Tài liệu Nothing But Net 2009 Internet Investment Guide 12 ppt

Online Advertising We Maintain Our Positive View on 2009 and Longer-Term Online Ad Market Growth While there are debates over how China’s economy will shape up over the next 2-3 years,

Figure 69: Email Use - China Behind Korea and US

91.0%

82.1%

56.5%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Source: CNNIC (2007), Pew Internet Study (Aug '06), NDIA Survey on Computer and Internet

Use (Dec '06)

Figure 70: IM Use - Significantly Higher in China

81.4%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Source: CNNIC (2007), Pew Internet Study (Aug '06), NDIA Survey on Computer and Internet Use (Dec '06)

Online Advertising

We Maintain Our Positive View on 2009 and Longer-Term Online Ad Market Growth

While there are debates over how China’s economy will shape up over the next 2-3 years, we believe strongly that Internet usage will continue to grow despite more challenging economic conditions Lower computer prices, declining connection fees, higher influence of online media, and government support should continue to drive Internet growth in China

Further, whether China’s 2009 GDP growth rate turns out to be over 9% or a lower 5-6% (in a “hard landing” scenario), GDP growth should add further upside to a base case of 18% online brand media growth, in our view Indeed, with better

measurements and lower price, online ads will likely be a preferred medium in difficult times Also, the online ad market still only accounts for a very small portion

of China’s overall ad market (still less than 10%)

We forecast the online ad market to witness 28% Y/Y growth in 2009 to reach Rmb14.3B (US$2.1B), and 37% Y/Y growth in 2010 to reach Rmb19.6B (US$2.9B)

Search Ad to Grow Faster than Brand Ad

We expect search advertising to see stronger growth in 2009 than brand advertising

From a top-down perspective, search ad is still ~40% of the total online ad market in China This compares with 67% in the US As such, we still see room to grow

From a bottom-up perspective, we expect: (1) higher adoption of pay-for-performance advertising during challenging macro environment, (2) search usage to increase with the growing eCommerce market, and (3) use of search ads as a brand advertising tool

Table 54: China Online Advertising Market Forecast

2004 2005 2006 2007 2008E 2009E 2010E

Brand Advertising (RMB M) 1,700 2,329 3,377 4,559 6,428 7,585 10,013

Search Advertising (RMB M) 584 846 1,442 2,851 4,663 6,614 9,438

Other Online Format (RMB M) 70 91 109 122 135 148 163

Total Online ad market (RMB M): 2,354 3,266 4,928 7,533 11,226 14,347 19,614

Total Online ad market (US$M) 284 402 621 999 1,627 2,092 2,860

Total China ad market (Rmb M) 78,778 90,704 105,712 116,422 155,074 178,336 203,303

Online ad as % of Total ad market 3.0% 3.6% 4.7% 6.5% 8.0% 9.3% 11.0%

Source: iResearch, CNNIC, J.P Morgan estimates Note: Growth rates are in Rmb terms

Online Advertising: Top-Down Perspective Internet Usage Growth – Same Old Story, But Is That What Is Driving the Online Ad Spending Growth Expected in 2009?

We expect China's Internet user base to grow around 20% Y/Y in 2009 to 24%

penetration, from its current penetration rate of 20% As mentioned earlier, this is driven by lower-priced computers, more affordable telecom connection fees, government support of Internet usage, low-cost entertainment aspects, etc As of

June 2008, the number of Internet users in China was 253 million (or 20% of the population) By the end of 2009, we expect the Internet population to reach ~320 million (or 24% of the population)

Figure 71: China Internet Users and Penetration Rate

23 27 34 46 59 68

80 87 94103111123

137162 210

253268295

322347 375

0 100 200 300 400 500 600

0%

5%

10%

15%

20%

25%

30%

Number of China Internet Users (Left, millions) Penetration Rate as % of Total Population (Right)

Source: CNNIC, J.P Morgan estimates

We believe if the number of Internet users grows 20% Y/Y (or roughly equal to the increase in media consumption), a minimum of ~18% Y/Y growth in online brand ad spending should be achievable, given: (1) higher number of hours spent online per user, (2) Internet can reach a broader audience in smaller cities in China, (3) more measurable and lower cost compared with traditional media like TV, (4) general inflation in advertising rates, and (5) GDP growth should also drive overall ad spending up

GDP Growth Likely Between 6.0-9.5%: Added to 20% Internet User Growth = Potential 26-29% Growth

According to J.P Morgan chief China Economist Frank Gong, Chinese officials are forecasting that China's economic growth may slow to "8%" oya, from nearly 12% oya in 2007, while many in the market have been pricing in a “hard landing” scenario

in which China's GDP growth could dip into 6-8% oya territory

While the few percentage points difference in the top and bottom ranges of GDP significantly changes the investment sentiments, from a fundamental revenue perspective, we believe online ad industry could potentially grow roughly 26% (20%

of penetration growth + 6%GDP growth) to 29% (20% of penetration growth + 9%GDP growth)

Indeed, J.P Morgan forecasts domestic consumption to pick up at a faster pace in

2009 vs 2008 This should be positive for domestic ad spending

US Advertising Spending = 2% of GDP vs China’s 0.5%

Although ad spend as a percent of GDP in China is still below the US level, as such

we still believe advertising in China can grow at least in line with GDP Online ads

should grow even faster; therefore a projection for flat growth is quite bearish, in our view

Online Brand Advertising Only Accounts for 3.5% of Overall Advertising, as per CTR Market Research

According to the latest CTR Research (leading cross-media research company in China), online brand advertising accounts for 3.5% of overall advertising We believe

if advertisers were to cut overall advertising, TV would be the first medium to be cut

as rates are higher and results are less measurable vs Internet This compares to around 8% in the US and more than 10% in the UK

Figure 72: China Advertising Spending Breakdown by Medium

TV 74.4%

New spaper 13.2%

Magazine 1.9%

Outdoor 3.8%

Other new media 2.3%

Radio 0.9%

Internet 3.5%

Source: CTR Market Research, Feb 2008

We believe advertisers may likely reduce the budget on some types of traditional media, such as TV/newspapers, and turn more to Internet advertising The CPM (cost per thousand) based price for Internet is around Rmb15-20, vs Rmb50-100 for TV Therefore, from a cost and reach basis (Internet can reach the whole nation, vs local TV), the Internet still appears to be at an advantage vs TV stations

In addition, performance for Internet advertising is more measurable Therefore, during times of budget tightening, advertisers will likely use the Internet as a more measurable media

Online Advertising: Bottom-Up Perspective

Many investors also expected concerns over trends in a few significant sectors for online advertising: automobiles, real estate and financial services

Automobiles Advertising

Our auto analyst, Frank Li, currently expects auto sales revenue to be roughly flat to slightly down in China in 2009 (with units flat and average selling price down ~5%)

Driver 1: Increased Online Allocation

Currently ~10% of automobiles advertising budget is allocated online in China, according to CTR Market Research We believe that, with Internet population growing, more measurable results, and lower rates vs TV, automobile companies will continue to increase budget allocation online

In addition, we believe more money will be directed to drive product sales (through advertising particular models, driving traffic for test drives) rather than general

branding exercise In our opinion, a product-specific campaign would be more effective over the Internet as Chinese consumers tend to do a lot of their own research before their first car purchase

Driver 2: Auto makers Still Have Room to Increase Ad Budget During Difficult Times

Auto industry overall spends ~ 6% of its top-line revenue on advertising However, with (1) passenger car ASP still around 35% higher than the global average, and (2) net margins for China-based autos makers higher than global peers as well, we believe there is still room to increase the overall automobile advertising budget

In addition, we believe longer-term growth prospects for auto sales in China are higher compared to other developed countries As such, we would expect leading auto companies to further invest during difficult times, in order to gain market share for the long run

Driver 3: Geographic expansion in autos sales

As we believe lower-tier cities shall be seeing faster autos sales in the next few years,

we believe advertisers would also be well served by investing more on the Internet for nationwide customer reach (rather than magazine and newspaper, which has limited geographic coverage)

Real Estate Advertising

A Geographic Diversification Story Beyond Beijing

Online real estate advertisers for Sina and Sohu are still concentrated around the Beijing area Currently, more than 70% of Sina’s real estate ads are from the Beijing area We expect that adoption of online real estate ads will drive Sina’s ad sales In particular, Sina formed a new joint venture with eHouse to push real estate online ad sales eHouse has offices in more than 30 cities across China, and should be able to help Sina drive ad revenue outside of Beijing

Even in the City of Beijing, Online Ad Growth Is Likely Despite Market Slowdown

From our checks with other private real estate portals in Beijing, those sites are still seeing acceleration in online ad spending We believe (1) online is an effective medium, and (2) the only way for real estate companies to relieve themselves of current inventories is to cut price and increase promotions

Financial Services Advertising

Investment funds have increased their overall ad budgets in late ‘07 and early ‘08 While they currently have pulled back on their overall budgets, they still have increased online allocation, so we believe companies like Sina still see growth in the segment

We think new drivers for the next few quarters could be insurance companies, personal banking, and wealth management advertisements

Branded Advertising

We Forecast Ad Spending to Still See ~18% Growth in 2009

The branded advertising (online display ad) segment is expected to grow ~41% Y/Y

in 2008 to reach Rmb6.4B, as per our estimates (or in US$ terms, 54% Y/Y growth

to reach ~US$932M) Growth during the year received a significant boost from the Beijing Olympics as advertisers attempted to capitalize on the historic event to promote their brands to Chinese consumers

For 2009, we lowered our forecast of branded ad segment growth to ~18% (from 22% growth) We believe the growth rate is achievable given the continuing increase

in Internet usage, higher cost effectiveness, and more measurable results for advertisers Further, our China economics team expects consumer spending growth

to accelerate next year compared to 2008, which should also support the growth of branded advertising

Table 55: China Branded Ad Segment Forecast

Branded Advertising (RMB M) 1,700 2,329 3,377 4,559 6,428 7,585 10,013

Branded Advertising (US$ M) 205 287 426 605 932 1,106 1,460

Source: J.P Morgan estimates

Leading Portals Should Gain Market Share with Advertisers’ Flight to Safety

Among different properties in Internet media, we believe leading portals will likely gain market share next year from smaller vertical sites, social networks sites, or video sites We expect second-tier sites, with less financial backing and traffic, will likely offer a lower CPM rate to advertisers in order to drive revenue growth

However, leading brand advertisers will likely turn to leading portals, with (1) advertisers making concentrated ad spending to maintain strong brand image on leading sites, (2) leading portal’s strong media influence, (3) proven historical performance, and (4) leading portals will also likely offer SNS, video content to attract users, and will likely offer advertisers new advertising packages

After years of slow market share decline to new Internet properties, we estimate that leading portals will see market share gain in next few years

Table 56: Online Brand Ad Market Share Trend for Leading Portals

Market share of key portal players* (%) 68% 67% 67% 64% 62% 64% 66% 69% 68% 66% 65%

Source: Company reports, Bloomberg estimates, J.P Morgan estimates

* Includes: Sina, Sohu, NetEase, Tencent (Bloomberg estimates for Tencent)

Good CCTV 2009 Prime Time Auction Results Set Positive Tone for 2009 Ad Market

Every year at 8:18am on Nov 18, CCTV (China Central Television) holds an advertising auction for the next year’s (2009) prime time ad resources on CCTV channels This important event auctions off ~15% of the country’s total TV ad spending and sets the tone for ad growth in the coming year

CCTV reported prime time ad revenue of Rmb9.26B, up 15.4% Y/Y: This is at the high end of industry expectations of 10-15% We see the following implications: (1) while advertisers are generally cautiously optimistic about the 2009 outlook, the auction results suggest consensus (hundreds of advertisers participated) is more optimistic than cautious; (2) with the CCTV auction setting a positive tone, the online brand ad rate is highly likely to achieve >20% growth; (3) published rates for leading portals and media are likely to increase next year

We continue to expect the online branded ad segment to benefit from decent 2009 overall ad market growth, as well as increased online ad allocation

We look at absolute dollar amount of ad sold at the auction (as prime time resources are essentially the same every year – although this year has slightly more inventory – and always gets completely auctioned off) The table below shows the auction results growth rate vs online brand ad growth rate (in Rmb terms)

Table 57: CCTV Auction Results vs Online Brand Ad Growth Year CCTV Prime time

Auction Revenue (Rmb billion)

YoY Growth Online Brand

Ad Growth Number of times (X): [Online Brand Ad Growth / CCTV

Auction Growth Ratio]

Source: CCTV, ZenithOptimedia Note: J P Morgan current estimates

Growth to Continue in the Longer Term after a Strong 2008

We expect branded ad spending to continue to grow in the longer term, given the following assumptions:

(1) Robust longer-term domestic consumer growth and high industry competition should continue despite current macro downturn

(2) Continued Internet usage growth even after the Olympics

(3) While a portion of Olympics-related ad spend in 2008 would have come from international companies targeting international visitors (buying ads in China during Olympics to show their presence there) and will not come back post-Olympics, we believe these international companies would not use Chinese Internet portals significantly to advertise in the first place

(4) Some industries, such as fast moving consumer goods (FMCG), may increase their percentage of online spending after the Olympics – due to good ROI from

online advertising – while “non-Olympics sensitive” sectors such as online games and real estate should continue to spend on online advertising

(5) The 2010 World Expo in Shanghai is another highly anticipated international event, and should provide advertisers another opportunity to associate their brands with a high-profile event that demonstrates the success of China

Macroeconomic Impact on Ad Spends of Certain Volatile Sectors

Investors still seem concerned about China’s economic outlook In particular, recent data point to a slowdown in automobile sales, as well as significantly lower real estate sales volume While the strong macro headwind against online advertisement

is not good for the headlines, we believe online advertising is still likely to be healthy during the slowdown period

Auto and Real Estate Sectors

As per our estimates, automobiles and real estate account for 25% and 15%, respectively, of Sina and Sohu’s online ad revenue As such, we have done some more detailed analysis on automobiles and real estate sectors We note that:

(1) Online real estate and automobile ads still account for a small percentage of total advertising revenue for each of these two sectors

From our discussions with ad agencies and advertisers, we believe advertisers in auto and real estate segments would likely increase allocation

to a more measurable and low-cost media, namely the Internet, while budgets in TV, newspaper and other traditional media would likely be cut

Table 58: Real Estate Segment Advertising Spend– Bear Case Assumptions for 2009

2005 2006 2007 2008E 2009E Overall real estate segment ad

Others: TV, magazine, and others 3.7 4.0 4.1 3.8 3.4

Source: CTR, J.P Morgan estimates

Even if we assume overall

real estate ads decelerate

in both 08 and 09, we

believe there is still room

for online ad budget

allocation to grow

Table 59: Automobile Segment Advertising Spend – Bear Case Assumptions for 2009

Overall automobile ad revenue

% of total automobile budget 42.4% 38.8% 34.2% 34.2% 33.1%

% of total automobile budget 50.1% 45.8% 48.3% 48.3% 46.6%

Source: CTR, Sina Auto channel news, J.P Morgan estimates

(2) Even assuming a bear case for ad budgets to decline, we think leading portals could possibly see 28% Y/Y growth in 2009 With a low % of

budget being allocated to the Internet now, we believe our minimum case of

~18% Y/Y 2009 ad growth is still achievable

(3) For the Real Estate Sector, We Still See Room for Growth in Southern China

From a market perspective, real estate sales (as well as ad dollar spend) are very dispersed over the whole For example, Beijing only accounts for ~5%

of property sales in China, and a similar ad spending for the city as well We note that both Sina and Sohu have the majority of their revenue coming from Beijing or areas surrounding Beijing With Sina’s eHouse JV and Sohu’s continued expansion into Southern China, we believe at least 90% of the real estate advertising market remains untapped

Table 60: Real Estate Advertisement Breakdown by City

advertisement

Source: CTR, J.P Morgan estimates

For autos, online ad

allocation has historically

been higher than other

segments We expect the

trend to continue

Sector Likely to See Margin Expansion in 2009

During 2006 and 2007, the branded ad sector has seen margins decline, mainly due to (1) competition for exclusive content, and (2) increasing video content offerings (broadcasted videos and user-generated contents) have led to higher bandwidth costs

We expect these to lead to margin upside for the sector in 2009 and 2010:

(1) After the 2008 Olympics, portals will likely reduce high editorial costs For Sohu

in particular, the upfront fee for the Olympics sponsorship amortization will be finished by 4Q08, and this should lead to higher margins Sina’s Euro exclusive 2008 soccer broadcast was concluded in 2Q08, which will also reduce Sina’s costs going forward

In 2009, we don’t expect any big sports events to be held, and as such portals are not likely to become involved in a price war for exclusive contents

(2) Increasing monetization of video contents – advertisers are more receptive to video-based advertising and are now likely willing to pay a higher fee for video ads

User Segmentation – Already Happening, But Leading Portals Should Continue to See High Growth

Over the past year, there has been an increase in the popularity of web2.0 sites such

as SNS sites like 51.com, Xiaonei, mop.com, and video sites such as Tudou, Youku While these sites have driven eyeballs and ad dollars away from traditional portals,

we still expect leading portals to hold dominant user market share and to gain revenue market share, given (1) Sina and Sohu are the leading news sites in China – other new sites do not have a similar level of media influence; (2) portals are also aggressively expanding horizontally to offer SNS, such as blogs and videos

What Are the Portals Doing to Prepare for a Potential Downturn?

(1) More Focus on CPM vs the Time-Based Model

In its 4Q08 – 1Q09 rate card, Sina offers more of its sought-after resources in the CPM (cost per thousand) business model We believe that in more cost-conscious times, more advertisers will adapt to the CPM model vs the traditional CPT (cost per time) model

In addition, the CPM model would likely drive more of customers’ spending to content pages and away from the sought-after resources

(2) Cost Control

Leading companies are reviewing different aspects of their businesses to optimize the number of employees in each department For example, Sina currently has no plans

to take fresh college graduates next year

(3) Video Ads - A Key Driver in 2009

With the success of video content and video format advertising during the Olympics,

we believe advertisers will increase video ad spending in both price and volume in

2009 Sina has been building up its video contents to capture the growth in video ads