China Market Strategy Hao Hong, CFA

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03 May 2016

China Market Strategy Hao Hong, CFA

[email protected]

BoCom Intl’ Internet Research Team Ant Financial: A Unicorn’s Defining Moment

Summary: Ant Financial has accomplished a stunning feat of achieving a $60bn valuation after only two rounds of financing.

Uber, a quintessential unicorn, is valued at $62bn after 14 rounds. Global low interest rate environment has continued to spur

funds to seek yields, and already high debt level has made leverage dangerous. Skewing valuation from the public market to

private is a return amplifier, given the liquidity glut and high IPO costs. But the market is turning more volatile, and internet

names are stuck in a declining trend.

At its current level, Ant is already more expensive than many of its peers, and can make some potential investors think twice

about chasing it. But Ant is on the verge of significant horizontal expansion through international cooperation, and vertical

expansion through rural penetration. These initiatives may not have been reflected in its current seemingly hefty valuation, and

will likely create value for investors later as they transpire.

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Ant Financial valued at $60bn in B series, almost equivalent to Uber – a stunning feat: In its Series B financing, Ant Financial

(“Ant” hereafter) raised $4.5bn from a group of prominent institutional investors led by CIC and China Construction Bank,

amongst the others. The deal valued the private internet financial service firm at ~$60bn. To put this in perspective, Uber, the

currently undisputed leader of the unicorn pack, is valued at ~$62bn after 14 rounds of financing; Xiaomi, a mobile service

unicorn from China, is valued at ~$46bn after six rounds; and Airbnb at $25bn after eight rounds (Focus chart 1).

Focus Chart 1: Unicorns' equity funding history.

Source: Internet, BoCom (Intl)

That is, Ant has surpassed its peers after only two rounds of financing – it is a stunning feat. Of course, Ant’s proven business

model, extensive financial network and the ability to monetize its service have put it several cuts above, and have created value

for its existing shareholders and employees. But for those IPO participants at a later day to capitalize on Ant’s commercial

success, the listing process must be shortened and accelerated, and new platform expansion must follow. Where would the

potential value creation come from?


China Market Strategy

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Focus Chart 2: Unicorns turning into “unicorpse” suggests unrealistic valuation pre-IPO.

Source: Internet, BoCom (Intl)

Capturing value pre-IPO has been a global phenomenon: In 2015, there have been a record 80 companies valued at over $1bn

during private financing rounds. Many of these companies are becoming the true unicorns – proven to be viable initiatives and

reshaping people’s daily lives. But unicorns have also been prone to turning into “unicorpse” after IPO (Focus Chart 2). A chart

from the internet based on data from Bloomberg and Techcrunch shows that many unicorns plunged well below their IPO prices,

at times even to a fraction of their IPO prices or even nearing failure, within 980 days of their listing. Such developments suggest

that growth expectation for these companies, and their consequent valuation before going public has been unrealistic.

Unrealistic expectations aside, we believe that the global liquidity glut must have also contributed to the difficulties for the

secondary-market investors to make money (Focus chart 3). With depressed bond yield nearing zero, the hunt for higher yield

has become greater. Adding leverage to multiply returns when global debt load is already high is perilous. As such, funds are

trying to re-arrange the value distribution between the public and private markets. Before Google became public, it raised only a

Series A financing of $25mn, valuing the company at $37.5mn before its listing in 2004. And Amazon raised a Series A of $8mn

before going public. This meager money raised by these truly transformational tech giants would put any deals done today in

shame. Recently, an internet celebrity who trashes many Chinese customs through YouKu videos raised more than $2mn, and

was valued at ~$50mn by an “arranged” deal.



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Focus Chart 3: VC return now have shifted to private financiers.

Source: Bloomberg, BoCom (Intl)

During this Labor Day holiday, my internet research team and I attended the GMIC summit in Beijing. Being a macro strategist, I

was dazed by the sounds and visions at the conference, before re-collecting myself and thoughts. Many exhibitors had used the

venue for product launch or introduction – but without a solid value proposition. Many more had not turned their ideas into

concrete output, and were merely pitching their hopes. I watched someone demonstrating a commoditized smart watch that

was not smarter than any of its other comrades on the market. And I could not feel the sensation of the fickle visions through

the bulky VR equipments. After 16,000 yuan for the ticket and a few days of immersion, I was disenchanted, and started to

wonder where the expectations for these industries come from. Incidentally, internet stock prices have been stuck in a declining

trading trend (Focus Chart 4).

Focus Chart 4: Internet/E-Commerce peers stuck in a declining trading channel; Internet peers slightly underperform.

Source: Bloomberg, BoCom (Intl)

Creating value through Ant’s global and rural expansion: We discussed with many industry experts regarding how internet

companies could justify their hefty valuation multiples, especially relative to traditional sectors. Experts tended to refer to

market size and growth as justifications. My view, however, is that a large market in itself is for anyone to compete, and as such

is conducive to, but does not vindicate high valuation. Faster growth in emerging markets is a given, and should have already

been factored into prices. The question now is how to create further value above the already premium valuation.

My internet research team estimated that the Series B funding round valued Ant Financial at ~$60bn, equivalent to 11x 2016E

P/S, 78x 2016E P/E (including 37.5% of pre-tax profit distribution to Alibaba), and value per user of ~$333 (based on 450mn



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Alipay users with verified real names, assuming 40% are MAU). PayPal’s market cap is ~$48bn (as of 27 Apr 2016), or 4.5x 2016E

PS, 26x 2016E PE and value per user of ~$674 (179mn Paypal users and 40% are MAU). This compares with Baidu’s 5x 2016E PS

and 28x 2016E PE, Tencent’s 10x 2016E PS and 31x 2016E PE, JD’s 1x 2016E PS and 632x 2016E PE, Amazon’s 2x 2016E PS and

64x 2016E PE, eBay’s 3x 2016E PS and 13x 2016E PE, and Lending Club’s 4x 2016E PS and 30x 2016E PE (Focus Chart 5).

Focus Chart 5: Internet companies’ valuation per user.

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注：滴滴出行按照165亿美金估值，MAU2300万计算（15年12月日均订单700万，假设人均使用1.5次，得出DAU470万，DAU/MAU=20%）。支付宝、Paypal 假设40%的活跃用户为月活跃用户

(美元/MAU)

Source: BoCom (Intl)

On a solid domestic platform, we believe Ant can expand horizontally through its international expansion, and vertically by

digging deep into China’s still largely un-penetrated rural area. Ant has already started its venture into India, one of the most

populous countries with a population equivalent to China, by taking a 40% stake in PayTM - India’s Alipay equivalent. PayTM has

already had ~120mn verified users, and is growing fast.

We believe that Ant must be on the brink of launching other international initiatives with other unicorns. With the payment

infrastructure already set up, and big data to understand user behavior and being able to construct various payment scenarios

to engage users, Ant’s platform has tremendous scale to leverage. Further, about 25% of Aliplay’s users, or ~120mn, are in rural

area, but only 37mn of them have equivalent access to financial services as their urban counterparts. It represents potential for

growth. While Ant’s current valuation is not cheap, we believe that these two significant growth opportunities right on the

horizon will likely lift Ant’s valuation further, and create value for existing and potential shareholders.

For further read on Ant Financial, please see my internet research team’s detailed report titled “Completion of Series B financing

with valuation equivalent to a top notch Internet firm” that follows.


03 May 2016

Internet Sector

Ant Financial Services Group

Completion of Series B financing with valuation equivalent to a top notch Internet firm

Ant Financial Services Group (Ant Financial) announced the completion of the world’s

largest private financing exercise ever in the Internet sector, valuing it only second to

Alibaba, Tencent and Baidu among China’s Internet companies. The financing is mainly

aimed at fueling internationalization, rural finance and technological innovation. The

ultimate vision of going global is to develop a global settlement network without

barriers, and to transform financial services into a lifestyle. The company hopes that

60% of Alipay users will be from overseas in the next 10 years. Rural users are growing

faster than those from the 1st and 2nd-tier cities. The company is also researching

biometric verification technologies other than face recognition, so as to resolve issues

related to remote account opening and achieve breakthroughs individual consumer

finance services. The company’s financial cloud services have over 200 bank clients. The

valuation of the latest funding round was equivalent to or exceeded the those of top

notch Internet firms, whether in terms of scale, PE, PS or number of users, which

reflected investors’ recognition of the current services of Ant Financial and the

company’s growth potential.

Event:

As reported by TechWeb, Ant Financial announced the completion of Series B financing

of US$4.5bn on 26 Apr 2016, with a valuation of US$60bn. The Series B financing was led

by China Investment Corp Capital and CCB Trust, along with CDB Capital, China Life and

various insurers as well as investment institutions such as Primavera Capital which jointly

invested in Series A financing.

The Series B financing is mainly aimed at fueling internationalization, rural finance and technological innovation.

For internationalization, the current strategy of Ant Financial is to 1) serve Chinese

tourists traveling overseas via Alipay’s overseas payment service which currently

supports offline payment in 12 countries and regions; 2) seek local partners through

M&As and provide financial wealth management and related services through the

establishment of infrastructure and export of technology, leveraging the partners’

understanding of the local market and regulation.

* Ant Financial has implemented its internationalization strategy mainly in India,

Korea, Southeast Asia and other emerging markets. Its plan of expansion also

included Paytm, a payment company in India established jointly with Alibaba

(with a joint shareholding of ~40%), and KBank, an Internet bank jointly

established by Ant Financial and Korea Telecom, both of which have been

approved for incorporation by the local governments.

Ma Yuan (Martina), Ph.D [email protected] Tel: (8610) 8800 9788-8039

Gu Xinyu (Connie), CPA [email protected] Tel: (8610) 8800 9788-8045

Sun Mengqi [email protected] Tel: (8610) 8800 9788-8048

UP MP OPUP MP OP

mailto:[email protected]





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Paytm, a payment company in India and invested by Ant Financial, has 122mn

users in India. Ant Financial targets to have 60% of users from overseas in the

next 10 years, both for Alipay and products using the technologies exported by

Alipay.

* Ant Financial and Alipay provide their partners with more advanced transaction

processing capabilities through the export of technology. The strategic goal of

the internationalization initiative is to open up a global settlement network to

achieve payment without barriers. In addition, the company will provide more

financial services in the international market through its payment business, so as

to open up more scenarios for finance and transform financial services into a

lifestyle.

* For rural finance, Ant Financial tapped into Alibaba’s rural Taobao partnership

channel to penetrate the rural finance segment. Underpinned by the ecosystem

of Alibaba, Ant Financial aspired to make use of mobile Internet and big data to

support small/micro enterprises and individual consumers, and ultimately

achieve financial inclusion.

* Alibaba kick-started the “Plan of Thousand Villages and Hundred Thousand

Counties” in Oct 2014, with a goal of setting up 1,000 county-level service

centers and 100,000 village service stations within 3 to 5 years. Rural Taobao is

also one of the three key strategies of Alibaba going forward. At present, Alibaba

has over 10,000 rural Taobao stations spanning more than 20 provinces and

regions. Alipay has more than 140mn users in rural villages in China, accounting

for approximately 30% of Alipay’s 450mn real-name users. On the other hand,

Yu'E Bao has more than 37mn users in rural areas.

* Ant Financial has formed a rural business department to provide credit products

such as Wangnong Loan (旺农贷), rural insurance and payment services. To

address the credit needs of rural villages for financing production activities, Ant

Financial has launched Wangnong Loan (旺农贷). To date, the service covers

1,000 villages spanning 17 provinces, municipalities and regions, as well as 65

countries. The development of the rural financial market leverages Alibaba’s

rural Taobao partnership channel which helps popularize rural finance. Through

the introduction of strategic investment of and cooperation with PSBC whilst

leveraging PSBC’s rural bank outlets, Ant Financial is well positioned to attract

rural users.

Ant Financial’s infrastructural development and technological research and

development include financial cloud computing, investment in biometric verification

technologies, deep learning and artificial intelligence.

* While the financial cloud of Ant Financial and Ali Cloud are established on the

basis of a shared platform, each serves different clients. With the major goal of

connecting financial institutions with payment-related 2B businesses, the

financial cloud currently provides 203 banks with financial cloud computing

services. For 2C businesses such as red packet, financial cloud will leverage the

technological competence of Ali Cloud when transactions peak.

* The biometric verification technologies of Ant Financial include fingerprint, palm

print, voiceprint, face, eye print and other biological features, as well as two



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behavioral features, namely handwriting and keystrokes. At present, fingerprint

payment and keystrokes have been applied in payment and risk control/security

measures, while biometric verification technologies such as face recognition

(investment in Face++) are technologies on the pipeline. In May, the company

will launch an eye print ID registration system. As PBoC loosens its grip on

remote account opening, the Internet finance services of Ant Financial enjoy

even greater potential.

Comparison of transaction scale, number of users, revenue and valuation between Alipay, PayPal, JD Pay and Weixin Payment

The valuation of the latest funding round was equivalent to or exceeded those of top

notch Internet firms, whether in terms of scale, PE, PS or number of users, which

reflected investors’ recognition of the current services of Ant Financial and the

company’s growth potential.

In terms of transaction scale, according to the data of iResearch, total transactions

on Alipay reached RMB13trn in 2015, which was 7x higher than PayPal’s RMB1.7trn

(3x/4x higher than PayPal in 2013/14) and 3x higher than Tencent’s Tenpay (PC +

Weixin Payment) (vs. 2x higher in 2014). The scale of Alipay was also 45x of JD Pay

and 92x of Suning Yi Fu Bao. Revenue from Alipay was one of the major sources of

revenue of Ant Financial, complemented by Ant Micro Loan, Yu'E Bao and other

well-established businesses.

In terms of the number of users, based on the latest data, Alipay has 450mn

real-name users, equivalent to 1.5x of the number of Weixin Payment users with

connected bank card (as of end-2015, Weixin Payment had over 300mn users with

connected bank card, compared with merely 100mn in 2014), 2.5x of the number of

active users of PayPal (as of end-2015, the number of active users was 179mn

compared with 162mn in 2014). It was also equivalent to 4x of JD Finance and Suning

Finance (JD Finance and Suning Yi Fu Bao had 100mn users and 130mn registered

users as of end-2015, respectively).

On revenue, Tencent Tech reported the revenue of Ant Financial amounted to

RMB10.15bn in FY14, up 91.6% compared with 2013. Net profit reached RMB2.63bn

and net profit margin hit 26%. We estimate revenue of Ant Financial in 2015/16 at

RMB25bn/RMB34bn, up 65%/33%, with revenue from Alipay accounting for 60%. In

2015, revenue of PayPal’s transaction platform rose by 14% to RMB51.3bn (US$8.1bn).

Alipay’s revenue was equivalent to approximately one-third of PayPal’s total revenue.

Though Alipay had a larger transaction scale than PayPal, its platform revenue was

relatively low, mainly because Alipay had a lower monetization rate. We estimate

that Alipay’s monetization rate was around 0.37% in 2015 while that of PayPal was

~3% during the same year.

In respect of valuation, according to TechWeb, the Series B funding round valued Ant

Financial at US$60bn, equivalent to 11x 2016E P/S, 78x 2016E P/E (including 37.5% of

pre-tax profit distributed to Alibaba), and value per user of approximately US$333

(based on 450mn real-name Alipay users and assuming 40% of that are MAU). The

latest market capitalization of PayPal was US$48.15bn (as of 27 Apr 2016),

corresponding to 4.5x 2016E PS, 26x 2016E PE and value per user of approximately

US$674 (179mn active users and assuming 40% are MAU). This compares with



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Baidu’s 5x 2016E PS and 28x 2016E PE, Tencent’s 10x 2016E PS and 31x 2016E PE,

Jingdong’s 1x 2016E PS and 632x 2016E PE, Amazon’s 2x 2016E PS and 64x 2016E PE,

eBay’s 3x 2016E PS and 13x 2016E PE, and Lending Club’s 4x 2016E PS and 30x 2016E

PE.

Figure 1: Value per user of major Internet companies

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Note:Didi 's valuation is estimated at USD16.5bn, MAU=23mn,（Daily order is 7mn as of Dec 2015,

assume 1.5 usage times per user per day, DAU=4.7mn, DAU/MAU=20%）。

Assuming Alipay and Paypal MAU are 40% of active users.

(USD/MAU)

Source: Analysys, company data, BOCOM Int’l

Figure 2: Valuation comparison Company name

Stock ticker CP

Market cap

Consensus/BOCOM Int’l EPS estimate –––––––PE––––––– –––––––PS––––––

Consensus/BOCOM Int’l revenue estimate Revenue YoY

FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E

LC (US$ mn) LC LC (x) (x) (RMB mn) (RMB mn)

Tencent 700.HK 158.9 192,871 5.14 5.88 31 27 9.5 7.9 130,958 158,505 27% 21%

Kingsoft 3888.HK 17.92 3,012 1.17 1.47 15 12 2.3 1.7 8,656 11,340 53% 31%

NetDragon 777.HK 24.2 1,540 -0.52 -0.39 N/A N/A 3.1 2.7 3,179 3,661 150% 15%

Alibaba BABA.US 76.61 189,679 2.62 3.34 29 23 10.6 8.3 115,453 148,446 22% 29%

Baidu BIDU.US 178.91 61,948 6.36 8.45 28 21 5.0 4.1 80,853 96,968 22% 20%

Netease NTES.US 139.38 18,325 9.60 11.47 15 12 3.8 3.1 31,484 38,056 38% 21%

Sina SINA.US 49.79 3,477 0.80 1.28 62 39 3.8 3.2 5,970 7,094 7% 19%

Sohu SOHU.US 44.35 1,715 -2.83 -0.71 N/A N/A 1.0 0.8 11,654 13,122 -5% 13%

Qihoo 360 QIHU.US 75.92 9,827 4.93 6.82 15 11 3.5 2.7 18,129 23,347 42% 29%

Youku YOKU.US 27.54 5,293 -0.74 -0.34 N/A N/A 3.7 2.9 9,391 12,002 45% 28%

Ctrip CTRP.US 44.54 20,054 0.51 1.21 87 37 6.3 4.7 20,482 27,689 87% 35%

Changyou CYOU.US 19.81 1,033 2.42 2.28 8 9 1.9 1.8 3,507 3,740 -29% 7%

VIPS VIPS.US 13.23 7,744 0.70 0.93 19 14 0.9 0.7 55,216 70,950 42% 28%

Cheetah CMCM.US 14.57 2,075 1.01 1.51 14 10 2.4 1.7 5,694 7,857 54% 38%

JD.com JD.US 25.29 35,000 0.04 0.32 632 79 0.9 0.7 259,207 346,309 45% 34%

Tuniu Corp TOUR.US 10.4 1,311 -2.52 -2.16 N/A N/A 0.7 0.4 12,925 19,648 67% 52%

Qunar QUNR.US 41.3 5,980 -0.75 0.68 N/A 61 6.7 4.8 5,740 8,128 43% 42%

58.com WUBA.US 53.4 7,558 -0.54 1.61 N/A 33 6.0 4.2 8,100 11,547 76% 43%

Weibo Corp WB.US 24.38 5,186 0.48 0.81 51 30 8.5 6.3 3,950 5,314 26% 35%

Google GOOG.US 698.21 485,433 33.51 39.40 21 18 6.8 5.9 458,891 530,032 16% 16%

Amazon AMZN.US 683.85 322,660 10.62 15.78 64 43 2.4 2.0 863,547 1,046,341 22% 21%

Facebook FB.US 118.57 339,490 3.55 4.60 33 26 13.1 9.8 168,398 223,730 47% 33%

eBay EBAY.US 24.26 27,872 1.86 2.04 13 12 3.2 3.0 57,179 59,600 1% 4%

PayPal PYPL.US 39.02 47,293 1.49 1.76 26 22 4.4 3.8 69,365 80,241 15% 16%

Twitter TWTR.US 14.4 10,083 0.52 0.68 28 21 3.7 3.1 17,775 21,364 22% 20%

Lending Club LC.US 7.93 3,024 0.27 0.44 30 18 4.1 2.8 4,758 6,956 71% 46%

Source: Bloomberg, BOCOM Int’l



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Figure 3: Comparison of WeChat and Alipay in O2O

Source: Company data, TechWeb, tech.sina.com.cn, Donews, PBoC, BOCOM Int’l

WeChat Alipay

User base No. of users 300mn payment users (WeChat MAU: 697mn) 450mn real-name registered users

Social features Chat (text, voice, video, emoticon), Moments Chat (text, voice, emoticon), Life Circle (生活圈)

Finance features

Wealth management products

Li Cai Tong Yu’E Bao, Zhao Cai Bao, stock, Ant Fortune

Others Taobao Crowd Funding, Yu Le Bao, My Insurance

Credit features Credit Sesame Credit, Ant Check Later, Ant Borrow

City services Name Smart City Future City

Police Household registration (Hong Kong or Macao visa, passport application, marriage registration)

Exit and entry document enquiry, duplicating name enquiry, exit and entry enquiry, marriage registration and appointment, etc

Life Bills (water, electricity, coal), cable TV (Fujian) Bills (water, electricity, coal, gas, traffic ticket, cable TV, broadband, property management fee), smart market

Transportation

Bus route checking, traffic condition checking, driving license information and violation records, enquiry of result of license plate lottery for small passenger cars, charging pole search, fuel card top-up, parking, vehicle and passenger traffic enquiry at Haikou Port, ferry ticket booking at Haikou Port (Hainan)

Smart parking, metro ticket purchasing (Shenzhen), enquiry of result of license plate lottery for small passenger cars, car repair service search, violation alert, road condition enquiry, public bike rental, bus ticket purchasing, route checking, valet parking at hospitals

Healthcare Registration, medical insurance and online payment for non-covered items

Online registration, medical card top-up

Sports & culture Travel complaint, itinerary checking for tour groups, tour guide license enquiry (Lijiang)

Sports ticket purchasing, venue booking, library services (Beijing), booking of tourist sight tickets

Civil administration services

Business administration (individual tax checking, invoice verification, social security checking), litigation information enquiry, notary, publication of defaults, reporting of environmental violations

Real estate services, notary services, contract services, electronic invoice enquiry, social security (Housing Provident Fund checking)

Others Hospital registration, weather information, education (exam result checking), top-up (mobile phone top-up, QB top-up), repayment (credit card repayment)

Top-up (mobile phone top-up, game top-up, phone card resell, school card, Guangzhou Card top-up), education fee payment, typhoon checking, 114 phone number checking, repayment (credit card payment), lottery ticket

Covered cities 27 cities including Beijing, Shanghai, Wuhan, Zhengzhou, Guangzhou, Shenzhen, Foshan, Hangzhou, Wenzhou and Chengdu; 19 cities and counties of Hainan province; Fujian province and Zhejiang province

165 cities in 23 provinces

Partner Partners Dazhongdianping, Meilishuo, JD, Didi Taxi, Wangfujing Department Store, Yili Convenience Store, Haidilao, Sinopec Convenience Store, Wanda, Circle K, Manning, 7-11, DQ, Guoda Pharmacy, Laobaixing Pharmacy, Xinxing Pharmacy, Tianhong, Yijiayi, Bufenglianhua, Haolinju, Aiyingshi, Minsheng Department Store, Laiyifen, Xishiduo, Sept Wolves, Xianshengzaikang, Xishaoye Chinese Hamburger, etc

Koubei.com, Kuaidi, SF Express, Intime, Home Inn, Wumart, Meilianmei Mart, Laiyifen, hospital and bus, etc

Payment Payment methods

Transfer, scan-to-pay, Weixin Red Packet, AA payment, payment via official accounts

Transfer, scan-to-pay, payment collection, lucky money, face-to-face payment, sound wave payment, loan receipt, AA payment, Qin Mi Fu, family account, international remittance

Fee rate 0.6% for goods, life services, financial services and insurance; 1.00% for crowd funding; 2.00% for online virtual services; 1.25% for gold and jewelry; 0.35% for fuel

PC: 0.10% for ordinary users; 0.5% for sellers on Taobao and merchants who conduct transfer on Alipay website without contract

Mobile: free

Others Other features Tencent Charity Donation, tax refund (La Rinascente, Harrods, Kaufhof, Le Printemps, etc)

Advantage in traffic sources

Payment users (300mn), MAU (697mn), official accounts Active buyers (Taobao + Tmall: 407mn)



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Figure 4: Comparison of Ant Financial, JD Finance and Suning Finance Ant Financial JD Finance Suning Finance

Revenue FY2014 revenue: RMB10.15bn; net profit: RMB2.6bn 1-3Q15 revenue: RMB1.258bn; loss: RMB677mn 2015 revenue: RMB1.603bn

User Alipay: 450mn real-name registered users 100mn users 130mn registered users

Consumer finance

Ant Check Later: Commenced business in Apr 2015; no. of users exceeded 10mn 20 days after launch; handled 60.48mn transactions during Double 11 in 2015.

As of end-Jun 2015, JD Bai Tiao had 3.24mn activated accounts, ~2mn active users and RMB10bn in overdraft. In 3Q15, revenue of JD Bai Tiao reached RMB124mn.

Ren Xing Fu, a personal consumer credit product: As of end-2015, credit invitation had been sent to 20mn people, with total pre-approved credit amount of ~RMB100bn.

Crowd funding

Taobao Crowd Funding: Total fund raised by successful projects amounted to RMB169mn in Mar 2016, with 1.06mn investors. Antsdaq: As of Jan 2016, the first 4 projects on the platform raised RMB105mn, of which subscriptions by user investors totaled RMB55.09mn. No. of investors on the platform has exceeded 40,000.

Product crowd funding: As of Jun 2015, no. of users reached 1.27mn, total fund raised reached RMB700mn, and no. of equity projects reached 21. Crowd funding: Revenue reached RMB13mn in 3Q15. Total fund raised by successful projects reached RMB220mn in Mar 2016.

Suning Crowd Funding: There are 8 RMB10mn-level projects and 30 RMB1mn-level projects. Total fund raised has reached RMB300mn. Total fund raised by successful projects reached RMB110mn in Mar 2016, ranking third, with 851,300 investors.

Wealth management

Yu’E Bao: 200mn wealth management users; AUM surpassed RMB700bn in 1Q16. Zhao Cai Bao: Aggregate transaction value exceeded RMB200bn as of Jul 2015. Monthly transaction value reached RMB40bn.

Xiao Jin Ku, Xiao Bai Li Cai, fund: Revenue was RMB47mn in 3Q15.

Suning Wealth Management: As of end-2015, no. of users reached the 10mn threshold; transaction value reached RMB100bn.

Payment Revenue of Alipay was RMB7.105bn in 2014. Total payment amount reached RMB5600bn in 2015

In 3Q15, revenue of the payment business was RMB245mn; JD Payment and JD Wallet partnered with >500k merchants, with 57mn credit cards bundled.

Yi Fu Bao: As of end-2015, Yi Fu Bao had >30,000 contracted merchants, 130mn members, and annual transaction value of RMB200bn.

Insurance Ant Financial insurance platform: As of end-2015, the platform provided 2,000 products and services to 311mn users; the no. of users of shipping fee insurance (for product return) and account security insurance exceeded 100mn.

Insurance revenue was RMB2mn in 3Q15. Suning Finance’s insurance platform: Aggregate sales reached RMB3bn; no. of customers served reached 5mn.

Supply chain finance

MYbank: Served more than 1.6mn small/micro enterprises; cumulative credit granted exceeded RMB400bn.

Jing Xiao Dai: Commenced operation in Oct 2014; cumulative credit granted exceeded RMB30bn (RMB4bn per month).

Supply chain finance: As of end-2015, served several thousand suppliers; total amount exceeded RMB30bn.

Financing, valuation

In Jul 2015, Ant Financial completed A-round financing, introducing 8 institutional investors including Social Security Fund (5% stake). Valuation reached US$45bn. In Apr 2016, Ant Financial completed B-round financing, raising US$4.5bn. Total valuation reached US$60bn.

Raised RMB6.65bn in Jan 2016. Valuation reached RMB46.65bn.

On 25 Apr 2016, Suning Finance raised RMB6.667bn in its first-round financing. Post-money valuation was RMB16.667bn.

Source: tech.qq.com, caijing.com.cn, Sohu, tech.163.com, askci.com, company data, BOCOM Int’l

Mobile payment as the key to win the O2O battle

In Jun 2015, Alibaba and Ant Financial jointly invested RMB6bn, with 50% stake each,

to re-launch Koubei, a local living service platform, as a competitor with Dianping

and Meituan. Alipay and Koubei jointly invested RMB1bn during the Double 12

activity in 2015, which attracted 28m Alipay users and 600,000 offline merchants

from more than 200 cities in China.

In Apr 2016, Alibaba announced stake purchase in Eleme with Ant Financial, with

each paying US$900m and US$350m, respectively. The deal valued Eleme at

US$4.5bn and Alibaba will own 27.7% stake. Alibaba’s move was aimed at

transferring the operation of Koubei Takeaway to Eleme. Upon re-launch, Koubei still

requires big investment in operation of takeaway platform and logistics if it needs to

build its own delivery team, despite the support of Alibaba’s traffic. Eleme enjoys a

leading position in terms of user stickiness, traffic and logistics in O2O takeaway, and

possesses a self-built Fengniao logistics system, which could help Koubei improve its

logistics efficiency and operation. The market leadership of Eleme could raise

Alibaba’s share in the O2O takeaway market and improve the financial service

businesses of Ant Financial (see the report “Eleme’s team-up with Alibaba to

intensify competition in O2O takeaway” dated 26 Apr 2016).



03 May 2016

11

As we mentioned in our reports entitled “Apple Pay to help accelerate mobile

payment development, benefitting Alipay and Weixin and Apple Pay may not be able

to change the competitive landscape in China, and may cooperate with BAT” (dated

11 Dec 2015 and 19 Feb 2016, respectively), the influence of Apple could attract

some “petite- bourgeoisie” and highly-educated users in first-tier cities, which could

help enhance the acceptance of mobile payment among merchants and users.

However, since the potential users of Apple Pay only represent 15-30% of the users

of Alipay and Weixin Payment, even though Apple Pay could help BAT open up the

market of mobile payment, Alipay and Weixin will remain the ultimate beneficiaries.

Appendix: Financial service businesses of Ant Financial

In Oct 2014, Ant Financial was officially established with the products of Alipay,

Alipay Wallet, Yu’E Bao, Zhao Cai Bao, Ant SME Loans, Sesame Credit and MYbank.

Various financial products are coordinated on Ant Financial’s platform, through the

process of “borrowing money”, “earning money” and “spending money”, to serve

the same customer (see Figure 5 of Appendix).

In Jul 2015, Ant Financial announced the completion of Series-A financing and

introduced 8 investment institutions including the Social Security Fund (5%

shareholding). Its valuation reached US$45bn.

Principal businesses of Ant Financial

Alipay: Founded in Dec 2004, Alipay provides payment and escrow services for the

e-commerce business of Alibaba. In Jun 2010, PBoC issued new regulations requiring

non-bank payment companies to obtain a 3rd-party payment license. In May 2011,

Alipay obtained the required license after being transferred to a local company

controlled by Jack Ma. Alipay became a subsidiary of Ant Financial and is no longer

consolidated with Alibaba. Alipay has entered into an agreement with Alibaba,

according to which Alipay will prioritize Alibaba in the provision of payment services,

for a term of 50 years (automatically renewed for 50 years). On 11 Nov 2015 (the

Double 11 Festival), orders on the Alibaba platform processed by Alipay exceeded

RMB91.3bn. In addition to online shopping payment and transfer functions, Alipay

has actively expanded its offline payment business. Currently, 600,000 physical

stores and over 1mn taxis accept Alipay. In terms of internationalization, as of Dec

2015, 50,000 retail outlets outside China supported Alipay. Alipay’s tax rebate is

available in 24 countries and regions. Alipay has penetrated itself from an electronic

wallet into all aspects of users’ daily life, including taxi hailing, hotel reservation and

movie ticket and financial product purchases.

Ali SME Loans: Average loan amount per customer for Ali SME Loans is RMB30k-50k.

The duration of loan is usually less than 1 month. The bad debt ratio is only 1%.

Starting from 2Q15, interest income of SME loans is transferred to Ant Financial. In a

2014 SAPA, Alibaba agreed to sell its SME loan business to Ant Financial for

RMB3.219bn (US$519m) with the following terms: 1) In 2015-2017, Alibaba will

charge an annual fee for the SME loan business’ system service and intellectual

property from Ant Financial. Such fee is equivalent to 2.5% of daily average loan

balance; and 2) for 2018-2021, the annual fee will be equivalent to the 2017 amount.

As of June 2015, Ali SME Loans had granted a total of RMB40m loans to 1.6mn

small/micro enterprises.



03 May 2016

12

MYbank: In late 2014, CBRC approved the establishment of Mybank by Ant Financial.

The bank was founded by six shareholders, including Ant Financial (30%), Shanghai

Fosun (25%), Wangxiang Sannong (18%), Jinrun Asset Management (16%), Dr. Herbs

(8%) and Jinzi Ham (3%), with a registered capital of RMB4bn. The bank began

operation on 25 Jun 2015. Business trial started in Jul 2015, starting with small loans.

Due to regulatory reasons, remote account opening is not available at the moment

even though face recognition technology is already mature. Leveraging the rich

resources of Ali SME Loans, MYbank mainly targets small/micro enterprises, personal

consumers and rural users. The bank provides deposit/lending services not exceeding

RMB200,000/5mn. As of Feb 2016, MYbank had granted a total of RMB45bn loans to

more than 870,000 small/micro enterprises.

Yu’E Bao: Launched in Jun 2013, Yu’E Bao had a much lower entry barrier than

banks’ wealth management services but a higher interest rate. As of Feb 2016, Yu’E

Bao served 260m users and achieved total return of over RMB50bn.

Zhao Cai Bao: In Apr 2014, Ant Financial launched Zhao Cai Bao, an open platform for

wealth management. As of Dec 2015, Zhao Cai Bao served a total of 10mn customers

and trading volume of wealth management products on the platform exceeded

RMB400bn.

Wangjinshe: Wangjinshe, founded by Ant Financial (25%), Hundsun Technologies

(21.75%) and China National Investment and Guaranty Co (31%) with total

investment of RMB50mn, commenced operation on 24 Jun. It is the first online

financial asset trading center approved by the government of China. Wangjinshe is

an important part of Alibaba’s Internet finance strategy. It mainly targets middle/

high net worth customers, mainly with property-based assets, and complements

Zhao Cai Bao which focuses on general customers, thus enriching Alibaba’s financial

product portfolio. Wangjinshe is also connected to Alipay. Users can make purchase

on Wangjinshe with Alipay.

Crowd funding: Ant Financial launched the first tranche of “Eco Win-Win Fund”

(RMB1bn) and AntDAQ, a crowd funding platform, to support the development of

the Internet+ financial sector and startups. According to the data released by Ant

DAQ, the first tranche of four projects on the platform raised RMB105m as of Jan

2016. The user investors subscribed for RMB55.09mn and the number of user

investors exceeded 40,000.

Sesame Credit: On 5 Jan 2015, PBoC ordered eight institutions to prepare

themselves for personal credit data services. Sesame Credit, launched by Ant

Financial, is the first personal credit data platform in China. Sesame Credit combines

and assesses a wide range of data including personal connections, behaviors,

repayment capability and credit history. The user is then given a score from 350 to

950 (according to its official website). This is combined with the e-commerce

transaction data of Alibaba, the Internet finance data of Ant Financial, and public

security data for conducting traditional banking businesses online, like credit card

repayment, online shopping, transfer, and wealth management. Sesame Credit has

only recently come online for open beta. 21st Century Business Herald reported that

although Sesame Credit only had 360,000 users when it first came online, the

number of users grew nearly 100x within just six months to over 10m, including users

of low-interest and small-sum loan services like Ant Borrow and Ant Check Later.



03 May 2016

13

Hundsun Technologies: Zhejiang Finance Credit Network Technology Co (Zhejiang

Finance Credit), effectively controlled by Jack Ma, acquired 100% equity interest in

Hundsun Group, the parent company of Hundsun Technologies (600570.SH), for a

consideration of RMB3.3bn. Zhejiang Finance Credit will become the controlling

shareholder of Hundsun Technologies by holding a 20.62% stake in Hundsun

Technologies via Hundsun Group. Hundsun Technologies is mainly engaged in the

provision of IT solutions for financial institutions including banks, securities firms,

insurance companies and fund companies. According to TechWeb, Hundsun

Technologies was for many years named one of the world’s top 100 software

companies by FinTech. Its asset management system, wealth management system

and trading system and many other products are sold in the financial industry.

Figure 5: Scope of principal businesses of Ant Financial

Funding

Zhejiang Wang Shang Bank

Ali small loan

SME Loan

Yule bao

Ant Dake

Making Money

Tianhong

Fund Yue Bao

Zhaocai Bao

WJSShum

i Fund

Zhongan Inssurance

Santan Fiance

Spending Money

Alipay

one97

Comuni-cations

Koubei

Platform

Hundson

Credit Sesame

Ant Check Later

Ant lJe Bei

Source: Company, BOCOM Int’l



03 May 2016

14

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20160301 No Growth, No Gain 20160307 Two-Sessions in a Cyclical Spring 20160321 Unprecedented Divergences 20160418 Sweet and Sour Hog Cycle



03 May 2016

15

BOCOM International

11/F, Man Yee Building, 68 Des Voeux Road, Central, Hong Kong

Main: + 852 3710 3328 Fax: + 852 3798 0133 www.bocomgroup.com

Rating System

Company Rating Sector Rating

Buy: Expect more than 20% upside in 12 months Outperform (“OP”): Expect more than 10% upside in 12 months

LT Buy: Expect more than 20% upside but longer than 12 months Market perform (“MP”): Expect low volatility

Neutral: Expect low volatility Underperform (“UP”): Expect more than 10% downside in 12 months

Sell: Expect more than 20% downside in 12 months

Research Team

Head of Research @bocomgroup.com Head of Research/ Strategy @bocomgroup.com

Raymond CHENG, CFA, CPA, CA (852) 2977 9393 raymond.cheng Hao HONG, CFA (852) 2977 9384 hao.hong

Banks/Network Financials Mid-Cap Industrial & Building Materials/ Automobile

Shanshan LI, CFA (86) 10 8800 9788 - 8058 lishanshan Angus CHAN (852) 2977 9392 angus.chan

Li WAN, CFA (86) 10 8800 9788 - 8051 wanli

Hannah HAN (86) 10 8800 9788 - 8055 hannah.han

Consumer Oil & Gas/ Gas Utilities

Summer WANG, CFA (852) 2977 9221 summer.wang Tony LIU (852) 2977 9390 xutong.liu

Shawn WU (852) 2977 9386 shawn.wu

Environmental Services Property

Wallace CHENG (852) 2977 9387 wallace.cheng Alfred LAU, CFA, FRM (852) 2977 9235 alfred.lau

Philip TSE, CFA, FRM (852) 2977 9220 philip.tse

Luella GUO (852) 2977 9211 luella.guo

Gaming & Leisure Renewable Energy

Alfred LAU, CFA, FRM (852) 2977 9235 alfred.lau Louis SUN (86) 21 6065 3606 louis.sun

Healthcare Technology

David LI (852) 2977 9203 david.li Chris YIM (852) 2977 9243 christopher.yim

Insurance & Brokerage Telecom & Small/ Mid-Caps

Jupiter ZHENG (852) 2977 9389 jupiter.zheng Zhiwu LI (852) 2977 9209 lizhiwu

Jennifer ZHANG (852) 2977 9250 yufan.zhang

Internet Transportation & Industrial

Yuan MA, PhD (86) 10 8800 9788 - 8039 yuan.ma Geoffrey CHENG, CFA (852) 2977 9380 geoffrey.cheng

Connie GU, CPA (86) 10 8800 9788 - 8045 conniegu Fay ZHOU (852) 2977 9381 fay.zhou

Mengqi SUN (86) 10 8800 9788 - 8048 mengqi.sun

http://www.bocomgroup.com/



03 May 2016

16

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Documents

China Market Strategy Hao Hong, CFA