JD Daojia in early 2015 after

partnering with local convenience stores and hypermarkets to deliver
fresh food using an on-demand O2O model. Meanwhile, packaged,
imported and premium foods are sold through its traditional e-commerce
channel. The business model reduces inventory risk and cold-chain capex.
The stocks valuation is cheap at 0.9x 16CL price/sales. We maintain our
High-Conviction BUY rating and DCF-based target of US$35.
Man Ho Lam
+852 2600 8732
New O2O brand JD Daojia

O2O brand JD Daojia launched in early 2015 after partnering with local
supermarkets, convenience stores and restaurants to handle and deliver
online orders. JD does not manage the products or services provided by thirdparty merchants, only handling the fulfilment portion. The platform is centred
on fresh food and groceries, but also provides takeout food and flower
delivery, as well as housekeeping, laundry, massage and beauty services.
3 November 2015
China
Internet
Reuters
Bloomberg
JD.OQ
JD US

HS CEI @ 10,439.4
Focus on groceries with crowdsourced trial deliveries

JD cooperates with local retail chains, convenience stores and hypermarkets
for its grocery offerings. Consumers place orders through smartphones. JD
will send its own, or a crowdsourced, delivery person to pick up and deliver
the products to a customer within two hours. JD is also experimenting with a
crowdsourced logistics model. People can work on a part-time, on-demand
basis. Orders are routed using an algorithm similar to that of ride-sharing
network Uber, with each courier earning Rmb6 per order, plus bonuses.
US$37.95/21.97
12M hi/lo
12M price target

% potential
US$35.00
+26%
Shares in issue
Free float (est.)
1,366.3m
23.1%
Market cap
US$38,287m
Minority stakes in Bitauto, Tuniu and Ele.me

JD has also invested in a number of non-grocery O2O companies. The most
notable is Ele.me, Chinas second-largest takeout food-delivery platform,
which JD transacted through a joint deal with Tencent, although there is little
collaboration between the two firms. JD also has minority stakes in Bitauto
(auto listings), Tuniu (package-tour provider) and Daojia.com.cn (another
takeout food-delivery site).
US$341.7m
(US$341.7m)

Major shareholders
Tencent 18.0%
Richard Liu Qiangdong 16.3%

Absolute
Relative
Abs (US$)
40
35
(US$)
1M
3M
12M
13.3
0.2
13.3
(16.8)
(10.2)
(16.8)
14.9
18.0
14.9
JD.com (LHS)
Rel to CEI
(%)
170
160
150
140
30
130
25
120
110
20
15
May 14
Nov 14
Source: Bloomberg
www.clsa.com
100
May 15
90
Oct 15
Valuation is attractive
JDs valuation is attractive. It is cheaper than Alibaba, at 20% of its market
cap, but its gross-merchandise volume (GMV) is 35% of Tmalls. Our US$35
DCF-based target equates to 1.2x 16CL price/sales, which is similar to
Vipshop, but at a discount to Amazon. We remain High-Conviction BUYers.
Financials
Year to 31 December
Revenue (Rmbm)
Net income (Rmbm)
EPS (fen)
EPS growth (% YoY)
PE (x)
Dividend yield (%)
FCF yield (%)
PB (x)
ROE (%)
Net debt/equity (%)
13A
69,340
(2,485)
(146.7)
nm
nm
0.0
1.6
83.7
(165.4)
(106.9)
14A
115,002
(12,954)
(535.4)
nm
nm
0.0
(0.9)
5.5
(66.1)
(40.1)
15CL
179,227
(2,583)
(94.5)
(2,363)
nm
nm
0.0
0.4
6.5
(6.9)
(20.5)
16CL
256,450
(311)
(11.4)
(8)
nm
nm
0.0
1.6
6.1
(0.8)
(28.7)
17CL
343,010
3,275
119.8
34
nm
73.9
0.0
3.4
5.2
7.6
(42.4)
Source: CLSA

China internet
JD.com - BUY
JD launched its O2O

brand JD Daojia in
early 2015
Focus on groceries
JD.com launched O2O brand JD Daojia () in early 2015. The service

was first tested in Beijing in April this year, later rolling out in the tier-one
cities of Shanghai, Guangzhou and Shenzhen, as well as several tier-two
cities. The platform is centred on fresh food and groceries, but also provides
takeout-food and flower delivery, and housekeeping, laundry and beauty
services. JD does not manage products or services provided by third-party
merchants but handles fulfilment on some verticals, such as groceries. Buyers
place orders through smartphones. JD sends its own, or crowdsourced,
logistics staff to deliver goods to shoppers located within 3km and two hours.
JD Daojia screenshots
Main menu
Pick a supermarket
Select products
Pick a restaurant
Select a dish
Order fast food
Pick your Whopper
Order home cleaning
Order massage
Order beauty
Source: JD Daojia, CLSA
184
JDs online grocery

vertical provides
a one-stop foodshopping platform
JDs grocery strategy is a hybrid of the online supermarket and O2O models,
providing a one-stop food-shopping platform. Standardised, dry food and
imported/premium fresh food are sold through its online supermarket.
Meanwhile, daily fresh-food offerings benefit from its O2O model. This
model enables JD to reduce inventory risk and cold-chain expenditure. Its
recent investment in FruitDay and acquisition of a 10% stake in Yonghui
Superstores will further enhance its online-grocery strategy.
JD is experimenting
with a crowdsourced
logistics model
JD is also experimenting with a crowdsourced logistics model for fresh-food

delivery. It already has a large, countrywide network of local couriers for its
e-commerce service, which handles most of JD Daojias deliveries. JD is also
recruiting people who are over the age of 18 and have a smartphone to work
on a part-time, on-demand basis. Orders are managed and routed using an
algorithm similar to that of ride-sharing network Uber, with each courier
earing Rmb6 per order, plus bonuses.
3 November 2015

China internet
JD.com - BUY
Online supermarket model
Supplier
On demand, online-to-offline model
Supplier
Entirely
in house
Regional DCs
Central fulfilment centre
Local stores
Regional DCs
Customer
Customer
Local stores
Local stores
O2O
Customer
Operated by
third party
Suppliers
O2O
Customer
Customer
Customer
Source: CLSA
JD delivery team dressed in Daojia uniforms
JD fulfilment staff sorting Daojia fresh-food orders
Source: JD Daojia, CLSA
Valuation is cheaper
than Alibaba
Valuation is attractive
JDs valuation is attractive. It is cheaper than Alibaba, at only 20% of its

market cap, but its GMV is 35% that of Tmalls. Our DCF valuation yields an
equity value of US$48bn, or US$35 per share, which equates to 1.2x 16CL
price/sales (P/S) and 24x 16CL normalised PE, assuming a 5% non-Gaap net
margin. This is similar to Vipshop, which currently trades at 1.3x P/S and is a
discount to Amazons 2.2x in 16CL.
DCF summary
Discounted to Jun 2016
16CL
17CL
18CL
25CL
Revenue growth (%)

Ebitda growth (%)
Ebitda margin (%)
Capex/sales (%)
WACC (%)
Terminal-growth rate (%)
Net cash (US$bn)
Equity value (US$/share)
43.1
nm
1.0
3.0
13.0
4.0
7.2
47.2
3.3
48.4
35.4
33.8
188.2
2.1
2.5
29.1
102.7
3.4
2.5
20.5
13.7
4.9
2.5
Cagr
(16-20CL)
30.4
(348.8)
Cagr
(21-25CL)
21.0
19.6
Source: CLSA
3 November 2015
185

China internet
JD.com - BUY
Our DCF valuation

yields an equity
value of US$48bn
Risks to our view include

a slowdown in the
Chinese economy
Valuation details
We value JD based on a DCF model, P/S and normalised PE. Our DCF
valuation yields an equity value of US$48bn or US$35/share using a 13%
WACC (4% risk-free rate, 1.5x beta, 6% equity-risk premium) and terminal
growth rate of 4% (implied terminal EV/Ebit of 7.2x).
Investment risks
Key investment risks include: the slowing Chinese economy, which may
impact consumption; intense competition in China's e-commerce industry,
especially from Alibaba; and continuous investment, such as in O2O and efinance, which may delay JD from achieving profitability.
Stock price (US$)
Recommendation history of JD.com Inc JD US

Elinor Leung, CFA
Other analysts
No coverage
40
BUY
U-PF
N-R
O-PF
SELL
35
30
25
20
Jul 14
Date
31 Aug 2015
09 May 2015
10 Sep 2014
Oct 14
Rec
BUY
BUY
BUY
Jan 15
Target
35.00
40.00
37.10
Apr 15
Date
12 Jun 2014
27 May 2014
Jul 15
Rec
BUY
BUY
Oct 15
Target
35.80
24.50
Source: CLSA
186
3 November 2015

China internet
JD.com - BUY
Summary financials
Year to 31 December
Revenue could enjoy a

44% three-year Cagr to
Rmb343bn by 2017
While JD is barely
profitable, its free
cashflow has already
turned positive
Overall inventory days

remained stable at
around 34-35 days
Account payable on
direct-sales business
stands at 42.5 days
2013A
2014A

Revenue
69,340
115,002
Op Ebitda
(286)
(4,152)
Op Ebit
(579)
(5,803)
Interest income
344
638
Interest expense
(8)
(29)
Other items
194
217
Profit before tax
(50)
(4,977)
Taxation
0
(19)
(2,435)
(7,958)
Net income
(2,485)
(12,954)
Net income
(2,485)
(12,954)
2,435
7,958
293
1,651
3,111
(13)
216
4,374
3,570
1,015
Capital expenditure
(1,292)
(2,902)
Free cashflow
2,278
(1,887)
Acq/inv/disposals
(1,379)
(10,301)
(2,671)
(13,203)
Increase in loans
75
944
Dividends
0
0
2,720
17,448
2,795
18,392
3,694
6,204
Exch rate movements
(59)
(101)
Opening cash
7,177
10,812
Closing cash
10,812
16,915
Cash & equivalents
10,812
16,915
Debtors
1,272
3,490
Inventories
6,386
12,191
2,122
14,308
Fixed assets
2,861
5,405
Intangible assets
230
9,500
Other term assets
2,326
4,685
Total assets
26,010
66,493
Short-term debt
933
1,891
Creditors
11,019
16,364
Other current liabs
4,818
10,741
Long-term debt/CBs
0
0
7,517
0
Shareholder funds
1,722
37,498
26,010
66,493
Ratio analysis
67.6
65.9
nm
nm
Ebitda margin (%)
(0.4)
(3.6)
(3.6)
(11.3)
Dividend payout (%)
0.1
(0.4)
Net debt/equity (%)
(106.9)
(40.1)
ROE (%)
(165.4)
(66.1)
ROIC (%)
(54.9)
EVA/IC (%)
0.0
(69.4)
2015CL
2016CL
2017CL
179,227
1,110
(3,078)
494
(57)
68
(2,572)
(10)
(2,583)
256,450
4,036
(1,034)
759
(57)
20
(311)
(311)
343,010
8,849
2,757
892
(57)
261
3,853
(578)
3,275
(2,583)
0
4,188
4,787
950
7,342
(6,273)
1,069
(8,450)
(14,723)
0
0
(7,381)
16,915
9,534
(311)
0
5,070
5,359
1,359
11,477
(7,694)
3,784
(7,694)
0
0
3,784
9,534
13,317
3,275
0
6,092
5,668
1,818
16,853
(8,575)
8,278
(8,575)
0
0
8,278
13,317
21,595
9,534
5,438
18,999
15,277
10,448
8,021
11,685
79,402
1,891
25,253
14,913
0
0
37,345
79,402
13,317
7,782
27,185
16,441
16,030
6,542
11,685
98,983
1,891
35,751
21,469
0
0
39,873
98,983
21,595
10,408
36,361
17,747
21,472
5,063
11,685
124,331
1,891
47,307
28,689
0
0
46,445
124,331
55.8
nm
0.6
(1.4)
(0.4)
(20.5)
(6.9)
(14.0)
(28.5)
43.1
263.5
1.6
(0.1)
0.0
(28.7)
(0.8)
(4.8)
(19.3)
33.8
119.2
2.6
1.0
0.0
15.0
(42.4)
7.6
11.7
(2.8)
Source: CLSA
3 November 2015
187

JD.com - BUY
China internet
Notes
188
3 November 2015

Qunar
US$46.27 - SELL
Frustrated No.2
Man Ho Lam
Future growth potential could be limited
man.ho.lam@clsa.com
+852 2600 8732
Qunar is Chinas No.2 online travel agency after Ctrip, with a 27% market
share in air ticketing and 10% in hotel reservations. Qunar will continue
to operate as an independent listed company following Ctrips acquisition
of a 45% voting right, but its long-term growth potential could be limited
with Ctrip as the largest shareholder. Reduced competition is positive for
near-term financials and we expect sales and marketing losses to narrow
and platforms to enjoy synergies such as hotel inventory sharing. We
maintain our SELL call and US$40 DCF-based target.
Elinor Leung, CFA

Internet Research
+852 2600 8632
3 November 2015
Qunar benefits from consolidation, but future could be limited

Ctrip has acquired a 45% voting right in Qunar, but both firms will operate
independently and compete in various markets. Although we believe Qunar
will benefit from reduced competition, which will allow it to cut marketing
costs, its future growth potential could be limited. The outcome of the CtripBaidu-Qunar deal could be similar to Ctrip-Expedia-eLong, where the market
reacted positively at first but eLongs share price subsequently corrected.
China
Internet
Reuters
Bloomberg
QUNR.OQ
QUNR US

HS CEI @ 10,439.4
12M hi/lo
Aggressive offline marketing to boost user growth

Qunars impressive sales growth saw flight revenue up 85% YoY in 2Q15 and
hotel revenue up 262%. This was driven by aggressive offline marketing.
Qunar sends teams to hotels and tourist attractions to meet travellers and
help them download its mobile app, open accounts and register their payment
cards. In return, users receive red packet discounts.
US$52.89/24.14
12M price target

% potential
US$40.00
-14%
Shares in issue
Free float (est.)
130.9m
27.2%
Market cap
US$6,059m
Using merchant model to tap high-end market

Qunar launched a merchant model in 3Q15, under which the company bears
inventory risk on packages and hotels in popular destinations during peak
season. Revenue is booked on a gross basis and as such, margin will narrow.
However, management expects no impact on gross profit. This could help
Qunar secure four- or five-star hotel rooms to attract high-end users, but
may add inventory risk in the current weak macro environment.
US$73.0m
(US$73.0m)

Major shareholders
Ctrip.com 45.0%
Chenchao (CC) Zhuang 6.5%

Absolute
Relative
Abs (US$)
55
50
1M
3M
12M
65.4
46.3
65.4
14.9
24.1
14.9
67.6
72.2
67.6
(US$)
(%)
Qunar (LHS)
Rel to CEI
45
130
35
110
30
90
25
www.clsa.com
170
150
40
20
Nov 13
Jul 14
Source: Bloomberg
190
Mar 15
70
Oct 15
Widening losses
Qunars losses have widened over the past few quarters due to a jump in
marketing costs that could continue until mid-2016. Management reiterated
its target of achieving non-Gaap Ebit profitability on a quarterly basis by end2016. We maintain our SELL call to a US$40 target, based on a DCF valuation
that uses a 13% WACC and 4% terminal-growth rate.
Financials
Year to 31 December
Revenue (Rmbm)
Net income (Rmbm)
EPS (fen)
EPS growth (% YoY)
PE (x)
Dividend yield (%)
FCF yield (%)
PB (x)
ROE (%)
Net debt/equity (%)
13A
851
(187)
(112.7)
nm
nm
0.0
(1.0)
20.8
(88.4)
(65.6)
14A
1,757
(1,847)
(748.9)
nm
nm
0.0
(5.4)
(197.0)
(309.9)
358.5
15CL
3,895
(3,340)
(1,803.3)
91
nm
nm
0.0
(16.2)
282.0
16,562.0
(344.6)
16CL
6,274
(1,163)
(527.7)
70
nm
nm
0.0
(11.6)
(59.1)
442.0
(191.2)
17CL
9,404
(174)
261.9
90
nm
37.7
0.0
(2.3)
(145.7)
37.7
(597.0)
Source: CLSA

China internet
Qunar - SELL
Pure play on travel O2O
Qunar is a pure play on travel O2O services. It provides consumers with a

one-stop service, offering a wide variety of travel options in a single
smartphone app. They can buy transport and attraction tickets and also
reserve rental cars and accommodation. Qunar is Chinas No.2 online-travel
agency (OTA) after Ctrip, with a 27% market share in flight ticketing and
10% in hotel reservations.
Qunar is a pure play on

travel O2O services
Qunar mobile app has a wide range of travel tools

Qunar main menu
(Left to right) Daily specials,

apartments, by-the-hour-hotels,
airport pickup
Order management
Voice commands
(powered by Baidu)
Hotels, flights (booking, price

trends, status, check-in)
Weekend trips, group-buy
attraction tickets, guides
Car rentals, package tours, train
tickets, photo sharing, local tour
guides
Switch between home, trip
management, voice search,
discovery, account services
Source: Qunar, CLSA
Smartphones are
revolutionising the
travel industry
Smartphones are revolutionising the travel industry. Mobile traffic is opening

up new possibilities for OTAs, enabling them to go beyond the traditional
planning and booking process on PCs to open up new revenue streams.
Through mobile, OTAs can offer a full range of travel services in one app and
collect information, such as customer location, to explore big-data
possibilities. Smartphone hardware, such as cameras and microphones, also
allows OTAs to develop new technologies. It provides new means of
interaction between on-the-go travellers, OTAs and service providers. This
increases customer engagement and stickiness, which help to lower
marketing costs and improve future margin.
Mobile is Qunars biggest

revenue contributor
Mobile comprises 68% of Qunars revenue, with the channel providing 52% of
flight-ticket volume and 85% of hotel-room bookings in 2Q15. Qunars
mobile-revenue growth reaccelerated in 2Q despite a high base, largely
driven by the companys aggressive offline marketing, where users received
red packet discount promotions for mobile bookings.
2Q15
1Q15
4Q14
3Q14
2Q14
20
10
1Q14
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
30
Flight volume
Hotel room nights
4Q13
100
100
40
3Q13
200
200
50
(%)
2Q13
300
60
2Q15
300
70
1Q15
400
400
90
80
70
60
50
40
30
20
10
0
(%)
4Q14
500
Mobile contribution to volume
80
3Q14
500
Mobile contribution to revenue
2Q14
600
1Q14
600
(%)
4Q13
Mobile revenue
YoY (RHS)
3Q13
(Rmbm)
1Q13
700
2Q13
Mobile revenue
Source: CLSA
190
man.ho.lam@clsa.com
3 November 2015

China internet
Qunar - SELL
Qunar has taken steps

to widen its lead in
mobile technology
Cooperation with Baidu on mobile map app

Qunar has taken many steps to widen its lead in mobile technology. Its
involvement in Baidus mobile map app is an example of is effort to capture
this market. Qunars results are fully integrated into Baidu Map, such that
when travellers search for hotel in Beijing, they can instantly make a booking
within the Baidu app via smartphone.
Baidu-Qunar cooperation in Baidu Map app

Hotel selection
Room/agent selection
Hotel information
Reservation form
Source: Baidu, Qunar, CLSA
Our DCF valuation yields

an equity value of
US$40 per share
DCF valuation
Our DCF valuation yields an equity value of US$40 per share, using 13%
WACC (4% risk-free rate, 1.5x beta, 6% equity-risk premium) and 4%
terminal growth (6.4x terminal EV/Ebit). Our DCF valuation assumptions are
consistent with those we use for peer Ctrip.
DCF valuation
Revenue growth (%)
16CL
17CL
18CL
19CL
20CL
26CL
Cagr (%)
17-21CL
22-26CL
61.1
49.9
33.9
26.1
22.3
17.0
30.5
19.0
Ebitda growth (%)
(68.3)
(104.6)
1,876.2
162.5
33.1
19.2
nm
24.4
Ebitda margin (%)
(16.5)
0.5
7.5
15.6
17.0
24.2
Non-Gaap Ebit margin (%)
(11.3)
5.5
12.0
19.7
20.8
26.8
9.0
9.0
8.0
7.0
6.0
5.0
Capex/sales (%)
WACC (%)
13.0
4.0
Implied terminal value/Ebit (x)
6.4
5.8
Net cash (US$bn)

Equity value per ADR (US$)
(0.1)
5.7
40.5
Source: CLSA
3 November 2015
man.ho.lam@clsa.com
191

China internet
Qunar - SELL
We base our valuation

on a DCF model
Chinas slowing economy

may negatively impact
the travel industry
Valuation details
Our valuation is based on a discounted-cashflow model, using a 13% WACC

(4% risk-free rate, 1.5x beta, 6% equity-risk premium, 0% debt/total capital)
and 4% terminal growth (or implied terminal value/Ebit of 6.4x).
Investment risks
The travel industry is inherently sensitive to global and Chinese economic

conditions. The slowing Chinese economy may have a negative impact on the
industry, but a rebalanced economic structure from investment-led to
consumption-driven will benefit it. A severe or prolonged economic downturn,
regional instability, calamities, etc, could affect the business. Competition in
the online travel industry in China is intense, characterised by price wars.
Qunar also faces margin pressure from investments in new businesses.
Further, leisure travel and mobile migration are still at an early stage. We
believe the company will need to keep investing in new products and
technologies to maintain its leadership. Margin recovery could be slower than
we expect.
Stock price (US$)
Recommendation history of Qunar Cayman Islands Ltd QUNR US

Man Ho Lam
Other analysts
No coverage
BUY
U-PF
N-R
O-PF
SELL
50
40
30
20
Jan 14
Date
27 Oct 2015
25 Aug 2015
02 Jun 2015
22 May 2015
Apr 14
Rec
SELL
U-PF
U-PF
U-PF
Jul 14
Oct 14
Target
40.00
36.00
50.00
50.30
Jan 15
Apr 15
Date
05 May 2015
17 Mar 2015
09 Feb 2015
Jul 15
Rec
U-PF
BUY
O-PF
Oct 15
Target
50.00
36.00
34.00
Source: CLSA
192
man.ho.lam@clsa.com
3 November 2015

China internet
Qunar - SELL
Summary financials
Year to 31 December
2013A

Revenue
851
Op Ebitda
(131)
Op Ebit
(153)
Interest income
5
Interest expense
0
Other items
3
Profit before tax
(146)
Taxation
(41)
Net income
(187)
Net income
(187)
23
41
63
(60)
Capital expenditure
(39)
Free cashflow
(99)
Acq/inv/disposals
(485)
(525)
Increase in loans
(50)
Dividends
(5)
1,487
1,432
847
Exch rate movements
(16)
Opening cash
149
Closing cash
980
Cash & equivalents
980
Debtors
341
Inventories
85
Fixed assets
46
Intangible assets
0
Other term assets
673
Total assets
2,125
Short-term debt
86
Creditors
10
Other current liabs
609
Long-term debt/CBs
58
0
Shareholder funds
1,362
2,125
Ratio analysis
69.6
nm
Ebitda margin (%)
(15.4)
(22.0)
Dividend payout (%)
(28.1)
Net debt/equity (%)
(65.6)
ROE (%)
(88.4)
ROIC (%)
(78.9)
EVA/IC (%)
(93.9)
2014A
2015CL
2016CL
2017CL
1,757
(1,793)
(1,845)
31
0
(16)
(1,829)
(18)
(1,847)
3,895
(2,848)
(2,901)
0
(28)
(391)
(3,320)
(20)
(3,340)
6,274
(982)
(1,086)
0
(52)
(1,138)
(25)
(1,163)
9,404
134
(47)
0
(87)
(134)
(40)
(174)
(1,847)
52
391
968
(436)
(164)
(599)
394
231
0
15
15
(190)
23
980
813
(3,340)
54
1,035
331
(1,920)
(351)
(2,271)
(500)
(851)
5,040
0
2,608
7,648
4,877
813
5,690
(1,163)
104
(457)
376
(1,139)
(565)
(1,704)
(565)
0
0
(1,704)
5,690
3,986
(174)
181
(59)
564
513
(846)
(333)
(846)
0
0
(333)
3,986
3,653
813
578
323
252
3
298
2,268
201
26
2,139
72
0
(171)
2,268
5,690
1,282
639
1,049
3
298
8,962
201
45
3,474
5,040
72
0
130
8,962
3,986
2,066
990
1,510
3
298
8,854
201
48
4,149
5,040
72
0
(657)
8,854
3,653
3,097
1,453
2,175
3
298
10,679
201
59
5,573
5,040
72
0
(266)
10,679
106.5
nm
(102.0)
(105.1)
(1.0)
358.5
(309.9)
0.0
121.7
nm
(73.1)
(85.8)
(0.6)
(102.8)
(344.6)
16,562.0
0.0
61.1
nm
(15.6)
(18.5)
(2.2)
(18.7)
(191.2)
442.0
(524.5)
(539.5)
49.9
nm
1.4
(1.8)
0.0
(29.9)
1.6
(597.0)
37.7
(5.9)
(20.9)
Source: CLSA
3 November 2015
man.ho.lam@clsa.com
193

Qunar - SELL
China internet
Notes
194
man.ho.lam@clsa.com
3 November 2015

Tencent
HK$148.00 - BUY
Extensive partnerships
Elinor Leung, CFA
Positioning Weixin as a one-stop O2O services platform

Internet Research
+852 2600 8632
Tencent is the most active acquisitor of O2O service providers and an

early mover in the space. It has minority stakes in Dianping, Ele.me,
58.com, Didi-Kuaidi, Tongcheng and eLong, offering their services on the
Weixin and Mobile QQ platforms. Through its alliances, Tencent minimises
investment costs while providing a wide range of O2O offerings.
However, its partners could fail to catch on with users and may not share
their data with Tencent. We maintain our BUY call and HK$185 target.
Man Ho Lam
+852 2600 8732
Extensive O2O partnership

Tencent is building an extensive O2O ecosystem by partnering with leading
players such as Dianping (group-buying site), Ele.me (takeout-food delivery),
58.com (home and beauty services), Didi-Kuaidi (car hailing) and Tongcheng
(travel). The strategy minimises investment outlay while enabling Tencent to
provide a wide range of O2O services to its users. However, some partners
may not be successful and they might not fully share their data with Tenent.
3 November 2015
China
Internet
Reuters
Bloomberg
0700.HK
700 HK

HS CEI @ 10,439.4
12M hi/lo
Weixin as O2O service gateway

Most Tencent-backed O2O services are accessible on Weixin and Mobile QQ.
In our proprietary O2O user study, respondents named Weixin and Alipay as
their top choices among one-stop services platforms which feature a unified
user interface and search function. Their singularity creates a closed-loop
system which can track user trends of social-media sharing, orders,
payments, consumption and written reviews made via the Weixin app.
HK$170.50/105.30
12M price target

% potential
HK$185.00
+25%
Shares in issue
Free float (est.)
9,160.0m
56.4%
Market cap
US$179,536m
Major shareholders
Investment through partnerships

Tenent is among the few internet companies with a widening margin. It
devotes the most subsidy spend to taxi-hailing app Didi Dache, but is starting
to scale back. Tencent largely invests through partnerships, through which it
can leverage third-party capital and infrastructure to grow O2O services on its
platform. Payments and e-finance represent its core investment areas.
BUY with a HK$185 target

Tencents share price has held up relatively well. It has a reasonable valuation
of 30x 16CL PE with a 25% three-year EPS Cagr. Advertising and mobile
games could surprise. Margin will continue to widen, given social-ad revenue
and investment through partnerships. Our DCF-based HK$185 target assumes
a 13.0% WACC and 4.0% terminal growth and we maintain our BUY call.
HK$2,829.2m
(US$365.0m)
Naspers 33.6%
Ma Huateng 10.0%
Absolute
Relative
Abs (US$)
190
170
(HK$)
1M
3M
12M
16.3
2.8
16.3
2.5
10.7
2.5
21.6
24.9
21.7
Tencent (LHS)
Rel to CEI
175
165
145
130
135
125
110
115
105
90
www.clsa.com
185
155
150
70
Nov 13
Jul 14
Source: Bloomberg
(%)
95
Mar 15
85
Oct 15
Financials
Year to 31 December
Revenue (Rmbm)
Net profit (Rmbm)
EPS (fen)
EPS growth (% YoY)
PE (x)
Dividend yield (%)
FCF yield (%)
PB (x)
ROE (%)
Net debt/equity (%)
13A
60,437
15,502
169.4
21.3
69.2
0.2
1.8
18.5
31.2
(49.5)
14A
78,932
23,810
258.9
52.8
45.7
0.2
2.5
13.7
34.5
(35.2)
15CL
97,251
28,445
308.1
95
19.0
39.7
0.3
3.2
10.4
30.2
(56.5)
16CL
120,627
37,406
405.2
96
31.5
30.2
0.4
4.4
7.8
29.5
(72.8)
17CL
148,433
47,811
517.9
96
27.8
23.6
0.5
5.4
5.9
28.3
(83.9)
Source: CLSA

China internet
Tencent - BUY
Tencent is building an
O2O ecosystem through
partnerships
Extensive O2O partnerships
Tencent is building an extensive O2O ecosystem through partnerships with

companies that include Dianping (restaurant and group buying), Ele.me
(takeout-food delivery), 58.com (classifieds portal), Didi-Kuaidi (taxi and car
hailing) and Tongcheng (travel). The strategy minimises its investment outlay
while enabling it to leverage the coverage and infrastructure of its partners to
provide O2O services to Tencent users. The risk is that partners may not be
successful and they might not fully share their data with Tencent.
Tencent's selected O2O investments

Company
Local services
58.com
iDaixi
eJiajie
Meijiabang
Ayibang
Roseonly
Weipiao
Food-related
Dianping
Ele.me
Healthcare-related
Guahao.com
Dxy.com
Travel-related
LY.com
Didi Dache
eLong
Name
Company description
Holding (%)
Value
(US$m)
58
e
e
Date invested
Classified portal, with O2O subsidiary 58 Home

Laundry service
Housekeeping service
Online home-decorating platform
Cleaning services
O2O flower delivery
Movie channel on Weixin
26
na
na
na
na
na
na
1,301
20
22
millions
millions
millions
10+
Yelp-like review portal, to merge with Meituan

Online takeout delivery
20
20
400
200+
2014 to present
Jan, Aug 2015
Doctor-appointment app
Online healthcare community
na
na
100+
70
2014 to present
Sep 2014
Online travel agent

Taxi-hailing app, subsequently merged with Kuaidi
Online travel agent; Tencent proposed to privatise
30
20
16
800+
395
84
2012 to present
2013 to present
2011 to present
Throughout 2014
Jul 2014
2014 to present
Jun 2015
Jan 2010
Oct 2013
Jul 2014, Apr 2015
Shareholding and investment values are estimates. Source: Media reports, CLSA
Four of its partners

O2O services are
offered on Weixin
Weixin as O2O service gateway
Most Tencent-backed services are accessible on Weixin and Mobile QQ.

Though the level-two menu under Weixins wallet tab, users can search for
nearby restaurants and purchase group-buying products (Dianping), call a
taxi (Didi), book movie tickets (Weipiao) and buy air/train tickets
(Tongcheng). Home-based services (via 58.com) such as housecleaning,
moving and car washing are currently only on Mobile QQ, but could be
integrated to Wexin in the future.
O2O functions within Weixin app

Me
4 secondary tabs under
me:
1) Albums (users moments)
2) Collection (contents saved)
3) Wallet (a tertiary tab)
4) Cardbook (coupons)
Wallet
14 links under wallet:

1) Phone bill top up
2) Licaitong (wealth mgmt)
3) Lottery
4) Didi Dache (taxi hailing)
5) Meilishuo (female curator)
6) JD
7) Q-coin top-up
8) Weixin red packets
9) Dianping
10) Credit-card repayments
11) Charity donations
12) Movie tickets
4 primary tabs:
1) Chat messages
2) Contact list
3) Discovery
4) Me
13) Bill settlement

14) Air/train tickets
Source: Weixin, CLSA
196
3 November 2015

China internet
Tencent - BUY
Our respondents like

to access O2O services
on Weixin
Weixin among top the two

preferred one-stop O2O
service platforms
In our proprietary survey, respondents named Weixin as one of their top

two choices for a one-stop, O2O services platform which features a unified
user interface and search function. It is favourable for Tencent which can
create closed-loop transactions and track user trends of social-media
sharing, orders, payments, consumption and written reviews made via the
Weixin app.
Do you prefer a consolidated O2O
service platform?
If consolidated under a big platform,

which app do you prefer?
Alipay
Weixin
Separately
run for
better
service
quality
27%
Taobao
Meituan
QQ
Dianping
Baidu Nuomi
Consolidate
under a big
platform
73%
Mobile Baidu
Baidu Map
58
(%)
JD
0
20
40
60
80
Source: CLSA
Valuation remains
reasonable
Maintain BUY and HK$185 target
Tencents share price has held up relatively well amid the recent market
correction. Yet its valuation remains reasonable at 30x 16CL PE against
a 25% three-year EPS Cagr. Ad and mobile games could surprise.
Margin will continue to expand with growing social-advertising revenue
and investment through partnerships. We maintain our BUY call and
HK$185 target.
DCF valuation
16CL
17CL
18CL
19CL
20CL
26CL
17-21CL
22-26CL
Revenue growth (%)
22.5
20.6
21.0
20.2
19.3
17.3
19.6
17.1
Ebitda growth (%)
21.3
22.7
19.7
19.1
18.4
17.8
19.3
17.6
Ebitda margin (%)
45.3
46.1
45.6
45.2
44.9
45.6
6.5
6.0
6.0
6.0
6.0
6.0
Capex/sales (%)
WACC (%)
Net cash (US$bn)
Cagr (%)
13.0
4.0
10.4
209
11
219
Equity value/share (HK$/share)
185
Source: CLSA
3 November 2015
197

China internet
Tencent - BUY
Our target price on

Tencent is at HK$185
Valuation details
We value Tencent using a DCF approach, assuming a 13.0% WACC (4.0%

risk-free rate, 1.5 beta, 6.0% equity-risk premium) and 4.0% terminal
growth (implied terminal EV/Ebit of 10.4x). We also adopt a sum-of-the parts
valuation where we use a 28x PE multiple for mobile and 25x for PC into
2018. Some 30% of our SOTP valuation is from mobile games, 20% from
mobile ads and payment and 50% from the traditional PC business.
Investment risks
Risks include: margin pressure from new investments including online

finance, healthcare, O2O, etc; a structural decline in the PC-game industry;
intense competition in mobile games as the market becomes saturated; and
uncertainty around monetising WeChat, which is still at an early stage.
Stock price (HK$)
Recommendation history of Tencent Holdings Ltd 700 HK

Elinor Leung, CFA
Other analysts
No coverage
200
BUY
U-PF
N-R
O-PF
SELL
150
100
50
Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14
Date
13 Aug 2015
27 Apr 2015
29 Jul 2014
28 Jul 2014
20 Mar 2014
11 Mar 2014
Rec
BUY
BUY
BUY
BUY
BUY
O-PF
Target
185.00
195.00
160.00
150.00
140.00
140.00
Jan 15 May 15 Sep 15
Date
09 Jan 2014
16 Sep 2013
11 Aug 2013
04 Jul 2013
21 Mar 2013
Rec
O-PF
O-PF
O-PF
O-PF
O-PF
Target
116.00
93.00
76.00
68.60
62.40
Source: CLSA
198
3 November 2015

China internet
Tencent - BUY
Summary financials
Year to 31 December
Margins likely to continue

to improve with
increasing ad revenue
from social platform
Investment likely to be
high as Tencent builds
O2O network through
partnerships
Solid cash generation

and cash balance
Non-Gaap operating
margin remains above
40% over 15-17CL
2013A
2014A

Revenue
60,437
78,932
Op Ebitda
20,566
30,904
Op Ebit
16,976
26,107
Interest income
0
0
Interest expense
(84)
(1,182)
Other items
2,389
4,088
Profit before tax
19,281
29,013
Taxation
(3,718)
(5,125)
Minorities/Pref divs
(61)
(78)
Net profit
15,502
23,810
Operating profit
16,976
26,107
3,590
4,797
5,915
13,210
Net interest/taxes/other
(2,107)
(11,403)
24,374
32,711
Capital expenditure
(4,788)
(5,799)
Free cashflow
19,586
26,912
Acq/inv/disposals
(4,456)
(6,000)
Int, invt & associate div
(9,890)
(16,589)
(19,134)
(28,388)
Increase in loans
4,699
18,071
Dividends
(1,468)
(2,648)
5,905
(855)
9,136
14,568
14,376
18,891
Exch rate movements
(103)
(188)
Opening cash
29,709
43,982
Closing cash
43,982
62,685
Cash & equivalents
43,982
62,685
Debtors
2,955
4,588
Inventories
1,384
244
5,365
7,804
Fixed assets
8,693
7,918
Intangible assets
4,103
9,304
Other term assets
40,753
78,623
Total assets
107,235
171,166
Short-term debt
2,589
3,215
Creditors
16,926
29,640
Other current liabs
13,752
17,180
Long-term debt/CBs
12,464
30,535
3,041
8,472
518
2,111
Shareholder funds
57,945
80,013
107,235
171,166
Ratio analysis
37.7
30.6
17.2
50.3
Ebitda margin (%)
34.0
39.2
Net profit margin (%)
25.6
30.2
Dividend payout (%)
11.1
11.1
19.3
17.7
244.8
26.1
Net debt/equity (%)
(49.5)
(35.2)
ROE (%)
31.2
34.5
ROIC (%)
330.9
17,912.8
EVA/IC (%)
315.9
17,897.8
2015CL
2016CL
2017CL
97,251
40,852
35,369
0
(1,700)
1,914
35,584
(6,939)
(200)
28,445
120,627
50,394
44,277
0
(850)
3,288
46,715
(9,109)
(200)
37,406
148,433
62,259
55,399
0
(425)
4,667
59,641
(11,630)
(200)
47,811
35,369
5,482
6,471
(3,848)
43,475
(6,808)
36,668
(6,808)
(3,122)
0
(3,122)
33,546
0
62,685
96,231
44,277
6,117
9,655
(3,055)
56,993
(7,841)
49,152
(7,841)
(4,106)
0
(4,106)
45,047
0
96,231
141,277
55,399
6,860
10,821
(2,893)
70,187
(8,906)
61,281
(8,906)
(5,248)
0
(5,248)
56,034
0
141,277
197,311
96,231
5,653
301
7,804
10,780
7,767
78,623
207,158
3,215
33,484
20,929
30,535
8,472
2,111
108,412
207,158
141,277
7,012
373
7,804
13,810
6,461
78,623
255,360
3,215
39,786
25,713
30,535
8,472
2,111
145,528
255,360
197,311
8,628
459
7,804
16,967
5,351
78,623
315,142
3,215
46,619
31,403
30,535
8,472
2,111
192,787
315,142
23.2
32.2
42.0
29.2
11.0
19.5
24.0
(56.5)
30.2
0.0
24.0
23.4
41.8
31.0
11.0
19.5
59.3
(72.8)
29.5
0.0
23.1
23.5
41.9
32.2
11.0
19.5
146.5
(83.9)
28.3
0.0
Source: CLSA
3 November 2015
199

Tencent - BUY
China internet
Notes
200
3 November 2015

China internet
Notes
3 November 2015
201

Important disclosures
China internet
Companies mentioned
58.com (N-R)
Ajisen (N-R)
Alibaba (BABA US - US$63.92 - BUY)
Alibaba Health (N-R)
Alibaba Pictures (N-R)
Alipay (N-R)
Amazon (AMZN US - US$599.03 - OUTPERFORM)
Autohome (ATHM US - US$36.60 - BUY)
Baidu (BIDU US - US$149.80 - BUY)
Bailan Group (N-R)
Baiyunshan Pharma (N-R)
Beijing Chuanyun Logistics Investment Limited (N-R)
Bitauto (BITA US - US$33.32 - OUTPERFORM)
Cainiao Logistics (N-R)
Carrefour (N-R)
China Eastern (N-R)
China Southern (N-R)
Chinasoft (N-R)
Cofco (N-R)
CRE (291 HK - HK$15.06 - OUTPERFORM)
Crystal Jade (N-R)
Ctrip (CTRP US - US$68.65 - BUY)
DHC Software (N-R)
Dian Diagnostics (N-R)
Dianping (N-R)
Didi-Kaudi (N-R)
eDaixi (N-R)
eJiaJie (N-R)
Ele.me (N-R)
eLong (N-R)
Expedia (N-R)
Gewara (N-R)
Google (GOOGL US - US$645.44 - BUY)
Groupon (N-R)
Gucci (N-R)
Hangzhou American-Sino Hospital (N-R)
Heilijia (N-R)
Huace Media Group (N-R)
Huakang Mobile Healthcare (N-R)
Hytours (N-R)
Intime (1833 HK - HK$8.59 - UNDERPERFORM)
iQiyi (N-R)
JD.com (JD US - US$27.71 - BUY)
Jointown Pharma (N-R)
juhu (N-R)
Kingstar (N-R)
Leju (LEJU US - US$6.85 - UNDERPERFORM)
LVMH (N-R)
McDonald's (MCD US - US$111.64 - UNDERPERFORM)
Meituan (N-R)
NetEase (NTES US - US$126.04 - OUTPERFORM)
New Oriental Edu (EDU US - US$22.45 - BUY)
Ping An (2318 HK - HK$43.80 - BUY)
Priceline (N-R)
202
3 November 2015

China internet
Qunar (QUNR US - US$33.85 - UNDERPERFORM)

Renhe Group (N-R)
Renhe Pharmacy (N-R)
Royal Caribbean (N-R)
Sequoia Capital (N-R)
Shanghai Pharma (N-R)
Sina (N-R)
SMI (N-R)
Softbank (9984 JP - 6,651 - BUY)
Sohu (N-R)
SouFun (SFUN US - US$6.82 - OUTPERFORM)
Suanya (N-R)
Sun Art (6808 HK - HK$6.24 - SELL)
Suning Commerce (N-R)
TAL Edu (XRS US - US$33.72 - BUY)
Taobao (N-R)
Tarena (N-R)
Tencent (700 HK - HK$139.60 - BUY)
Tmall (N-R)
TravelSky (N-R)
Tuniu (N-R)
Uber (N-R)
Vanke (2202 HK - HK$18.22 - BUY)
Vipshop (VIPS US - US$20.35 - BUY)
Wal-Mart Stores (N-R)
Wanda (N-R)
Wanda Cinema (N-R)
Wandong Medical (N-R)
Wowo (N-R)
XYWY.com (N-R)
Yihaodian (N-R)
Yonghui Superstores (N-R)
Youku (N-R)
Yum! Brands (YUM US - US$73.17 - BUY)
Yunfeng Capital (N-R)
Yuwell Technology (N-R)
YY (N-R)
Covered by CLSA; Covered by CLSA Americas
Analyst certification
The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect
my/our own personal views about the securities and/or the issuers and that no part of my/our compensation
was, is, or will be directly or indirectly related to the specific recommendation or views contained in this
research report.
The policy of CLSA (which for the purpose of this

disclosure includes subsidiaries of CLSA B.V. and CLSA
Americas, LLC ("CLSA Americas")), and Credit Agricole
Securities (Taiwan) Company Limited (CA Taiwan) is to
only publish research that is impartial, independent,
clear, fair, and not misleading. Analysts may not receive
compensation from the companies they cover.
Regulations
or
market
practice
of
some
jurisdictions/markets prescribe certain disclosures to be
3 November 2015
made for certain actual, potential or perceived conflicts of

interests relating to a research report as below. This
research disclosure should be read in conjunction with
the
research
disclaimer
as
set
out
at
www.clsa.com/disclaimer.html
and
the
applicable
regulation of the concerned market where the analyst is
stationed and hence subject to. This research disclosure
is for your information only and does not constitute any
recommendation, representation or warranty. Absence of
203

a discloseable position should not be taken as

endorsement on the validity or quality of the research
report or recommendation.
To maintain the independence and integrity of CLSAs
research, our Corporate Finance, Sales Trading and
Research business lines are distinct from one another.
This means that CLSAs Research department is not part
of and does not report to CLSA Corporate Finance (or
investment banking) department or CLSAs Sales and
Trading business. Accordingly, neither the Corporate
Finance nor the Sales and Trading department supervises
or controls the activities of CLSAs research analysts.
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CLSA has put in place a number of internal controls
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personnel, Corporate Finance and Sales and Trading
personnel, CLSAs financial product issuers and CLSAs
research analysts do not compromise the integrity and
independence of CLSAs research.
Neither
analysts
nor
their
household
members/associates/may have a financial interest in, or
be an officer, director or advisory board member of
companies covered by the analyst unless disclosed
herein. In circumstances where an analyst has a preexisting holding in any securities under coverage, those
holdings are grandfathered and the analyst is prohibited
from trading such securities.
China internet
and/or the issuers and that no part of my/our

compensation was, is, or will be directly or indirectly
related to the specific recommendation or views
contained in this report or to any investment banking
relationship with the subject company covered in this
report (for the past one year) or otherwise any other
relationship with such company which leads to receipt of
fees from the company except in ordinary course of
business of the company. The analyst/s also state/s and
confirm/s that he/she/they has/have not been placed
under any undue influence, intervention or pressure by
any person/s in compiling this research report. In
addition, the analysts included herein attest that they
were not in possession of any material, nonpublic
information regarding the subject company at the time of
publication of the report. Save from the disclosure below
(if any), the analyst(s) is/are not aware of any material
conflict of interest.
Key to CLSA/CLSA Americas/CA Taiwan investment
rankings: BUY: Total stock return (including dividends)
expected to exceed 20%; O-PF: Total expected return
below 20% but exceeding market return; U-PF: Total
expected return positive but below market return; SELL:
Total return expected to be negative. For relative
performance, we benchmark the 12-month total forecast
return (including dividends) for the stock against the 12month forecast return (including dividends) for the
market on which the stock trades.
In the case of US stocks, the recommendation is
relative to the expected return for the S&P500 of 10%.
Exceptions may be made depending upon prevailing
market conditions. We define as Double Baggers stocks
we expect to yield 100% or more (including dividends)
within three years at the time the stocks are introduced
to our Double Bagger list. "High Conviction" Ideas are
not necessarily stocks with the most upside/downside,
but those where the Research Head/Strategist believes
there is the highest likelihood of positive/negative
returns. The list for each market is monitored weekly.
Unless specified otherwise, CLSA/CLSA Americas/CA

Taiwan did not receive investment banking/noninvestment banking income from, and did not
manage/co-manage a public offering for, the listed
company during the past 12 months, and it does not
expect to receive investment banking compensation from
the listed company within the coming three months.
Unless mentioned otherwise, CLSA/CLSA Americas/CA
Taiwan does not own a material discloseable position,
and does not make a market, in the securities.
Overall rating distribution : Buy / Outperform - CLSA:

64.48%; CLSA Americas only: 61.15%; CA Taiwan only:
63.49%, Underperform / Sell - CLSA: 35.37%; CLSA
Americas only: 38.85%; CA Taiwan only: 36.51%,
Restricted - CLSA: 0.00%; CLSA Americas only: 0.00%;
CA Taiwan only: 0.00%. Data as of 30 September 2015.
As analyst(s) of this report, I/we hereby certify that

the views expressed in this research report accurately
reflect my/our own personal views about the securities
Investment banking clients as a % of rating category:

Buy / Outperform - CLSA: 3.16%; CLSA Americas only:
0.63%; CA Taiwan only: 0.00%, Underperform / Sell -
204
Overall rating distribution for CLSA/CLSA Americas

only /CA Taiwan only Universe:
3 November 2015

CLSA: 1.71%; CLSA Americas only: 0.00%; CA Taiwan

only: 0.00%, Restricted - CLSA: 0.00%; CLSA Americas
only: 0.00%; CA Taiwan only: 0.00% . Data for 12month period ending 30 September 2015.
There are no numbers for Hold/Neutral as CLSA/CLSA
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China On Demand (O2O Digitising The Service Industry) 031115

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China On Demand (O2O Digitising The Service Industry) 031115

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China on-demand

O2O digitising the service industry

Elinor Leung, CFA

Head of Asia Telecom &

Executive summary ............................................................................ 3

Digitising traditional businesses ........................................................ 9

+852 2600 8732

Investment thesis .............................................................................. 4

Proprietary consumer study ............................................................. 36

Watch Elinor Leung

Education ....................................................................................... 148

JD.com ................................... 183

Alibaba ................................... 163

Qunar ..................................... 189

Baidu ...................................... 169

Tencent ................................... 195

Ctrip ....................................... 177

For important disclosures please refer to page 203.

The internet is digitising

Services are the new

O2O services have huge

Our proprietary consumer

Consumer service market

We estimate the consumer service market could be worth Rmb11tn by 2019.

. . . with O2O services

China O2O-service GMV

Why invest in O2O?

O2O rides on the

Online-to-offline (O2O) is the new big thing, riding on Chinas booming

O2O is a broad concept digitising offline commerce. Offline retailers and

Service industry is Chinas next growth pillar

Services are a critical driver of Chinas economy. Tertiary industry growth is

Caixin/Markit services PMI

2006 2007 2008 2009 2010 2011 2012 2013 20141H15

Source: NBS, Markit, CEIC, Wind, CLSA

O2O services in great demand

GMV up 200% YoY

Takeout delivery GMV

Source: Eguan, CLSA

Source: Tuan800, CLSA

Consumer service market to be Rmb11tn by 19CL

O2O services could be

We estimate the consumer-service market could be worth Rmb11tn by 2019.

Source: Euromonitor, CLSA

Consumer service market (2014)

Online penetration by service segment

Consumer service market (19CL)

Source: Euromonitor, CLSA

O2O service revenue (19CL)

c.70% flights &

Winners and losers

Baidu, Tencent and

Chinese O2O stocks under coverage

15CL net cash

Note: Alibaba PE is non-Gaap. Source: Bloomberg, CLSA

Proprietary consumer study

Over half of our panel

Alipay and Weixin the

We conducted an online-consumer study with 573 people in 10 major O2O

If consolidated under a big platform,

Food: Dineout, takeout and grocery

Expect 47% O2O

Dineout O2O GMV