china: financial services -...

November 14, 2014

China: Financial Services

Equity Research

Internet Finance Part 1: Clash of the Titans unfolds; Midcap banks face risk of marginalization

China’s internet giants expand into finance

China’s internet giants: Alibaba Group, Baidu, and

Tencent have been using their vast customer base

and market dominance to expand into online

financial services. With their online payment tools

playing a key role in obtaining retail and SME clients

and data, we now expect them to target off-line

financing to consumers and China SMEs, who

often face expensive funding cost from traditional

financials. Indeed, Alibaba Group and Tencent

have been granted banking licenses — setting the

stage for a clash with established China financials.

Internet finance is small, but growing fast

We acknowledge that it is early days for internet

finance and its size is small in the context of

China’s banking system. Also, the newcomers face

challenges in capital, funding, and due diligence.

That said, we expect rapid growth off a low base

on 4 key drivers: e-/m-commerce, payment, clients

and data, and deregulation. We project internet

players to extend credit of Rmb6.8tn in 2024, still

only 2% of TSF excl. bonds/ equities — albeit with

profit to grow at 41% CAGR to US$40bn, or 8% of

our estimate for banking sector profit in that year.

Alibaba most promising among internet giants

Among China’s internet giants, we see Alibaba

Group as better placed than Tencent or Baidu to

grow its financial business, given Alipay’s position

as a client and data acquisition tool, its robust e-

commerce ecosystem, capabilities in big data and

risk management, and broad finance platforms.

Implications for China financials

We assess how China’s established financials are

meeting this nascent threat and will explore the

phenomenon in a series of reports, of which this is

the first. Our initial analysis indicates that three

select large cap financials are best placed to

defend their positions due to their strong IT

capability and internet finance strategic focus:

Ping An, China Merchants Bank and ICBC.

Those most at risk of marginalization, albeit in the

longer-term, are mid-size banks, notably BoCom,

China CITIC, Shanghai Pudong Dev. Bank, Huaxia

and China Everbright Bank, on relative weakness

in their retail banking franchise and a focus on

SME business — the next battlegrounds as the

internet and finance Titans square up.

INTERNET THREAT TO CHINA FINANCIALS

China’s three internet giants have increasing

advantage over banks in 4 of 7 key banking service

elements: transactional, payment, data gathering,

and regulation.

Banks still have advantage in deposit funding and

capital base, as well as due diligence checks and

NPL resolution.

Source: Gao Hua Securities Research

Ning Ma +86(10)6627-3063 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with companies

covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Jessica Wu +86(10)6627-3487 [email protected] Beijing Gao Hua Securities Company Limited Piyush Mubayi +852-2978-1677 [email protected] Goldman Sachs (Asia) L.L.C.

Nan Li, CFA +86(10)6627-3021 [email protected] Beijing Gao Hua Securities Company Limited

The Goldman Sachs Group, Inc. Global Investment Research

On-site DD

check

Deposit

fundingCapital Regulation

7 key elements for financial services

Consumers

Online/offline

transactions

SMEs

Corporate

Retailers

Online/offline

payment

Data

2

4

76

3

5

1

November 14, 2014 China: Financial Services

Goldman Sachs Global Investment Research 2

Contents

Overview: Emergence of internet finance to reshape China’s lending markets 3

The stage is set for Titans to clash: Internet finance to come of age in the next decade 8

We see four key drivers of internet finance in China 8

Internet finance giants’ profit: US$40bn by 2024, equal to around 8% of banks’ profits 12

The first battleground: payment as client/data acquisition tool; now moving to offline 15

Online payment develops rapidly – large by transaction number, but small by value 15

The move to offline 16

NFC payment function could provide banks a way to repel BAT, if well executed 18

The second battleground: consumer and SME banking — huge but still untested for BAT 20

Mining their advantages could allow BAT to threaten banks in consumer/SME banking products 20

BAT’s internet finance strategy: Alibaba leads in internet finance 24

Alibaba leads in internet finance 24

Tencent still to monetize its retail customers 30

Baidu: potential in financial searches and WMP distribution; O2O worth watching 33

Impact on financials: Marginalization a risk for midcap banks; Ping An, CMB, ICBC best placed 37

Assessing internet finance strategies of key financial institutions 39

Ping An Group: comprehensive internet finance strategy, top rank IT and integrated platforms 39

CMB: strong in IT service for SMEs, NFC trial, consumer/credit card brand and IT capability 43

ICBC: strong retail/SME franchise and IT capability; data mining and marketing needs to improve 44

Minsheng Bank: reasonably strong SME/IT capability; trial in direct banking and O2O services 44

Industrial Bank: potential in developing internet WMP platform, retail/SME franchise weak 45

Bank of Beijing: cooperation with Xiaomi in NFC; value-added marketing services at an early stage 45

CNCB: actively developing mobile code payment and POS loan; strategy unproven 45

SPDB: early mover in NFC with China Mobile but user experience remains a key issue 46

Disclosure Appendix 48

Prices in this report are based on the market close of November 12, 2014

_____________________________________________________________________________________________________________

Related reports

Alibaba Group Holding Ltd (BABA): Open Sesame: Initiate on China’s vast digital marketplace at Neutral, October 29, 2014

Tighter payment rules gives banks time to develop own capability, March 17, 2014

Interbank VII: Rapid growth in T+0 money market funds may increase system liquidity risk, January 29, 2014



Overview: Emergence of internet finance to reshape China’s lending markets

Internet finance in China has been developing rapidly over the past three years:

China’s three internet giants — Alibaba Group, Baidu, Tencent (which we dub “BAT”) — as well as JD.com have all been using

their success in e-commerce to build their online payment capabilities. They have all now begun to offer a wide range of financing

capabilities: consumer credit, SME loans, and small-scale wealth management tools such as Alibaba’s T+0 money market funds

(MMFs) that links to Alipay. (Note: Alibaba in this report refers to Alibaba Group and its affiliate Ant Financial Services Group.)

There are many new forms of internet finance emerging in China, such as:

Over 1,400 new peer to peer (P2P) lending firms that have been set up over the past three years to link directly between

borrowers and personal lenders for small ticket loans. P2P providers are typically internet service platforms to allow

personal lenders to search for borrowers on-line.

Crowd funding — that is, entrepreneurs post their projects or company descriptions to crowd funding websites in order to

attract broad investors;

Other kinds of internet finance business models such as third party payment for e-commerce/m-commerce, bank/financial

products search and price comparison websites, and web-based wealth management platforms, etc.

The move into financing by these internet players raises three key questions:

What is the growth potential of internet finance in China?

What are the potential threats to the traditional bricks and mortar banks, insurers, and brokers?

What might the impact be on China’s macro economy?

Germinating from our GS China Internet Finance Seminar, held in in Shenzhen in April, and developed in close collaboration with

our internet and macro teams, this report marks the first in a series we plan to publish on this new platform.

We believe internet financing has the potential to reshape the dynamics of China’s lending markets over time. We expect internet

financing business to grow rapidly in China off a low base and drive greater competition with banks in payments, and in consumer,

and SME banking areas. We expect internet finance players gradually to take some market share and wrestle some profitable

consumer and SME banking segments from banks.

We believe that, at least for the moment, they lack the funding, the capital and the requisite interpersonal relationships with

customers (to conduct due diligence) to take market share quickly. Over the longer-term, we think they may pose increasing long-

term marginalization risk for mid-cap banks that do not have strong franchises and IT/internet banking strategies.



Internet finance set to boom on four key drivers

We expect internet players will accelerate their development of payment, consumer credit and SME banking products. We forecast

consumer and SME loans/payment-related business of internet giants (essentially BAT and JD.com) could generate

US$29bn/US$11bn net profits by 2024, or up to c. 6% /2% of total bank profits then, driven by four factors:

• The rapid growth of e-commerce and mobile commerce activities in China, thanks to increasing penetration of

mobile/internet use, improving logistics for online shopping, and expansion by e-commerce giants and emerging new e-

commerce providers in new areas such as autos, health care, etc.

• Internet companies’ financial innovation as a catalyst for financial service “deregulation”. The current tight regulation

around banks and insurers provides many growth opportunities for internet finance players to serve un-satisfied demand.

For instance, we think consumer banking (i.e. credit cards, high yield subprime consumer loans) and SME banking are

under penetrated in China, offering segments that internet finance players can serve.

The government is generally supportive of financial innovation, and has imposed few regulatory constraints on internet

finance providers so far. China’s government encourages financial innovation to serve SMEs and consumer banking,

offering a favorable regulatory environment. For instance, the banking regulators recently approved for Tencent and

Alibaba Group to be the major shareholders and sponsors of two new private banks. On the other hand traditional banks

and insurers still face strict regulations such as credit quota, the 75% loan/deposit ratio cap for housing loans and capital

requirement that could hinder their competitiveness and curtail their willingness to serve the consumer and SME segments.

• Internet players have great incentive and capability to collect and analyze data related to transactions, behavior and

payments to enable them to improve risk management and promote targeted markets to potential users. In contrast,

although banks have lots of transaction data in credit and banking cards, we think they have not analyzed or utilized this

data effectively to conduct targeted marketing or detailed credit analysis.

• Internet players’ relatively closed ecosystem allows them to include their own online payment business such as Alipay,

Tenpay to close the transaction loop to lock in customers and transaction data. In 2013, third party payment functions

accounted for 76% internet shopping transactions (with the remainder conducted via bank cards), vs. 15% in the US.

Online payment allow internet players to gather clients and data; moving offline

In the absence of Chinese banks’ ability to provide suitable solutions to satisfy online shoppers’ requirements for security,

convenience and trust, online payment tools, such as Alipay and Tenpay, were first developed to facilitate e-commerce transactions

in 2004. Now, ten years later, internet players’ payment services have come to dominate e-commerce and mobile-commerce

transactions — with users numbering over 900mn and 300mn, respectively, by early 2014.

With critical mass, Alipay and Tenpay are now developing off-line payment solutions. For example, Alipay has recently moved to

enable payment for restaurants, taxis, etc. We believe these off-line payment scenarios will be critical for BAT to further develop

online-to-off-line (O2O) business — allowing them to acquire off-line clients (including SMEs), compile transaction data, and create

off-line relatively closed ecosystem business models. This in turn should enable them to build a foundation to expand their

consumer and SME banking.



In contrast, banks and China Unionpay (the banking card association) have traditionally been strong in off-line payment scenarios,

and have enjoyed high growth in these channels over the past decade (bankcard usage as a percentage of retail sales rose to 47% in

2013 from 5% in 2002). However, they have not developed comparative datamining capabilities to position them to effectively target

new products at the right customers.

We believe banks will need to increase investment and more focus their efforts to develop their banking card and new payment

technologies. Moves are underway, however. For example, Unionpay and many banks are pushing NFC mobile payment, likely

using the iPhone 6 (as in the US), and currently in conjunction with Xiaomi, Huawei and others. If executed well, this could provide a

way for banks to defend their traditional dominance of off-line payments. However, we believe NFC’s effectiveness remains to be

established in China, as there is little incentive for offline merchants to use NFC and it has not deeply penetrated consumers

consciousness, even though NFC has many advantages over the bar-code payment system employed by the internet giants. NFC as

a system has greater speed and safety, as well as offline merchant payment scenarios and regulatory support.

Consumer and SME banking the next battleground; huge but untested for internet players

Alibaba Group and JD.com already offer SME loans to their merchants and/or suppliers, as well as consumer loans to their clients

for online purchases. We expect BAT and JD will accelerate their efforts in offering consumer banking, credit cards and SME

banking online, to leverage their enormous retail and SME client base, their strong datamining capability (especially online

transactions), and their established e-commerce/m-commerce ecosystems.

We believe that compared with banks, BAT have increasing advantages in four of seven key banking services:

Transactions —capturing online economic transactions, and increasingly pushing into off-line transactions;

Payment — using online and off-line payment services to capture payment data

Data — using their ecosystem and big data technics to gather and analyze clients’ entity and identity data including

locations, age, family size, etc, as well as consumers’ multi-dimensional behavior data such as purchase behaviors, and

transaction data. Essentially they have the ability to analyze who their clients are, their online and off-line behavior, and

what they shop for, and whether they have ability and willingness to repay loans.

Regulatory advantages — so far internet players are subject to limited regulation regarding their financial innovations,

whereas banks face still strict regulations for loan quotas, L/D ratios, and capital and anti-money laundering requirements.

However, banks retain their traditional strengths: cheap deposit funding, on-site due diligence based on personal contacts, their

broad physical network which is critical for risk assessment of more complicated and larger transactions such as mortgage and SME

loans, and enormous capital positions to support the business.

In light of these fundamentals, we believe internet players’ consumer and SME banking will grow very rapidly off a low base, but it

will take many years for internet players to wrangle significant market shares from traditional financial service players —

predominantly due to their comparatively limited capital and funding. We forecast internet finance total credit growth (incl. P2P) to

reach Rmb8.8tn annually in 2024E, equivalent to 2.8% of TSF (total social financing; excl. bonds and equities), as banks also grow

their loan balances.



Alibaba leads in internet finance among peers

We have analyzed the key strengths, weakness and strategies of the three internet giants’ internet finance business, and believe:

Alibaba is the leading player, given its strong e-commerce franchise and closed ecosystem, Alipay’s pre-eminent position

in online payment, strong data mining and risk management capability, strong product development capabilities, and a

comprehensive repertoire of internet finance platforms such as Alipay, Yu’e’bao, Zhaocaibao, etc.

• Tencent has advantages in gathering retail customers through WeChat, as well as the potential to develop O2O payments

and financial service for consumers and SMEs in the longer run. Tencent is able to collect a variety of consumer behavior

data, but it will take time to build up a platform to capture e-commerce transactions and a wide range of payment scenarios.

In terms of its further consumer/SME banking potential, we believe Tencent’s O2O initiatives, cooperation with JD.com, and

its new banking subsidiary’s strategy are the three areas to watch for.

• Baidu is relatively weak in e-commerce transaction/payment functions, but its strong data mining capability and searching

traffic could help it build wealth management platforms and/or generate revenue from financial-service related searches.

That said, we believe BAT are likely to face challenges if and when they expand into finance services — notably complying with

complicated financial regulations in payment, anti-money laundering, customer education, and face-to-face interviews. These

may become more challenging if regulators impose tighter compliance standards (for example, third-party payment volume

caps, face-to-face interview in physical places).

Impact on financials: Risk of marginalizing mid-cap banks; Ping An, CMB, ICBC best placed

Although still very early days in the ascent of internet finance and therefore difficult to predict how the challenge from BAT can be

met, we believe three large-cap financials are best placed to defend their positions due to their strong IT capability and internet

finance strategic focus: Ping An Group, China Merchants Bank and ICBC.

Those most at risk of marginalization, albeit in the longer-term, are mid-cap banks — specifically BoCom, Citic Bank, Shanghai

Pudong Development Bank, Huaxia and China Everbright Bank — on relative weakness in their current retail banking franchise and

their focus on SME business, which we see as the next big battleground for internet finance initiatives.



Exhibit 1: H-/A-share listed China banks valuation comp table: we believe BoCom, CNCB, SPDB, Huaxia, CEB face long-term marginalization risks

* denotes the stock is on our regional Conviction List.

Source: Datastream, Gao Hua Securities Research

12-Nov Mkt Cap

RatingPrice (US$ bn)

2014E 2015E 2014E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015EH-shares (HKD)ICBC (H) 1398.HK Buy 5.05 229 0.96 0.84 1.03 5.0 4.6 3.4 3.1 7.1 7.6 7.0 7.1 20.6 19.3BOC (H) 3988.HK Neutral 3.84 138 0.82 0.74 0.89 5.0 4.7 3.2 3.0 7.0 7.5 7.8 7.1 17.3 16.6CCB (H) 0939.HK Buy 5.72 184 0.92 0.81 0.95 4.9 4.6 3.2 2.9 7.0 7.4 7.9 5.2 18.8 17.5ABC (H) 1288.HK Buy* 3.56 149 0.93 0.82 0.93 4.8 4.4 3.1 2.9 7.3 8.0 14.3 10.2 20.8 19.9BoCom (H) 3328.HK Neutral 5.95 57 0.74 0.67 0.81 5.3 5.0 3.2 3.1 5.8 6.7 5.7 5.1 14.3 13.8CMB (H) 3968.HK Buy 14.78 48 0.96 0.83 1.01 5.1 4.8 3.3 3.0 4.4 4.9 11.8 5.6 20.2 18.4CNCB (H) 0998.HK Neutral 5.32 32 0.75 0.66 0.88 4.5 4.4 2.7 2.4 5.5 5.7 10.4 3.6 16.4 15.1Minsheng (H) 1988.HK Neutral 7.99 35 0.92 0.79 1.03 4.6 4.5 2.9 2.7 5.5 5.3 10.7 1.0 21.1 18.3CQRCB 3618.HK Neutral 4.39 5 0.77 0.69 0.88 4.8 4.6 2.5 2.2 6.1 6.4 11.3 4.4 17.1 15.9BOCQ 1963.HK Neutral 5.51 2 0.75 0.66 0.84 4.3 4.0 2.2 1.9 5.8 6.2 17.6 7.3 18.8 17.6 H-share average 0.85 0.75 0.93 4.8 4.6 3.0 2.7 6.1 6.6 10.5 5.6 18.5 17.2

FEH 3360.HK Buy 7.16 3 1.22 1.07 7.8 6.1 4.6 3.7 3.9 4.9 25.6 26.2 15.8 17.5 Cinda 1359.HK Buy* 3.92 18 1.29 1.13 9.5 7.6 5.8 5.1 2.6 3.3 3.7 25.3 14.3 15.8

A-shares (RMB)ICBC (A) 601398.SS Buy 3.76 216 0.90 0.79 0.97 4.7 4.4 3.2 2.9 7.5 8.0 7.0 7.1 20.6 19.3BOC (A) 601988.SS Neutral 3.08 140 0.83 0.75 0.90 5.1 4.7 3.3 3.0 6.9 7.4 7.8 7.1 17.3 16.6CCB (A) 601939.SS Buy 4.31 176 0.88 0.78 0.91 4.7 4.4 3.0 2.8 7.3 7.8 7.9 5.2 18.8 17.5ABC (A) 601288.SS Buy* 2.65 141 0.88 0.77 0.88 4.5 4.1 2.9 2.7 7.7 8.5 14.3 10.2 20.8 19.9BoCom (A) 601328.SS Neutral 4.65 56 0.74 0.67 0.80 5.2 5.0 3.2 3.0 5.9 6.7 5.7 5.1 14.3 13.8CMB (A) 600036.SS Buy 10.99 45 0.90 0.78 0.95 4.8 4.5 3.1 2.9 4.7 5.2 11.8 5.6 20.2 18.4CNCB (A) 601998.SS Sell 5.22 40 0.93 0.82 1.10 5.6 5.4 3.3 3.0 4.4 4.6 10.4 3.6 16.4 15.1Minsheng (A) 600016.SS Sell 6.81 38 0.99 0.86 1.11 5.0 4.9 3.2 2.9 5.1 4.9 10.7 1.0 21.1 18.3SPDB 600000.SS Neutral 11.05 34 0.86 0.75 1.01 4.5 4.2 2.8 2.6 6.3 6.6 12.9 5.3 20.6 18.9Industrial 601166.SS Neutral 11.02 29 0.89 0.76 1.10 4.5 4.2 2.7 2.4 4.6 4.9 14.4 6.9 21.6 19.6Hua Xia 600015.SS Sell 9.09 13 0.82 0.73 1.05 4.9 5.0 3.1 2.8 5.1 5.0 6.3 -2.4 17.9 15.4BONB 002142.SZ Neutral 11.61 5 1.12 0.97 1.21 6.2 6.0 3.9 3.7 3.0 2.9 10.7 3.3 19.4 17.2BOBJ 601169.SS Neutral 8.48 15 1.00 0.88 1.18 5.9 5.6 3.8 3.5 4.3 4.5 13.2 5.2 18.2 16.8BONJ 601009.SS Sell 11.26 5 1.10 0.99 1.26 6.8 6.6 4.6 4.2 4.4 4.6 8.8 3.5 17.2 15.9CEB 601818.SS Sell 3.09 23 0.82 0.72 0.99 5.1 4.9 3.2 2.8 4.3 4.5 3.8 6.0 17.0 15.8

A-share average 0.92 0.80 1.04 5.3 5.0 3.3 3.0 5.2 5.5 10.2 5.3 18.6 17.1Big banks average 0.87 0.77 0.91 4.7 4.4 3.1 2.9 7.3 7.9 9.3 7.4 19.4 18.3Shareholding banks average 0.88 0.77 1.05 5.1 4.9 3.1 2.8 4.7 4.9 10.4 4.9 18.3 16.7City Bank Average 1.07 0.95 1.22 6.3 6.1 4.1 3.8 3.9 4.0 10.9 4.0 18.3 16.6

P/B (X) P/E (X) P/PPOP (X) Div yield (%) EPS growth (%) Adj. P/B

(X) ROE (%)



The stage is set for Titans to clash: Internet finance to come of age in the next decade

Internet finance in China has been developing rapidly in China, evidenced by the leadership of Alipay/Tenpay in online shopping

payment marketing, the boom in internet money market funds (c. Rmb1tn increase in AUM in the past year), thousands of P2P

lending websites, and BAT’s push in O2O payment, etc.

We expect internet players will accelerate development of their consumer credit and SME banking capabilities, building on their

success in gaining a lead over banks in the online payment scenarios. We forecast consumer and SME loans/payment-related

business of internet giants (essentially BAT and JD.com) could generate US$29bn/US$11bn net profits by 2024, or up to c. 6%/2% of

bank profits. We estimate their overall loan book could grow to Rmb6.8 tn in 2024, representing 2% of total social financing,

excluding bonds and equities in China.

We see four key drivers of internet finance in China

(1) Rapid growth in e-commerce and mobile commerce activities in China, thanks to increasing numbers of internet and

smartphone users, improving logistics for online shopping, and a plethora of e-commerce providers. For example, Alibaba Group’s

Tmall and Taobao market places’ Gross Merchandise Value (GMV) reached Rmb1.5tn in 2013, 3% of GDP and 14% of retail sales.

Moreover, China’s e-commerce penetration ratio and smart phone penetration ratio growing at the fastest clip among major

economies and quickly catching up with the US (Exhibits 2-6).

Exhibit 2: Alibaba Group’s Tmall and Taobao market places’ GMV on a steady upward curve

The GMV of Tmall and Taobao retail market place vs. nominal GDP and total retail sales

Source: Company data, Wind, Goldman Sachs Investment Research

0%

5%

10%

15%

20%

25%

30%

2012

2013

2014

E

2015

E

2016

E

2017

E

2018

E

As % of nominal GDP As % of total retail sales



Exhibit 3: According to Euromonitor, E-commerce as % of GDP in China rose

to 1.02% in FY13 vs. 1.24% in US, and will catch up rapidly

Exhibit 4: According to Euromonitor, e-commerce as % of retail sales in China

rose to 5.5% vs. 7.7% in US in FY13 and will catch up rapidly

Note: The e-commerce data refers to B2C retail value only excl. sales tax based on

Euromonitor of which e-commerce definition differs from Alibaba retail GMV (B2C and C2C).

Hence China’s E-commerce value based on Euromonitor is smaller than Alibaba’s retail GMV.

Note: The e-commerce data refers to B2C retail value only excl. sales tax based on

Euromonitor of which e-commerce definition differs from Alibaba’s retail GMV(B2C and C2C).

Hence China’s E-commerce value based on Euromonitor is smaller than Alibaba’s retail GMV,

Source: Euromonitor, Wind, Goldman Sachs Investment Research

Source: Euromonitor, Wind, Goldman Sachs Investment Research

Exhibit 5: China’s smartphone subscription as % of population (aged 15 to 64)

is improving rapidly and catching up with developed countries

Exhibit 6: A similar trend is occurring in China’s smartphone subscription as

% of total handsets

Source: Gartner, Global Mobile, World Bank, and Goldman Sachs Investment Research

Source: Gartner, Global Mobile, World Bank, and Goldman Sachs Investment Research

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

201

4E

201

5E

201

6E

201

7E

201

8E

United States Western Europe

Japan Brazil

India China

Ecommerce as a % of nominal GDP

0%

2%

4%

6%

8%

10%

12%

14%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

201

4E

201

5E

201

6E

201

7E

201

8E

United States Western Europe

Japan Brazil

India China

Ecommerce as a % of total retail (online + offline)

0%

10%

20%

30%

40%

50%

60%

70%

80%

200

9

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

North America Japan Brazil India China

0%

20%

40%

60%

80%

100%

120%

2009

2010

2011

2012

2013

2014

E

2015

E

2016

E

North America Western Europe

Japan Brazil

India China



(2) Internet players’ financial innovations as a catalyst or a driving force for financial service “deregulation”, as the tight

regulations on banks and insurers and the interest rate and loan quota regulations provide many growth opportunities for

internet finance to serve un-satisfied demand.

In our view banks have weaker incentive to lend to consumers and SMEs than to big SOEs because of China’s loan quota policy,

implicit government guarantees of SOEs, the 75% L/D ratio cap and an undeveloped credit investigation system for smaller

borrowers. As a result, many SMEs have a cost of funding of 16% or more, considerably higher than large corporates of 5%-6%,

and many SMEs and consumers have limited access to bank loans or corporate bonds (Exhibits 7-9). Therefore, we believe the

underpenetrated market for smaller borrowers provides internet players with growth potential in these areas.

In contrast, government is supportive of financial innovation in the internet sphere, and has imposed limited regulatory limits

to internet finance providers so far. China’s government has encouraged financial innovations to serve SMEs and consumer

banking. For instance, the banking regulators recently approved for Tencent and Alibaba Group to be major shareholders and

sponsors of two new private banks.

Exhibit 7: SMEs have much higher funding costs than large corporates, partly

due to their limited access to traditional bank loans/corporate bond markets

Exhibit 8: SMEs loans accounted for only 31% of bank loans in 2013

Source: PBOC, company data, Wind, Goldman Sachs Investment Research, Gao Hua Securities Research

Source: PBOC, company data, Wind, Goldman Sachs Investment Research, Gao Hua Securities Research

18.6%

15.6%

5.9%4.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1Y Informal

lending in

Guangzhou

Chailease

China(secured

SMEs)

CCB corp loan AAA Corp 1Y

yield

2012

2013

Funding cost by borrower type

Proxy for

secured SMEs

Proxy for

subprime

SME/consumers

Proxy for

big corps

Proxy for

big corps

29%

30%

31%

28.5%

29.0%

29.5%

30.0%

30.5%

31.0%

2011 2012 2013

SME loans as % of total loans



(3) Internet players have strong incentives and capability to collect and analyze transaction, behavior and payment data to

enable them to improve risk management and target potential users for certain markets. In contrast, although banks have a plethora

of transaction data in credit and banking cards, we believe they have so far not analyzed or utilized this data effectively to do

targeted marketing or credit analysis.

(4) BAT and JD.com have a more closed ecosystem to execute both transactions and payment and capture multi-dimensional

data for credit assessment. In China, third-party payment tools (mainly Alipay, Tenpay, etc.) made up of 76% of online shopping

volume in 2013, vs. only 15% in the US, where e-commerce payment is dominated by US banks (Exhibit 10).

The closed ecosystem includes both e-commerce transactions and payment, enabling internet players to know the identity of the

customer, whether payment has been made, whether the transaction is completed, and whether the vendor has received payment.

The information gathered in closed systems on transaction and fund flow can help internet players perform credit analysis, and ascertain whether the suppliers or customers need working capital. Banks typically are strong in capturing such data

for offline commerce transactions and payment.

Exhibit 9: Consumer leverage has been much lower than corporate leverage

in China, suggesting big growth potential for consumer banking in China

Exhibit 10: Bankcard share in online shopping in China is much smaller than

US, suggesting internet players have more closed ecosystem to complete

transaction and payment functions

Source: PBOC, Wind, Gao Hua Securities Research

Source: iResearch, company data, Goldman Sachs Investment Research, Gao Hua Securities Research

4 6 9 12 12 12 11 12 12 16 19 19 20 23 25 2622 22 24 25 26 32 28 30 28 29 27 25 24 24 24 230

79 11 12

13 15 15 1624 25 22 23

27 24 23

109103

107114 106 98 98 96 97

112125 129

142

155169 179

135 138149

161156 155 154 153 153

181

195 194

208

229

243252

0

30

60

90

120

150

180

210

240

270

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

E

20

15

E

Corporate

leverage

LGFV

leverage(loa

n, bond)

Govt.

Leverage

Consumer

loans

(as % of GDP) Total debts

as % of GDP

15%

76%

85%

24%

US China

Bankcard

Third-party

Internet shopping payment volume's share by payment

tools in 2013 estimated by GS



Internet finance giants’ profit: US$40bn by 2024, equal to around 8% of banks’ profits

We project the consumer and SME loan balance of internet giants (essentially BAT and JD.com) to rise to Rmb6.8tn by 2024E,

generating 76% CAGR in the coming decade from its start-up loan base of c.Rmb7bn in 2013. Even still, this will represent only 2%

of total social financing (excl. bonds and equities) in 2024E, as we expect banks’ and other financial institutions will also grow their

credit products at a 2014E-2024E CAGR of 12%.

Our projection of 76% CAGR over 10 years off a low base takes into consideration:

• BAT need time to build up their capital base if they aim to grow their offline SME and consumer loans. According to the

China Banking Regulator (CBRC), banking financial institutions’ capital base was c. Rmb11tn in August 2014, multiple times

larger than the capital of BAT’s financial companies. (e.g. the Rmb1.2bn registered capital of Small and Micro Financial

Services Company, Alibaba’s financial business; the Rmb3bn registered capital of WeBank invested by Tencent; and the

Rmb200mn registered capital of Baidu’s micro lending firms)

• It may take time for internet players to develop solid risk management models in the off-line business. Currently Alibaba’s

initial success in online SME loans (e.g. Alibaba’s Rmb15 bn SME loan portfolio has an NPL ration of around 1%) is built

around selected Taobao shops for which Alibaba has information about sales and cash flow. In addition, Alibaba is able to

control the activities of a Taobao shop in the case of a loan default, providing an incentive for vendors to maintain

payments.

As the internet giants move into offline channels to compete with traditional banks, we believe their inherent information

advantage over banks will be diluted, and therefore their expansion will be less rapid that in their online business models.

In terms of their profits, we project internet player could earn 28% ROE and NPAT of Rmb180 bn (US$29bn) from credit

products or c.6% of banks’ overall profits in 2024E), as they will mainly focus on the areas with the most promising and

profitable bank business — consumers and SMEs.

Separately, we forecast BAT payment businesses could earn net profits of Rmb66bn (or US$10.7bn), with a 24% CAGR in

the next decade, driven by robust internet shopping and their push into O2O payment.

In terms of banking sector profitability projection, we project banks’ ROA to decline from 1.35% in FY13 to 0.82% in 2024, given:

A fall in the net margin from an average 2.68% in FY13 to 2.01% in 2024E, due to the increasing competition and interest

rate deregulation.

Average credit costs to normalize to 1% in 2024 from 0.64% in FY13.

Credit growth to slow to c. 10% in FY2024E from 17.9% yoy in FY13.



Exhibit 11: We project that the credit products underwritten by internet

giants/P2P players could account for 2%/0.9% of TSF balances excl. bonds

and equities in 2024E

Exhibit 12: We project that the internet credit products of BAT and JD could

earn profits equivalent to c.6% of bank sector’ profit in 2024E

Source: PBOC, company data, Gao Hua Securities Research

Source: CBRC, company data, Gao Hua Securities Research

Exhibit 13: We project of BAT and JD Transaction Payment Value(TPV) could

grow to 4.5% of bankcard payment volume in 2024E

Exhibit 14: We project of BAT and JD payment profits c reach Rmb66bn in

2024E



0.0%

0.4%

0.8%

1.2%

1.6%

2.0%

2.4%

2013

2014E

2015E

2016E

2017E

2018E

2019E

2020E

2021E

2022E

2023E

2024E

P2P Internet giants (mainly BAT, JD)

Credit as % of TSF excl. bonds/equities

0 1 2 5 12

27

53

84

116

137

158

180

0%

2%

4%

6%

8%

0

50

100

150

200

2013

2014E

2015E

2016E

2017E

2018E

2019E

2020E

2021E

2022E

2023E

2024E

Profit of Internet giants' credit products

As % of bank profits (RHS)

Rmb bn

0%

1%

2%

3%

4%

5%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2013

2014E

2015E

2016E

2017E

2018E

2019E

2020E

2021E

2022E

2023E

2024E

Internet giants' payment volume

Relative to bankcard payment (RHS)Rmb bn

0%

10%

20%

30%

40%

50%

0

10

20

30

40

50

60

70

2013

2014E

2015E

2016E

2017E

2018E

2019E

2020E

2021E

2022E

2023E

2024E

Internet giants' paymenet NPAT

yoy (RHS)

Rmb bn



Exhibit 15: Our detailed long-term projection of banks, internet giants’ (predominantly BAT, JD) credit products and payments

Note: The P/L data of internet giants’ credit products and their payment in 2012 and 2013 are our estimates.

Source: Company data, PBOC, CBRC, Gao Hua Securities Research

RMB, bn 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025ETSF excl bonds and equity 81,673 96,313 110,612 125,461 142,303 159,272 178,264 199,520 223,311 249,940 279,743 311,702 345,753 381,795

yoy growth 1.120718 17.9% 14.9% 13.4% 11.9% 11.9% 11.9% 11.9% 11.9% 11.9% 11.4% 10.9% 10.4% 9.9%Bank P/L

Bank earnings assets est. 100,500 113,348 130,265 147,752 165,370 185,089 207,160 231,862 259,510 290,455 323,637 358,992 396,414 435,755 NIM 2.75% 2.68% 2.59% 2.50% 2.41% 2.36% 2.31% 2.26% 2.21% 2.16% 2.11% 2.06% 2.01% 1.96%Non-NII income as % of revenue 19.83% 21.2% 22.2% 23.2% 23.2% 23.2% 23.2% 23.2% 23.2% 23.2% 23.2% 23.2% 23.2% 23.2%CIR 39.4% 38.8% 38.8% 38.8% 38.8% 38.8% 38.8% 38.8% 38.8% 38.8% 38.8% 38.8% 38.8% 38.8%Credit cost 0.61% 0.64% 0.65% 0.73% 0.78% 0.83% 0.88% 0.93% 0.98% 1.00% 1.00% 1.00% 1.00% 1.00%Profit 1,239 1,418 1,565 1,692 1,789 1,911 2,036 2,164 2,294 2,459 2,655 2,849 3,041 3,226 ROAE 19% 19% 18% 17% 16% 16% 15% 14% 13% 13% 12% 12% 12%ROAA 1.35% 1.31% 1.24% 1.17% 1.11% 1.06% 1.01% 0.95% 0.91% 0.88% 0.85% 0.82% 0.79%

Internet credit productsP2P 6 27 83 233 465 698 816 954 1,116 1,304 1,519 1,760 2,032 2,335

yoy growth 210% 180% 100% 50% 17% 17% 17% 17% 16% 16% 15% 15%as % of TSF excl bonds, equities 0.0% 0.1% 0.2% 0.4% 0.6% 0.6% 0.6% 0.7% 0.7% 0.8% 0.8% 0.9% 0.9%

Internet giants (mainly BAT, JD) 2 7 23 73 211 550 1,215 2,199 3,321 4,450 5,206 5,935 6,766 7,713 yoy growth 230% 210% 190% 161% 121% 81% 51% 34% 17% 14% 14% 14%as % of TSF excl bonds, equities 0.0% 0.0% 0.1% 0.1% 0.3% 0.7% 1.1% 1.5% 1.8% 1.9% 1.9% 2.0% 2.0%Margin 11% 11% 11% 11% 10% 10% 9% 9% 8% 8% 7% 7% 7%Cost-income ratio 46% 46% 46% 46% 44% 42% 40% 38% 36% 35% 35% 34% 34%Credit cost 0.8% 0.8% 0.9% 0.9% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%Profit 0 1 2 5 12 27 53 84 116 137 158 180 206 yoy growth 237% 211% 174% 162% 127% 92% 60% 38% 19% 15% 14% 14%Capital needed 2 7 21 55 121 220 332 445 521 593 677 771 as % of bank profit 0.0% 0.0% 0.1% 0.3% 0.6% 1.3% 2.4% 3.7% 4.7% 5.2% 5.5% 5.9% 6.4%ROE 23% 35% 32% 32% 31% 31% 31% 30% 28% 28% 28% 28%

PaymentBankcard transaction payment 346,212 423,360 495,331 569,631 646,531 730,580 818,250 908,257 1,008,165 1,119,064 1,242,161 1,378,798 1,530,466 1,698,817

yoy growth 22% 17% 15% 14% 13% 12% 11% 11% 11% 11% 11% 11% 11%Internet giants 4,971 6,967 9,641 13,175 17,568 22,396 27,096 32,727 39,465 47,523 57,148 68,637 82,339

yoy growth 40% 38% 37% 33% 27% 21% 21% 21% 20% 20% 20% 20%Payment fees and idle funds' interest income 10 14 19 25 33 41 49 59 69 82 97 115 135

Take rate 0.20% 0.20% 0.19% 0.19% 0.19% 0.19% 0.18% 0.18% 0.18% 0.17% 0.17% 0.17% 0.16%Cost-income ratio 30.0% 29.5% 29.0% 28.5% 28.0% 27.5% 27.2% 26.9% 26.6% 26.3% 26.0% 25.7% 25.4%

Internet giants' payment NPAT 5 8 10 14 19 23 28 33 40 47 56 66 79 yoy growth 39% 37% 35% 32% 26% 20% 19% 19% 19% 19% 18% 18%



The first battleground: payment as client/data acquisition tool; now moving to offline

Online payment develops rapidly – large by transaction number, but small by value

Payment has been the first battleground — a primary tool to gather clients, transactions and data; after success in online, BAT is

moving off-line and into O2O. Internet players like Alipay have been rapidly developing their payment business, and taking market

share from banks/China Unionpay. They have dominated the PC and mobile consumption payment market — taking 76% of volume

by value in 2013.

Particularly, we note Alipay in 2013 has almost drawn level with bankcard consumption payment in terms of transaction units (albeit

a fraction by value). Moreover, it gained 21% market share in third-party Transaction Payment Volume, second behind Unionpay’s

subsidiary ChinaUnionpay Merchants Service (ChinaUMS) (Exhibits 16-17).

Exhibit 16: Alipay’s number of transactions rose rapidly to 98% of bankcard

consumption payments, although its TPV was only a tenth (Rmb3.6tn vs.

32tn in 2013)

Exhibit 17: Third-party players’ TPV was much smaller than banks’ due to

their small-ticket size. Alipay’s share in the third-party payment (internet +

offline) was 21% vs. 40% of Unionpay’s subsidiary ChinaUMS in 2013 TPV in Rmb tn, and market share breakdown in third-party payment

Source: PBOC, Company data

Source: iResearch

0

2

4

6

8

10

12

14

2009 2010 2011 2012 2013

# of Alipay transaction

# of bankcard consumption transaction

(bn units)

ChinaUMS

40%

Alipay

21%

Tenpay

8%

China PNR

6%

99bill

6%

Tong Lian

payment

4%

Sandpay

3%

Yeepay

2%

Others

10%

Third

party

players

17

Banks

1,344

November 14, 2014

Goldman Sachs Global Investment Research

The move to offline

The payment battle betwee

payment solutions for offlin

We believe payment is a hig

any lending business, gene

Moreover, we believe BAT

both within and outside the

Payment also prov

customers (B2B an

Tenpay can attract

the majority of freq

such as small ticket

Payment can help

identities of parties

financial needs and

Exhibit 18: Payment collects a variety of data for internet

B2C/C2C/B2B economic transactions, and acts as a chan


n banks/Unionpay and the internet giants has become fiercer since BA

ne business — so called O2O (online to offline) business, challenging b

gh ROE business for BAT given their scale and limited credit risks invo

rating service fee income with little capital.

will increasingly leverage their payment functions to gather clients

eir groups, and both online and off-line:

vides user traffic and client information between consumers and co

d C2C), and acts as a channel of financial product distribution. Widely

lots of consumers to merchants and be used to execute various B2C/B

quent interactions between internet financial service providers and cus

t purchase, money transfers among friends, settlement etc.

p BAT collect a variety of data to help run credit risk management.

s, merchant sales data, etc, which can be analyzed by internet players t

d borrowers’ credit quality.

t players and banks to run data mining and risk management. It also

nel for financial products

China: Financial Services

16

AT started to develop mobile

banks’ offline payment leadership.

olved as payment does not involve

s, transaction and payment data

orporates (B2C) and among

-used payment tools like Alipay and

B2B/C2C transactions. Moreover,

stomers occur in payment services,

It captures shopping, fund flow,

to ascertain precise customer

provides user traffic for



We expect both bankcard payment and BAT’s payment methods will continue to grow rapidly. However, we expect BAT’s payments,

to register much higher growth, driven by internet commerce, smartphone penetration, user-friendly experience that is supported a

simple, convenient and intuitive system, and the addition of more payment scenarios in BAT’s ecosystems (Exhibit 19). We also

expect Alipay and Tenpay to further develop their off-line payment scenarios such as Alipay’s recent move to offline merchants such

as hospitals and taxis.

We think these off-line payment scenarios are critical to BAT to further develop their O2O business — by acquiring off-line clients

including SMEs, acquiring transaction data, and allowing the off-line business model to be a relatively closed ecosystem. In turn,

this should enable them to build a foundation to develop their consumer and SME banking.

In contrast, banks and China Unionpay are traditionally strong in off-line payment scenarios, and have enjoyed high growth over the

past decade with their merchant penetration ratio rising to 47% in 2013 from 11% in 2008. Their dataming capability, however, is still

undeveloped.

Exhibit 19: We see continued increase of penetration of bank cards, but online/mobile payment should have much higher growth than banking cards

Source: iResearch, PBOC, Gao Hua Securities Research

Red marked numbers are GS est. Unit 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017EBankcard system

Bank card Consumption Volume RMB bn 3,947 6,861 10,430 15,212 20,826 31,830 42,334 52,917 63,501 73,661 yoy 32% 74% 52% 46% 37% 53% 33% 25% 20% 16%

POS machine-No. of POS Mn 1.85 2.41 3.33 4.83 7.12 10.63 14 16 17 19 yoy 56% 31% 38% 45% 47% 49% 30% 15% 10% 6%

Merchant penetration-No. of merchants accepting bankcard payment Mn 1.2 1.6 2.2 3.2 4.8 7.6 9.4 11.1 12.3 13.2 yoy 59% 33% 39% 46% 52% 58% 23% 18% 11% 7%-As % of total merchants % 11.3% 13.7% 17.6% 23.4% 32.8% 46.9% 53.0% 57.6% 59.2% 59.2%

Online payment systemInternet retail shopping RMB bn 128 263 461 785 1,303 1,983 2,761 3,784 4,775 5,637

yoy 129% 105% 75% 70% 66% 52% 39% 37% 26% 18%

- Mobile shopping RMB bn 12 69 274 828 1,616 2,517 3,207 yoy 490% 297% 202% 95% 56% 27%

- PC shopping RMB bn 773 1,234 1,709 1,932 2,168 2,259 2,429 yoy 60% 38% 13% 12% 4% 8%

Penetration ratio by various consumption channelsBank card consumption as % of retail sales(excl. property/auto/wholesale)

% 24% 32% 35% 39% 44% 47% 51% 53% 56% 58%

Mobile shopping as % of retail sales % 0.1% 0.3% 1.2% 3.1% 5.6% 7.9% 9.3%

PC shopping as % of retail sales % 4.2% 5.9% 7.2% 7.3% 7.5% 7.1% 7.0%



NFC payment function could provide banks a way to repel BAT, if well executed

We believe banks will need to increase investment and more focus their efforts to develop their banking card and new payment technologies. Moves are underway, however. For example, Unionpay and many banks are pushing NFC mobile

payment, potentially using the iPhone 6 (according to Caixin) and already in conjunction with Xiaomi, Huawei and others. If

executed well, this could provide a way for banks to defend their traditional dominance of payments. NFC is a near-field payment

tool with bankcard information stored in cellphones. Unionpay is leading banks to promote NFC and has upgraded over 3mn POS to

NFC-enabled machines. NFC as a system has greater speed and safety for offline merchant payment scenarios than bar-code

payment tools.

However, we believe NFC’s effectiveness remains to be established in China, as there is insufficient incentive for offline merchants

to use NFC and it has not deeply penetrated consumers consciousness, even though NFC has many advantages over the bar-code

payment system employed by the internet giants. For NFC payment to become widely used in the next few years, we believe banks

and Unionpay will need to do the following:

Aggressively promote NFC and install more NFC enabled POS machines in offline merchants.

Simplify or remove the NFC-wallet charge process from customers’ bank accounts to separate NFC wallet accounts.

Currently, customers need to get a special NFC wallet account for small ticket payments, which link to their bank accounts,

and need to transfer money before they use NFC. This greatly impacts on their user experience, and so need to be

simplified, in our view.

Collaborate with as many mobile manufacturers and telecom operators as possible.

Develop value-added services to incentivize merchants and consumers, similar to BAT’s CRM service for merchants and

customized merchant recommendation for consumers.

Recently, Apple launched the NFC function in its i-Phone6 in the US. We believe that if China banks and Unionpay can reach an

agreement to cooperate with Apple, their NFC payment can overcome its user-experience weakness, penetrate Apple aficionados

and attract other cellphone manufacturers to follow its NFC model, it will give them a way of defending their position from the BAT

challenge.



Exhibit 20: NFC has advantages in speed, safety, offline use over bar-code payment. But we believe NFC in China still has many weaknesses to overcome,

including its money-charge process, and the absence of consumer awareness or incentive for offline merchants

Source: iResearch, PBOC, Company data, Gao Hua Securities Research

Payment speed Only one quick touch Three steps

Internet access No Needed

Safety High Unconfirmed, software encryption

Money charge Pre-charge on ATM/UnionPay website. <Rmb 1k+ No pre-charge needed. Linked to Yu'ebao/credit card, etc.

Offline scenarios Over 3mn+ NFC POS. Gradual penetration by applying online license for offline

merchants

Mobile users Limited NFC-enabled cellphones. Likely iPhone6 900mn+ users/300mn+ active users in early 2014

Merchants' incentive No CRM value-added service launched Potential attractive CRM service

Regulation Support Temporarily halt code payment in offline payment deals

Bank system' NFC Code payment led

by Alipay/Tenpay



The second battleground: consumer and SME banking — huge but still untested for BAT

Mining their advantages could allow BAT to threaten banks in consumer/SME banking products

Alibaba Group and JD.com already offer SME loans to their merchants and/or suppliers, as well as consumer loans to their clients.

We expect the internet giants and JD will accelerate their efforts in offering consumer banking, credit cards and SME banking online,

to leverage their enormous retail and SME client base, their strong datamining capability (especially for online transactions), and

their established e-commerce/m-commerce ecosystem, etc.

We believe that compared with banks, BAT have increasing advantages in four of seven key banking services:

Transactions —capturing online economic transactions, and increasingly pushing into off-line transactions; E.g. Alibaba

leads the online B2B/B2C/C2C commerce transactions in China.

Payment — using online and off-line payment services to facilitate online and O2O transactions and capture clients and

payment data. E.g. Alipay active users reached 300mn+ in early 2014. Alipay is now challenging banks’ leadership in the

offline payment market, by developing offline payment scenarios such as hospital, utilities, taxi and other O2O cases as well

as its mobile payment tools such as code payment, etc

Data — using their ecosystem and big data techniques to gather and analyze clients’ entity and identity data including

locations, age, family size, etc, as well as consumers’ multi-dimensional behavior data such as purchase behaviors, and

transaction data. Essentially they have the ability to analyze who their clients are, their online and off-line behavior, and

what they shop for, and whether they have ability and willingness to repay loans.

For instance, Alibaba captures various data about Taobao merchants including their sales trend, client distribution, client

feedback, logistics and fund flows (Exhibit 22). As such, on the back of its datamining, credit analysis, and automatic loan

approval and risk management, Alibaba can offer attractive unsecured credit products to Taobao merchants at c. 15% to

25% yields. These shops can easily apply online, get the approval/proceeds instantly and pay much lower funding cost than

informal lending (25%-40%). In addition, we believe Alibaba’s SME business could also deliver high ROEs given its good

risk control, on the back its c.18-25% loan yield, fewer manual data entry requirements and good asset quality (NPL ratio

only 1.1pp in early 2014).

Regulatory advantages — so far internet players are subject to limited regulation regarding their financial innovations,

whereas banks face still strict regulations for loan quotas, L/D ratios, and capital and anti-money laundering requirements.

There are risks that in the future regulators may need to level the play field between internet finance players and banks.

However, banks retain their traditional strengths:

• Cheap deposit funding — as provided by their licenses to undertake deposit taking business. Although internet players

can issue bonds or undertake securitization to attract funding, we think their funding costs could be at least 300bp higher

than banks.

• Enormous capital positions — to support the business.



• On-site due diligence (DD) — based on personal contacts and banks’ broad physical networks, which is critical for risk

assessment of more complicated and bigger transactions such as mortgages and SME loans and corporate loans. For

example, in terms of SME loans, typically the due diligence process checks the true operation of the business, such as

production and inventory, and the background of the entrepreneurs and senior management. Personal contacts and

conversations between banks and corporate, their suppliers and customers are critical for the quality of the DD review.

Exhibit 21: Internet players have increasing advantages in transactions, payment, data and regulations, 4 of 7 key elements for financial services

The comparative advantage of internet players from the angle of the 7 key s for successful financial services


Entity/Identity

Behaviors

Transactions

Personal

contact

Behaviors

NPL resolution

1. Deposit funding franchise

2. Strong capital

3. Better on-site DD check and NPL resolution

Internet players' increasing

advantage over banks, part 2:

- Banks face strict regulations while internet players

do not

- Internet players may overcome capital/funding

weakness via innovation (securitization, etc.)

- Banks' advantage

over internet players in funding and on-site DD

1. Increasing internet/mobile consumption traffic

2. Significant advantage in data mining/big data

computing, which is the basis for risk management

and targeted marketing

3. Dominat position in online payment and increasing

penetration of offline payments through OTOs

Note

Internet players' increasing

advantage over banks, part 1:

7 key elements for financial services

Funding

and

regulations

Deposit

fundingCapital Regulation

SMEs

Corporates

Retailers

Consumers

Client

acquisition

and risk

mgmt.

Online/offline

transactions

Online/offline

payment

On-site DD

check

Data

1

2

4

5 76

3



Exhibit 22: Alibaba’s instant online loan for Taobao merchants: business and risk management process

Source: Company data, Gao Hua Securities Research

In light of these fundamentals, we believe internet players’ consumer and SME banking will grow very rapidly off a low base, but it

will take many years for internet players to wrangle significant market shares from traditional financial service players —

predominantly due to their comparatively limited capital and funding. Moreover, internet players will still need to strengthen their

multi-dimensional behavior database and risk management tools as the battleground migrates to off-line consumer and SME

banking business, as:

Compared with banks, internet players still have limited financial-related data (salary, fund flow, personal wealth) for

consumers and SMEs, as well as little insight into the offline commerce transaction data that banks usually capture from

banking cards and fund remittance activities;

Their current off-line risk mgmt. model is still in its infancy, and untested for the bigger and more complicated off-lines

financial transactions.

Client application Loan approval Post loan mgmt.

Database

‐ Historical sales

‐ Current sales

‐ Client distribution

‐ Client feedback

‐ Promotion plan

‐ Taobao score

‐ Logistics

‐ Fund flow‐ ID/Entity

Online risk model

Data mining

Instant approval

Customized size

Precise pricing

‐ Update data in real‐time‐ Update the input of its risk model‐ Automatic risk warning‐ Location data to support debt collection‐ Use Taobao stores as a pledge

Online

24/7 service



Exhibit 23: Mapping the internet finance battlegrounds between banks and BAT, and their relative strengths and weakness colored cells suggest the strengths of the players


Banks Alibaba Tencent Baidu

Little online e-commerce

C2C small-ticket transaction

Some offline utility transaction C2C small-ticket transaction

Financial investment Recent push to grow O2O Recent push to grow O2O

Future

development

Some efforts in

O2O commerce and NFC

payment

Recent push to grow

O2O commerce and code/web

payment

Recent push to grow

O2O commerce and code/web

payment

Recent push to grow

O2O commerce and

code/web payment

Very limited data mining

Little precise marketing

- Deposits Current products: Current products: Current products:

- Bank WMPs - Third-party WMPs - Third-party WMPs -Third-party WMPs

- Third-party WMPs - some consumer loans - some consumer loans -Gateway for financial

- Credit card - large amounts of SME loans - SME loans products

- Consumer loansFuture: Future: -Big potential in financial

search advertisement

- SME/corp loans More bank products post the

launch of its bank

More bank products post the

launch of its bank

Financial product selling

Payment

Current status

Big retail customer Wechat/QQ

touch, ID, behavior data like

networking; future O2O dataData for

consumer/

SME credits

Utilization

Data source

Large amount of

entity/ID/financial/

operating/B2B transaction

data but lack behavior data

Sizable multi-dimension data

incl. household entities

identification, behavior, online

transactions data

- Dominating player in on-line

payment via Alipay, esp. in small-

ticket B2B, B2C, C2C payment

- Strong online payment

scenarios and now gradually

migrating to off-line payments

such as hopital, utilities, taxis,

OTOs, etc

- Strong small-ticket C2C payment

- Convenient online payment

with some online scenarios

- Significant number of customers

that link Tenpay to their banking

cards

- Little B2B payment

- Strong security

- Strong offline scenarios

- Convenient big-ticket online

payment

- Weak online payment

scenarios, less convenient

small-ticket online payment

Economic transactions

Strong online B2B/B2C/C2C

commerce transactions

Strong search data and some

behavior data, but lack

ID/transaction data

Strong skills for data mining

Strong data mining/big data,

precise marketing/risk

management capability

Strong skills for data mining

Strong B2B transactions,

offline B2C transactions, C2C

large-ticket transaction

Some online e-commerce with

investment in JD.com

- Convenient online payment

- Weak online/offline

payment as a late entrant

- Few payment scenarios



BAT’s internet finance strategy: Alibaba leads in internet finance

We have analyzed the key strengths, weakness and growth strategies of the BATs’ internet finance business, and believe:

• Alibaba Group (Alibaba, in this report refers to Alibaba Group and its affiliate Ant Financial Services Group) is the leader in

internet finance in terms of transactions, payment, data, risk management, and comprehensive financial platform.

• Tencent enjoys strong retail customer acquisition, but has yet to monetize this; its O2O push and new banking subsidiary

are critical to watch for its consumer and SME banking business growth.

• Baidu is relatively weak in e-commerce, but has the potential to monetize financial related searches and WMP distribution

platforms.

However, we note the customer franchises and internet finance strategy of these internet firms will be constantly changing, and we

will continue to monitor new trends.

Alibaba leads in internet finance

We believe Alibaba is the leading internet finance player — with strong e-commerce, payment, data mining, risk management and

product development. The majority of its finance businesses is conducted by Ant Financial Services Group (AFSG, formerly Small

and Micro Finance Service Company), of which 37.5% of profit sharing rights are attributed to the listed Alibaba Group. We believe

Alibaba’s strengths in internet finance include five main strengths:

(1) Its strong and relatively closed e-commerce ecosystem provides a solid platform to acquire consumers/SMEs clients, and

capture payment and consumer behavior data.

• Its retail e-commerce maintains a leadership position in China, and we think it will be difficult for competitors to catch

up. The GMV (Gross Merchandise Value) of its e-commerce platforms reached Rmb1.9tn in FY14. Taobao dominated

with over 90% market share in C2C commerce, while Tmall account for 57% share in B2C in 2013.

• Large user base: Around 279mn active buyers and 8.5mn active sellers in its China retail market places in FY14.

• No. 1 player in online e-commerce transactions (90+ % share in C2C, 57% share in B2C and No.1 in B2B) in 2013.

• Alipay is the leader in online small-ticket payment market (over 300mn active users in early 2014 and Rmb3.6tn TPV

in 2013)

• Alibaba Group is able to capture sizable multi-dimensional data — including: identity, payment, transactional and

users’ behavioral data — and has strong data mining skills.

(2) Alipay dominates online payment, and is now moving off-line into areas such as taxis, hospitals, utility bills, etc., to gather

even more off-line commerce, customer traffics and data.

Alipay initially emerged as a payment tool to facilitate online e-commerce transactions. It offers 7 day credit/escrow accounts so that

customers can buy goods and pay the escrow accounts first; Alipay then releases the funds to online shops after clients are satisfied



with the goods delivered. This helps customers shop online without worrying about fraud (e.g. shops walking away without

delivering the goods).

By contrast, banking cards are not frequently used as consumers have concerns about the safety of putting card information online.

Moreover, neither banks nor China Unionpay have really tried to address such concerns or sufficiently promote banking card e-

commerce transactions. With new services now being rolled out, such as paying utility bills, peer to peer payments, and payment

services off-line, Alipay is becoming an even better tool to captures more customers outside Aligroup’s ecosystem.

(3) Alibaba has strong IT, data mining and cloud computing capability to develop online risk assessing, credit scorings, loan

monitoring systems, which we believe could be more advanced than China banks’ systems for consumer and SME banking.

For instance, in its Taobao merchant loan model (Exhibit 24), Ali-Cloud processes over 30 Petabytes available for data mining every

day (a colossal amount). In our view it is vital for the system to be able to assess risk, rank credit and assign loan limits within

seconds and continuously monitor asset quality trends, perform advanced data mining and have cloud computing. This sets a high

entry barrier.

Exhibit 24: Alibaba captures operating data, IT system data, CRM data and personal information of SME owners for its risk

management in its online SME loan model

Source: Company data, Various news sources; Gao Hua Securities Research.

Implication Risk mgmt.Payment, money transfer

PBOC database

ID, fund flow, credit card repayment

Yu'ebao assets Other WMPs Wealth

Online sales O2O sales Revenue

Client feedback

Client serviceE‐commerce creditability

Client distribution

LogisticsJudge sales

decoration, address

ERP,IT system

TBC... Operation, etc.

Pre‐lending DD

Post‐lending update

Debt collection

Data in real‐name account



(4) Alibaba has built a comprehensive financial platform. By leveraging the traffic and data in transactions and payment, Alibaba

is actively growing wealth management product (WMP) business — such as Ali-WMP platform, asset managers etc.

Its Yu’ebao money market fund has gained 124mn+ investors and over Rmb500bn in AUM within a year, demonstrating how

effective Alipay can be in bringing traffic to its WMP business.

(5) With Alibaba’s bank license, we believe its SME/consumer lending business looks promising in the long-term.

It is unclear to us what the business models Alibaba’s new bank will adopt, and what the future strategy for AFSG will be.

According to Alibaba, it may build an open platform for its financial services, such as selling WMP of other financial institutions,

being a platform for P2P lending, offering mutual funds such Yu’ebao, and similar strategies.

In the mid-to-long term, we believe Alibaba’s bank subsidiary can offer unsecured consumer loans and credit card loans to its

enormous Alipay customer base, or Taobao/Tmall customers.

For SME loans, we believe Alibaba’s bank subsidiary (30% stake owned by AFSG) can continue to offer its SME loans to serve Tmall

and Taobao merchants online, as its current online SME loan model enjoys the following advantages:

• Under its real-name account ecosystem, a large number of multi-dimensional data including financial, personal,

location, ID are collected by its ecosystem automatically (Exhibit 27).

• User-friendly experience for applicants: three minutes for a vendor to apply for a loan and a one minute waiting period

for loan approval and issuance. This compares to the detailed and long-drawn out proves for offline applications for

traditional bank loans.

• Manageable credit cost: 1.1% NPL ratio in early 2014 for unsecured micro loans.

Moreover, we believe Alibaba can expand SME loans to off-line merchants, as Alibaba increasingly moves offline. Its offline

commerce — such as travel, healthcare and other daily-life consumer business are gradually being incorporated in its ecosystem.

However, we see these challenges in Alibaba’s finance business going forward:

• There is much ground for Alibaba to cover to increase its penetration in offline merchants and make its O2O payment

widely-used in offline scenarios.

• Its online risk model has not been tested for off-line merchants and large borrowers (especially non-Taobao merchants and

consumer credit cards).

• It will also encounter more NPL collection problems offline than online, as Alibaba finance division does not have many

branches, and has limited measures of sanctioning borrowers for debt defaults (for online shoppers, Alibaba can close their

shops);

• Its rapid credit growth could be limited by the relatively small capital base of AFSG (registered capital of Rmb1.2bn)

• If it gains sufficient scale and regulators decide to treat it as a financial institution, AFSG might need to meet similar

compliance requirements as banks for payment, anti-money laundering, customer education, face-to-face interviews, etc.



Exhibit 25: Alibaba is the leading internet finance player with strong e-commerce, payment, data mining, risk mgmt. and product development Alibaba’ s SWOT analysis in the internet finance space

Source: CBRC, Gao Hua Securities Research.

Strengths1. Dominant player in online B2B/B2C/C2C commerce

2. Alipay as the leader in online small-ticket payment market in terms of both # of deals and user base

3. Sizable multi-dimensional data incl. ID, payment, transaction and its ecosystem's behavior data

4. Top-tier data mining, cloud computing skills supported by Ali-cloud and Hundsun Tech; good risk mgmt. track record of Taobao loans

5. Various financial license(bank, mutual funds, online/POS payment)

6. Strong financial product innovation capabilities like ABS, Yu’ebao, etc.

Opportunities1. Grow O2O commerce and payment scenarios to penetrate offline payment and gain more data (e.g. hospital, taxis, etc.)

2. Develop its ecosystem to lock customers and capture more behavioral and transaction data

3. Sell value-added CRM/marketing service to offline merchants/SMEs; gather more corporate data from investing into custom clearing corporates, hotel IT players, etc.

4. Issue online credit cards, consumer/SME loans based on data mining after the launch of the new bank

5. Distribute financial product via internet channel

Weaknesses1. Small capital base of Alibaba Group and its financial operations, vs. banks’ capital of Rmb11tn in Aug 2014

2. Relatively weak penetration in offline merchants

Potential risks1. Challenges in complying with complicated financial regulations including payment, anti-money laundering, customer education, face-to-face interviews, etc.

2. Failure of risk management model could cause high NPLs; lack of off-line NPL collection/ restructuring resources



Exhibit 26: Alibaba’ s layout of internet finance strategy: the most comprehensive financial service platform with great potentials in consumer/SME banking and

supported by strong e-commerce traffic and Alipay, and further O2O pushes

Source: Company data, iResearch, Analysys, Gao Hua Securities Research

SNS Local info service Transportation Big data

Taobao Tmall

Note: data for 2013 unles otherwise stated. Red text represent its core business and strength.

Ali-WMP(Zhaocaibao)

Sina Weibo

- SNS media

- MAU 157mn in

2Q14

- 900mn+ users/300mn+ active users in early 2014

- TPV Rmn3.6tn/internet mkt share 49pp in 2013

- Internet payment, bankcard POS, online prepaid card licenses

Alipay

- Set up mutual access with WeiboPay

- Launched 4/14; WMP platform open to various

FIs

- Products include P2P loans backed by bank

acceptance, mutual funds, fixed-income

insurance

- Transaction volume Rmb14bn+ since April 2014

- Alibaba won't provide guarantees

Online

E-commerce

O2O websites/apps

Citic 21CN

- online drug-sale

license

- nationwide drug-

distribution data

Juhuasuan linked to

Taobao

- 90+% share in

C2C

- No.1 mobile

ecommerce

app in terms of

MAU as of Jan

2014

- 57.4% share

in B2C

- Pioneered

Singles Day

promotion

festival

Tango

- Global Video

chat software

- 200+mn subs

Meituan

- Rmb16bn sales, 50%+

of them from mobile

- 52% mkt share

Taxi-hailing app Kuaidi

- subs 100mn+

- daily deals 6mn+ in

1Q14

Micro lendings

- Subsidiary Tianhong asset managers

- MMF Yu'ebao AUM Rmb574bn,

124mn+ users in 1H14; T+0 online

consumption function linked to Alipay

- Aim to build a platform of broker

WMPs

Mutual fund firms (incl. Yu'ebao) Zhongan P&C

Support

Ali-bank

Taobao Life

- provide LBS life

info

- support ordering,

payment, coupons in

some nearby

restaurants,

entertainment, etc.

Groupons

Hundsun Tech

- 50pp+ mkt share

in FI IT

outsourcing

Ali-cloud

- IT service for FIs

- SME IT system

provider/collect

SME data

- Loan balance Rmb14.6bn in 1H14;

Launched in 2010

- Average loan size Rmb37k in 1H14

- 100% credit loans based on Ali's big data

- NPL ratio 1.1pp in early 2014

- Launched one ABS with quota up to

Rmb5bn to securitize its MSE loans

Taobao

traveling

- user share

5.6pp as of

Aug 2013

HealthcareTraveling

Autonavi Map

- c.33pp share in mobile

in 4Q13

- 100mn+ subs

- Online P&C

insurer with 21mn

sales in 2M14

co-investor with

Tencent and

PingAn

- Focus on

consumer/SMEs

- Online deposit and

lending model

- Small deposit and

loan size



Exhibit 27: Alibaba Group Finance, Payment and SME/consumer lending forecasts

Source: Company data, Goldman Sachs Global Investment Research.

2014 SAPA FY2015E FY2016E FY2017E FY2018E FY2019E FY2020EGMV (Rmb bn) 2,418 3,025 3,719 4,417 5,095 5,731

% of total Alipay volume 36% 35% 33% 32% 30% 29%

Implied total Alipay volume 6,627 8,645 11,106 13,807 16,712 19,768

SME loan balance (Rmb mn) 43,148 84,217 140,746 211,314 294,730 388,774 % of GMV 1.8% 2.8% 3.8% 4.8% 5.8% 6.8%

Annnual fee charged by Alibaba Group 1,592 2,812 4,401 4,401 4,401 % of average balance 2.5% 2.5% 2.5% 2.5% 2.5%

PaymentAlipay PBT (payment only) 4,810 6,447 8,504 10,849 13,465 16,323

% yoy change 34% 32% 28% 24% 21%% of Alipay GMV 0.07% 0.07% 0.08% 0.08% 0.08% 0.08%% Alibaba Group's share 37.5% 37.5% 37.5% 37.5% 37.5%

Alibaba Group's profit share - 2,417.50 3,189 4,068 5,049 6,121

SME LendingLoan balance 43,148 84,217 140,746 211,314 294,730 388,774

% yield 18% 18% 17% 16% 15% 14%% funding cost 7.0% 7.0% 6.5% 6% 6% 6%% net spread 11% 11% 11% 10% 9% 8%

Net interest income 4,746 9,264 14,778 21,131 26,526 31,102

Provision for bad debt 431 842 1,407 2,113 2,947 3,888 % provision for bad debt 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Other operating costs (including business tax) 2,373 4,632 7,094 9,720 11,671 13,063 % of net interest income 50% 50% 48% 46% 44% 42%

Profit before tax 1,942 3,790 6,277 9,298 11,907 14,151

Income tax 485 947 1,569 2,324 2,977 3,538 % of PBT 25% 25% 25% 25% 25% 25%

Net profit (SME lending) 1,456 2,842 4,708 6,973 8,930 10,614 % yoy growth 95% 66% 48% 28% 19%% ROA 3% 3% 3% 3% 3%

Leverage ratio (X) 5.0 10.0 10.0 10.0 10.0 10.0

% ROE 34% 33% 33% 30% 27%Book value 8,422 13,130 20,103 29,033 39,647



Tencent still to monetize its retail customers

We believe Tencent has advantages of gathering retail customers through WeChat and Tenpay, but has yet to monetize its internet

finance business given still relatively weak e-commerce transaction volumes vs. Alibaba Group. Its O2O push is critical to

developing a consumer/SME banking operation in the longer run, in our view.

(1) Tencent has a large customer base and stickiness via its WeChat and QQ, providing strong traffic support to its WMP

distribution and other O2O applications.

For instance, Wechat helped Tencent distribute a Rmb62bn money market fund from 2.4mn users, becoming the second largest

internet money market fund as of 1H14. Tencent is in the process of developing a mobile WMP platform, which will allow financial

institutions to distribute various products to its grass-root customers.

(2) Tencent has popular C2C small-ticket payment and a large amount of social network and ID data, a solid foundation for its

consumer lending business especially after its WeBank subsidiary becomes operational.

Tencent captures abundant ID data and behavior data like social networking, peer-to-peer small ticket payment, location,

gaming by levering its WeChat and QQ.

We view this as a good basis for the risk management of consumer loans. However, compared with Alibaba, Tencent lacks

of personal wealth and shopping habits data for assessing credit risks;

We believe Tencent’s WeBank subsidiary (30% stake) will likely to leverage Tencent’s strength to focus online retail loans

and deposits. It may also set up some physical branches or VTM so as to develop its large-ticket payment and bank WMP

services.

(3) Tencent can build its off-line transactions and payment-customers plus data (needed elements to develop consumer/SME

banking) via its push into O2O

Tencent invested in Jingdong (JD.com), the No.2 B2C e-commerce player, as well as several influential O2O players in order to

quickly expand its O2O business.

It remains to be seen whether Tencent can effectively migrate its 500-600mn WeChat and QQ users to its m-commerce and O2O

commerce applications (e.g. Jindong, WeChat O2O shops and many other O2O applications) (Exhibit 29).

However, Tencent has not monetized its internet finance, given its following weakness and risks as below:

Tencent has weaker B2C/C2C e-commerce and online payment transaction volume than Alibaba, which may result in

insufficient transaction data and fund flow data for its online risk management, as well as less access to merchants.

Similar to Alibaba, Tencent faces a relatively small capital base and weak offline DD to combat banks’ current advantage in

off-line commercial activities and their branch network.

Tencent could also face challenges if required to meet compliance requirements for payment, anti-money laundering,

customer education, face-to-face interviews, etc. to level the playing field with banks.



Exhibit 28: Tencent has advantages in gathering retail customers through WeChat, and the potential to develop O2O payment/financial service for

consumer/SME financial service in the longer run Tencent’s SWOT analysis in the internet finance space

Source: CBRC, Gao Hua Securities Research

Strengths1. Strong consumer user base and stickiness to mobile

app WeChat/QQ

2. Capture some online transaction data by investing in No.2 B2C commerce player JD.com

3. More O2O merchant penetration via WeChat accounts and other services than peers

4. Strong small-ticket C2C payment due to WeChat; large amount of bank cards linking to Tenpay

5. Strong database and data-mining skills

6. Bank license and online/POS payment license

Opportunities1. Grow O2O commerce and mobile payment to penetrate

offline transaction and gain more data

2. Issue online credit cards and consumer/SME loans based on data mining after the launch of Webank

3. Distribute financial product via its WeChat and on-line channel

Weaknesses1. Weaker online B2C/C2C commerce than Alibaba

and involvement in online B2B commerce

2. Smaller market share in online payment than Alipay

3. Weaker in consumer fund flow data/SME data than Alibaba

4. Small capital vs. banks’ capital of Rmb11tn in Aug 2014

Potential risks1. Difficulties in complying with complicated

financial regulations including payment, anti-money laundering, customer education, face-to-face interviews, etc.

2. Failure of risk mgmt. model could cause high NPLs; lack of off-line NPL collection/ restructuring resources and expertise



Exhibit 29: Tencent’s layout of internet finance strategy: leveraging WeChat success/customer base, growing O2O business and payment business, to further

develop retail/SME banking/WMP distribution


SNS E-commerce Local info service Groupons

WeChat

QQ

500mn mobile subs/

594mn hours of visit(42% of

Top10) in Dec13

800mn PC subs

Note: data in 2013 otherwise stated. Red highlighted texts represent its core business and strength;

Tencent owns 30% of WeBank and 15% of Zhong an P&C

WeChat WMP platform WeChat service accounts Micro-lending WeBank Zhongan P&C

Tenpay

- C. 300mn+ subscribers in early 2014

- Online transaction volume Rmn1tn, mkt share 19pp in 2013

- Internet payment/bankcard POS licenses

600mn subs

779mn hours of visit(55% of

the sum of Top10) in Dec13

Living

Leju

online property

agent leader, 3.4

penetration rate of

property sales in

Top40 cities

Taxi-hailing

Dazhong Dianping

- 21pp mkt share

- c6bn sales

Jingdong

- active user 47mn,

18pp share B2C

- 323mn orders,

119bn volume

Didi App

- subs 100mn+

- daily deals 5mnm, 88%

of which were paid by

Tenpay in 1Q14

Traveling

Tongcheng+Yilong

7.2pp share in online

travelling agency mkt

3-tier players

Gaopeng, QQ

Online O2O websites/apps

Dazhong Dianping

in 3Q14

- MAU170mn+

- Merchants profile

10mn+

- Sold MMF with AUM Rmb 62bn to 2.4mn users

as a third-party channel in 1H14

- T+0, consumption or money transfer NA

- Likely to introduce other financial products in

future

- Invest in the leading third-party online mutual

fund platform Howbuy

- Many FIs launched their service account in

WeChat. Most of them only provide basic

services like balances check, product intro so

far.

- CMB WeChat bank is one of the leading

accounts with 4mn+ subscribers in 2013

- Registered capital of

Rmb300mn in 2013

- Would try to improve

client selection

efficiency based on its

data like SNS

- Focus on

consumer/SMEs

- Retail deposit and

SME loans

- Most business

online + physical

branch support

- Online P&C

insurer with 21mn

sales in 2M14

co-investor with

Tencent & PingAn



Baidu: potential in financial searches and WMP distribution; O2O worth watching

Unlike Alibaba and Tencent, Baidu has low e-commerce transaction/payment volumes. However, its strong data mining abilities and

internet search traffic could help it establish its franchise in financial vertical searches and WMP distribution.

We believe Baidu has the potential to establish a popular WMP platform and monetize its financial vertical search, with the

help of its large user traffic and strong data mining skills.

Baidu is the dominant domestic search engine provider — with over 85% market share in both PC and mobile market in 2013.

Particularly, Baidu enjoys large financial-related traffic (350mn financial-related search queries per day).

We believe Baidu could monetize these financial search queries by introducing clients to various financial product providers in a

more efficient and organized way. Financial vertical search could be a revenue driver for search engine companies. For instance,

finance and insurance search business contributes around 11% of Google’s advertising revenue in 2011.

By leveraging such a large volume of traffic, it is also possible for Baidu to develop popular WMP distribution platform like landing

pages/ Baifa WMP platform, and become a gateway for various financial product providers.

Its landing page could convert search engine traffic effectively to WMP selling. For example, in future, when a customer

searches for “mutual fund” in Baidu, Baidu could present various mutual fund products and let users fulfill payment &

transactions on its landing pages instead of directing them to financial institutions’ web pages.

Its young WMP platform, Baifa, has the potential to develop to a platform with comprehensive financial products and

precise product recommendation based on its strong data mining skills.

Although only limited mutual fund products and insurance products are currently on sale on its Baifa platform, we believe it

is possible for Baidu to distribute more financial products since Baidu is open to various financial institutions and is

applying for more financial licenses.

We believe its push into O2O commerce could give Baidu an opportunity to develop its mobile payment and transactions for

consumer and SME banking business in the longer term, similar to Tencent. Baidu can leverage its map application (260mn+ subs in

2013) in the O2O challenge against Alibaba and Tencent.

Although the number of its O2O applications is currently lower than Tencent and Alibaba, we believe the underpenetrated O2O or

offline commerce market will provide massive growth potential for all three of the BAT giants. The O2O market is still in an early

stage of development, and we don’t rule out the chance of the success of Baidu’s mobile payment and Baidu Connect (a customized

m-commerce page directly connecting Baidu Search App users and offline merchants).



Exhibit 30: Baidu is relatively weak in e-commerce transaction/payment, but its strong data mining skill & search traffic may help sell WMPs and/or generate

revenue from financial related searches. O2O worth watching

Baidu’s SWOT analysis in the internet finance space

Source: CBRC, Gao Hua Securities Research.

Strengths1. Large user traffic and financial-related search

queries

2. Large behavioral database related to search, hobbies and location

3. Strong data-mining skills, esp. for precise marketing

4. Some penetration in offline merchants via Baidu Map

Opportunities1. Distribute WMPs with precise product

recommendation via its internet WMP platform and landing pages

2. Provide precise marketing services to FIs levering its search traffic and data mining skills

3. Develop O2O commerce and payment scenarios to catch up with Alibaba/Tencent

4. Enter online consumer/SME credit businesses by cooperating with FIs

Weaknesses1. Limited involvement in online B2B/B2C/C2C

commerce

2. Negligible payment market share as a late entrant and lack payment scenarios

3. Weak in ID, transaction, payment and SME data

4. No bank license

Potential Risk1. Potential later mover into O2O

2. Difficulties in complying compliance standards of anti-money laundering, customer education, face-to-face interviews, etc. in its financial services



Exhibit 31: Baidu’s internet finance strategy: convert virtual name accounts to BaiPay users; develop precise WMP selling capabilities; further grow financial

services related search business


SNS Baidu Map

Note: data in 2013 otherwise stated. Red highlighted texts represent its core business and strength

Baidu micro-lending

Traveling

Qunar

- 22% share in

online travelling

agency mkt

Baidu Tieba

- Subs 600+

- MAU 200mn+

- Based on

virtual name

account/hobbies

Nuomi

- 7.6pp share

- c.Rmb2bn sales

- Launched in 2013

- Registered capital of

Rmb200mn

O2O websites/apps

Groupons

- 4Q13 share

25pp

- 260mn+

mobile subsInput method

Top2 app download gateway

91wireless, etc.

- New entrant with internet payment license since 2013 July

- Transaction volume's mkt share <1pp in 2013

BaiPay

Online

Others with 100+mn subs

No.2 video player iqiyi

Internet explorer

350mn financial-related search

queries per day

Mobile- 89.1% share, 400mn+ subs

PC- 85.7% share

Landing page

- Sold MMF with AUM Rmb23bn

to 361k users as a third-party in

1H14

- Sold negotiable deposit WMPs

- Likely to promote various

financial products as a third-

party

Search engine

Baifa WMP platform

- Present various related

product info./link on the

landing pages when users

search for financial products

on its PC search engine



Exhibit 32: Internet companies’ valuation comp table

Note: All target prices mentioned above are on a 12-m basis except for WUBA, ATHM, BIDU, CTRP, QIHU, QUNR, SINA, SOHU, SFUN, 0700.HK, WB, and YOKU, which are on an 18-month basis. *Denotes on GS Conviction List..

Source: Company data, Goldman Sachs Global Investment Research.

Last Target +/- Mkt CapCompany fx Price Price Side Rating (US$mn) 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 14-17E 15-18E 2014E 2015E

China Internet58.com $ 46.12 35.0 -24% Neutral 4,196 NM 45.1x 8.5x 5.7x NM 38.4x 6.9x 4.3x 135% NM NM NMAlibaba $ 118.20 104.0 -12% Neutral 311,455 44.5x 34.0x 17.8x 13.9x 34.4x 26.4x 10.4x 7.7x 30% 27% 2.0x 1.7xAutohome $ 43.00 40.0 -7% Neutral 4,835 29.6x 21.5x 9.2x 6.9x 20.0x 14.4x 4.2x 2.9x 35% 34% 1.2x 0.9xBaidu $ 249.82 265.0 6% Buy 88,016 25.3x 19.0x 7.3x 5.4x 18.0x 13.4x 5.8x 5.1x 34% 27% 1.1x 0.9xCtrip $ 56.72 65.0 15% Neutral 8,925 27.7x 20.7x 5.2x 3.9x 24.3x 16.1x 4.1x 3.4x 46% 35% 1.0x 0.8xE-house $ 9.94 14.1 42% Buy 1,350 11.2x 8.6x 0.8x 0.7x 3.4x 2.8x 0.6x 0.5x 24% 21% 0.6x 0.5xJumei $ 24.19 31.0 28% Buy 3,513 30.3x 19.1x 2.4x 1.7x 21.2x 12.8x 1.7x 1.3x 53% 36% 1.0x 0.8xLeju $ 14.65 19.9 36% Buy 1,956 13.7x 10.3x 2.6x 2.1x 7.8x 6.3x 2.4x 1.8x 35% 25% 0.6x 0.6xQihoo $ 72.37 105.0 45% Neutral 9,555 19.2x 14.4x 4.2x 3.1x 11.1x 8.2x 3.6x 2.6x 38% 28% 0.8x 0.7xQunar $ 26.02 27.5 6% Neutral 3,067 NM 55.9x 6.2x 3.7x NM 25.2x 5.0x 5.9x NM 275% NM NMSina $ 41.84 58.0 39% Buy 2,751 16.5x 9.5x 0.5x 0.4x 3.4x 2.2x 0.2x 0.1x 84% 56% 0.5x 0.3xSohu $ 51.26 54.0 5% Neutral 1,992 35.1x 14.5x 0.3x 0.2x 2.4x 1.7x 0.3x 0.3x NM 95% NM 0.4xSouFun $ 8.68 13.5 56% Buy 4,037 13.4x 10.8x 3.5x 2.7x 8.8x 6.3x 2.6x 2.1x 23% 28% 0.7x 0.5xTencent HK$ 129.20 146.0 13% Buy 155,961 29.1x 22.7x 8.6x 6.7x 19.9x 14.6x 10.2x 7.2x 30% 27% 1.3x 1.1xVIPShop $ 23.88 28.7 20% Buy 14,268 45.5x 30.6x 2.1x 1.5x 33.2x 21.2x 5.4x 3.6x 43% 27% 1.7x 1.7xWeibo $ 19.47 25.0 28% Buy 4,206 50.1x 24.4x 8.5x 6.1x 38.2x 19.3x 6.4x 4.8x 435% 59% NM 0.9xYouku Tudou $ 21.83 21.0 -4% Neutral 4,566 NM 55.2x 3.0x 2.2x NM 29.6x 1.1x 1.0x NM 98% NM NMMedian (Sum for Mkt cap) 15% 624,648 28.4x 20.7x 4.2x 3.1x 19.0x 14.4x 4.1x 2.9x 37% 31% # 1.0x 0.8x

Global InternetAmazon $ 311.51 360.0 16% Buy* 147,730 53.6x 36.5x 1.3x 1.1x 14.9x 11.6x 5.5x 4.3x 93% 39% NM 1.4xeBay $ 54.06 64.0 18% Buy* 68,456 17.2x 14.7x 3.2x 2.6x 10.4x 9.1x 1.9x 1.6x 14% 1.4xExpedia $ 87.11 82.0 -6% Neutral 11,547 18.9x 15.9x 1.7x 1.4x 8.9x 7.7x 2.0x 1.7x 17% 1.3xFacebook $ 74.72 85.0 14% Buy 220,424 38.5x 30.5x 11.8x 8.7x 20.0x 16.1x 9.1x 7.5x 21% 21% 2.1x 1.8xGoogle $ 558 600.0 7% Neutral 384,196 18.8x 15.6x 5.4x 4.7x 11.0x 9.3x 2.8x 2.4x 17% 16% 1.3x 1.2xLinkedIn $ 231.13 250.0 8% Buy 30,109 65.2x 45.0x 8.4x 6.3x 29.5x 20.1x 6.9x 5.9x 52% NMNetflix $ 384 450 17% Buy 24,390 49.5x 30.2x 3.2x 2.5x 27.7x 17.2x 150.4x 55% 1.5xPandora $ 18.79 32.0 70% Buy 4,253 29.3x 17.1x 2.9x 2.1x 23.1x 13.5x 19.7x 13.7x 109% NMPriceline $ 1,161 1,400.0 21% Buy* 61,916 18.3x 14.8x 5.5x 4.3x 13.5x 10.9x 6.1x 5.6x 23% 22% 1.0x 0.8xTripAdvisor $ 70.38 78.0 11% Neutral 10,455 29.0x 23.4x 6.0x 4.7x 16.7x 13.4x 7.4x 6.9x 23% 1.5xTwitter $ 42.54 60.0 41% Buy 30,983 87.6x 40.1x 11.5x 7.2x 46.5x 25.2x 6.8x 5.5x 185% NMYahoo $ 50.60 49.0 -3% Neutral 51,079 64.7x 63.4x 8.7x 8.8x 28.5x 27.4x 0.8x 0.7x -19% 3% NM 24.6xYandex $ 26.62 32.6 22% Neutral 8,938 23.7x 18.9x 5.9x 4.6x 14.2x 11.4x 9.0x 6.9x NA NMYelp $ 60.58 71.0 17% Neutral 4,849 56.4x 30.8x 7.8x 5.8x 39.0x 20.8x 16.5x 14.5x 53% 1.5xMedian (Sum for Mkt cap) 16% 1,134,932 29.3x 21.5x 4.7x 3.6x 15.8x 12.6x 5.8x 4.3x 25% 1.5x

MEDIAN, GLOBAL 12% 1,968,289 21.5x 18.7x 3.2x 2.6x 13.4x 11.4x 3.6x 2.7x 33% 1.2x

EPS CAGR, non-GAAP PEG, non-GAAPP/E, non-GAAP EV/Revenue EV/EBITDA EV/GCI



Impact on financials: Marginalization a risk for midcap banks; Ping An, CMB, ICBC best placed

Most China banks and financial service providers generally spotted the threats from internet players in 2013, and started to

react and defend their positions, by:

Setting up their own e-commerce websites to sell merchandise from their proved business partners;

Setting up their own P2P platforms to sell securitized loan products as a WMP to compete with other P2P companies, and

setting up money market funds like Yu’e’bao.

However, we believe their initiatives typically have not addressed the key threats from internet players, i.e. payment, consumer

banking, SME banking/O2O, and datamining/big data capabilities. As such, if the current situation continues, we believe banks may

gradually lose their advantage in payment, retail and SME banking business as e-commerce and O2O develop.

Although still very early days in the ascent of internet finance and therefore difficult to predict how the challenge from BAT can be

met, we believe three large-cap financials are best placed to defend their positions due to their strong IT capability and internet

finance strategic focus: Ping An Group, CMB and ICBC.

Those most at risk of marginalization, albeit in the longer-term, are mid-cap banks — specifically BoCom, CNCB, Shanghai Pudong

Development Bank, Huaxia and CEB — on relative weakness in their current retail banking franchise and their focus on SME

business, which we see as the second battleground for internet finance initiatives.

We assess banks’ retail banking franchise and IT capability (Exhibit 33), with ICBC and CMB ranking well, and CNCB, SPDB,

Industrial, CEB, Huaxia, BONJ CQRCB, BOCQ, ranking poorly. We look at:

Retail deposits as a share of total deposits — to show the current customer and funding franchise of banks, and as an

indicator of client stickiness.

Number of credit cards and bank card fees as a share of revenue as evidence of ability to market and attract credit card

users.

Number of branches for convenience to retail customers, and as an indicator of client stickiness.

We also look at banks’ SME banking franchises (Exhibit 34): we believe CMB, ICBC, ABC, Minsheng, Industrial Bank are best

placed, with BoCom, CNCB, SPDB, Huaxia, CEB much less so.



Exhibit 33: Potential rising marginalization of mid-cap banks in their retail

business: CNCB, SPDB, Industrial, Huaxia, CEB, BONJ, CQRCB, BOCQ etc.

Exhibit 34: Potential increasingly marginalization of mid-cap banks in their

SME business due to BAT’s O2O push: BoCom, CNCB, SPDB, Huaxia, CEB.

Note: 1. Higher scores represent strong capabilities.

2. Red-marked banks indicate those likely to suffer the most severe marginalization.

3. Consumer franchise scoring is based on credit card market share, retail deposit

proportion and bankcard fee contribution. IT scores are based on our assessment of its

IT strength and the quality of their internet banking and mobile banking applications.

The score of the ability to defend is the average the scores of consumer franchise and

IT skill/internet focus.

Note: 1. Higher scores represent strong capabilities.

2. Red-marked banks indicate those likely to suffer the most severe marginalization.

3. Consumer franchise scoring is based on credit card market share, retail deposit

proportion and bankcard fee contribution. IT scores are based on our assessment of its

IT strength and the quality of their internet banking and mobile banking applications.

The score of the ability to defend is the average the scores of consumer franchise and

IT skill/internet focus.

Source: PBOC, Company data, Gao Hua Research.

Source: PBOC, Company data, Gao Hua Research.

ICBC 47% 95.4 5% 17,550 5 5 5BOC 41% 46.2 4% 11,497 4 3 3.5CCB 45% 60.2 5% 14,729 4 4 4ABC 58% 48.8 3% 23,583 5 3 4BoCom 32% 33.4 6% 2,767 3 3 3CMB 34% 54.6 7% 1,110 5 5 5CNCB 20% 22.5 6% 1,098 2 3 2.5SPDB 18% NA 2% 991 2 3 2.5Industrial 16% 12.6 4% 892 2 3 2.5Minsheng 25% 18.7 9% 902 3 4 3.5PAB 17% 15.2 9% 566 3 4 3.5Hua Xia 16% 4.2 1% 558 2 3 2.5BONB 25% NA 8% 230 3 4 3.5BOBJ 20% NA 1% 281 3 3 3BONJ 17% NA 0% 122 2 2 2CEB 21% 21.7 11% 896 2 3 2.5CQRCB 73% 0.1 2% 1,772 4 1 2.5BOCQ 18% NA 1% 116 2 2 2

Retail

deposits

as % of

total

# of credit

cards

(mn

units)

Bankcard

fees as %

of

revenue

No of

branches

IT capability/

on-line focus

score

Ability to

defend score

Current

consumer

franchise

Branch

score

ERP/

cloud service Focus Total

ICBC 17% 4 4 4 12

BOC NA 3.5 3 3 9.5

CCB 11% 4 3 3 10

ABC 10% 5 3 3 11

BoCom NA 3 2 3 8

CMB NA 3 5 5 13

CNCB 6% 3 3 2 8

SPDB NA 2.5 3 3 8.5

Industrial 6% 2.5 4 5 11.5

Minsheng 24% 2.5 4 5 11.5

PAB 11% 2 4 5 11

Hua Xia 21% 2 3 3 8

BONB 44% 4 2 5 11

BOBJ 29% 4 2 4 10

BONJ 34% 4 2 4 10

CEB 18% 2 3 3 8

CQRCB 31% 5 1 4 10

BOCQ 33% 4 2 5 11

Business stickiness score

SME as %

of loans



Exhibit 35: ICBC was the Top 1 credit card issuer, followed by CCB and CMB

in 2013

Exhibit 36: Big banks and CMB are Tier 1 players in terms of credit card

transaction volume in 2013

Source: Company data


Assessing internet finance strategies of key financial institutions

Ping An Group: comprehensive internet finance strategy, top rank IT and integrated platforms

Among the Chinese financials, we believe Ping An Group was one of the first to determine a comprehensive internet finance

strategy, and it has recently stepped up the pace of implementation. However, we point out that many of its endeavors are still at an

early stage of development and the ability to add value depends on future execution.

Instead of treating the internet as another distribution channel, Ping An’s internet finance seeks to incorporate financial services into

consumers’ everyday life through health, food, housing (home) and transportation (auto) needs. Ping An has set up seven

subsidiaries such as Wanlitong Loyalty Points Program, Lufax, Ping An Haoche (used car trading platform), and Ping An Pay etc. The

plan is to utilize these subsidiaries as ‘platforms’ to access and attract potential customers, maximize contact points with consumers,

gather personal information/perform data mining.

If utilized well, these platforms should help Ping An to understand their target consumers better and offer precision marketing, and

eventually help migrating customers from non-financial services to the consumer financial services that Ping An specializes in. They

88

5244 42

30

51

1721 20

14

4

ICB

C

CC

B

AB

C

BO

C

Bo

Co

m

CM

B

Min

sh

en

g

CN

CB

CE

B

PA

B

Hu

a X

ia

No. of credit cards issued by 2013, mn units 1,614

1,273

806

1,020

791

940

583459

585 528

ICB

C

CC

B

AB

C

BO

C

Bo

Co

m

CM

B

Min

sh

en

g

CN

CB

CE

B

PA

B

Credit card transaction volumn, Rmb bn



could also help lock in customers via cross-selling, loyalty programs and other value-added services, and eventually creating a

closed loop or ecosystem around it, instead of just being the downstream of the value chain.

For example, Ping An Haoche aims to provide an efficient used car trading platform in the nascent used car market in China, utilizing

Ping An P&C’s auto database/pricing expertise. The goal eventually is to migrate customers from such a platform to traditional

businesses, and provide a one-stop financial service associated with used car trading, such as car loans (Ping An Bank) and car

insurance (Ping An P&C).

Subsidiary Lufax is a trading platform for non-standard credit assets (NSCAs), providing liquidity in NSCAs for financial institutions

via securitization products like ABS for individuals, corporates and FIs. We believe such a platform might create some a revenue

stream (underwriting fees charged over the borrowers, distribution fees over retail and institutional clients at a rate of 5-20% and

commission for secondary market NSCA deals at a commission rate at 0.5-5%), and help acquire new clients for the group.

At present, it selects borrowers, conduct risk management offline and securitize NSCAs by P2P and sell them to households. As of

1H14, Lufax attracted 17mn+ registered clients and sold Rmb300bn+ P2Ps. Most of the P2Ps receive a guarantee from Ping An’s

subsidiary at present, although Ping An is trying to educate investors and remove guarantees eventually.

We see these key strengths in Ping An Group’s strategy and capabilities to help it defend against the threat:

• Development of internet services for consumers and SMEs’ daily life, aiming to acquire customers and data. The services

include used car online trade platform, online housing promotion, healthcare prepaid card, points-for-prizes platform, along

with Ping An Bank’s orange E platform providing B2B commerce and IT solution services to SMEs.

• Apply “one-account system” to all internet applications and financial services to lock in clients and integrate the multi-

dimensional data of one-account users. Ping An’s one-account system could be viewed as a real-name ecosystem to

integrate Ping An’s product offerings across life insurance, P&C insurance, banking, trust and brokerage business. This

could help Ping An undertake cross-selling among various businesses and capture multi-dimensional data about clients’

solvency/credit worthiness.

• Ping An’s IT strengths and the integrated back-office to enable Ping An to consolidate online/off-line data to run data mining

for retail loans, insurance pricing and smart WM service, etc.

• Better management incentive scheme to develop internet finance than its peers. As a privately owned financial service

group, we believe Ping An’s management are more long-term focused than peers, especially in light of its proposed

Employee Share Purchase Scheme, which could help better align the long-term interests of management/key employees

and shareholders. By contrast, management in many other China financial service companies are state-owned.

There are still areas for improvement, such as attracting customers to use them more by adding more usage scenarios, and

improving user experience and datamining capabilities in its internet finance platforms. We believe that except for Lufax and

Wanlitong, its internet businesses’ user base is still relatively small, due to its late entrance, weaker user experience and absence of

sufficient differentiation/traction.



Exhibit 37: Ping An’s internet finance strategy: develop key online financial services for daily life (auto, housing, P2P/WMP, health care, etc) and consolidate

online/off-line data to run data mining for retail loans, insurance pricing and smart WM service.

]


Acquire clients/data

Clients/data pass Clients/data passthrough funnel through funnel to left line to right line

Home & Auto(Haoche/Haofang)

Healthcare prepaid card

P2P platform(Lufax)

B2B commerce(PAB Orange E)

Points‐for‐prizesplatform

Ping An BankPing An Insurance

Ping AnWM

Internet businesses

Traditionalfinancial services

Payment

One accountsystem

Share Share

Data mining for retail loans

Data mining for P/C pricing

Data mining for smart WM service



Exhibit 38: Ping An aims to use its 7 internet subsidiaries to access & attract potential customers, maximize contact points with consumers, gather personal

information/perform data mining. Ping An’s internet finance subsidiaries


Ping An internet finance subsidiaries Core business Business highlights Target customers Strategic purpose

Rmb 300bn trading volume, 17mn+ registered users (Mar'12 to June'14)

Yield 40% above PBOC loan rate, currently (7.5%‐9%)

Principle and interest guaranteed by a Ping An subsidiary for most P2Ps

5mn+ registered users; very few payment scenarios linked to itLack differentiation vs. Alipay/Wechat

Free used car information and auto diagnose

Auto insurance, loans and maintenance services

Branches in 11 major cities

Several thousand cars sold via the platform within 1 year of its launch

Coupon distribution for property developers and financial serviceCurrent model lack differentiation vs. market leader

Launched in 2014 and expected to have 26 branches by the end of 2014

Introduced prepaid card for 20,000 drug stores in 35 cities

Core product "Healthcare Expert" under development

Incubator of Ping An’s tech subsidiaries (Haoche, Ping An Pay, Lufax etc.)

One Account is the customer's account for all Ping An services

Established in Aug 2011; 400 employees

‐ Used car sellers and buyers‐ Used car dealers

Promote auto insurance and auto loan businesses

LufaxOnline peer‐to‐peer funding platform

‐ Grass‐root investors; ‐ Individuals/small businesses with funding needs

Build a comprehensive and transparent platform for P2P, B2C, B2B, F2F etc. transactions

Ping An WanlitongPoints‐for‐prizes platform

Cash‐equivalent points exchangeable among cooperating platforms Mass internet users

Transfer internet users to Ping An's customers60mn+/14mn registered users/MAU, 300 cooperating shopping websites and

200,000 offline retailers

Ping An Paye‐Wallet (mobile payment and social network app)

‐ Mobile payment and social network users‐ Ping An financial services users

‐ Provide customers with mobile payment option‐ Strengthen the stickiness of existing customers

Functions in the future: pay for all financial services by Ping An and its cooperating institutions

Ping An Financial Technology

One Account; Ping An tech subsidiaries' incubator

All Ping An customers‐ R&D for the Group‐ Maintain and support internet finance services

Ping An HaofangReal estate trading platform

Home sellers and buyersPromote P&C insurance and home loan businesses

Ping An Health Healthcare + Health insurance network

Customers with healthcare or health insurance needs

Promote health insurance

Ping An HaocheUsed car trading platform



CMB: strong in IT service for SMEs, NFC trial, consumer/credit card brand and IT capability

Among China banks, we believe China Merchants Bank has the following strengths in its internet finance development, and in

defending its business from BAT competition:

CMB has one of the best consumer and SME banking expertise and brands to serve mid-to-high end customers.

CMB has a first-tier IT team capable of above-peer data mining for consumers/credit cards/SMEs and excellent PC banking and

mobile banking user experience, evidenced by its mobile banking app and credit card apps (rank Top 2 and 3, respectively

among financial institutions apps with over 25mn MAU (Monthly Active User) in Aug 2014 based on iResearch)

In terms of SME banking, CMB is in the process of collecting SME data online by offering IT/ERP (Enterprise resource planning)

software services to SME clients. It provides free IT services including comprehensive settlement mobile app, corporate

email/call center/ERP software, etc. to 30k+ SMEs.

We view this as an efficient way to bond with SMEs clients, collect their operational information such as sales, inventory, salary

payment and payment information so that CMB can better serve these corporate clients by offering trade finance products, as well

as better perform credit risk management.

Moreover, we believe CMB’s SME ERP service can differentiate it from IT software players in the following ways:

Its SME IT software provides more comprehensive solutions than IT software players. CMB can provide settlement, WMP

investment and other payment services while the latter can’t do due to the lack of bank or third-party payment license.

Its software is free while IT software companies charge fees for some core software. CMB monetize such services by its

SME loan interest income and banking service fees.

It could lock in its SME customer relationships since SME clients are usually unwilling to change their IT software after they

become familiar with it. Corporates prefer stable back-end system, unlike consumers who tend to embrace changing

technology fashions. So far BAT have employed only limited efforts in this market (only Alibaba provides some IT/ERP

services to the SMEs in its commerce platform). Therefore, CMB could still enjoy early-mover advantage in our view.

CMB has differentiated its NFC model from other banks so far, and could be a good basis for O2O payment in the future.

We believe CMB’ NFC model (NFC chip in cellphone) differentiates it from many other banks’ NFC models such as SPDB, as:

It has a slightly simplified money-charge process and hence better user experience.

CMB set up a JV with China Unicom (No.2 telecom player in China) to promote its NFC tool.

Its relatively young customer mix could make such new payment technology more easily accepted.

In contrast, we note SPDB’s NFC model (NFC chip in SIM card) employs a more complicated process than CMB’s, as users have to

go to China Mobile outlets to apply for an NFC-SIM card and sign-off.



ICBC: strong retail/SME franchise and IT capability; data mining and marketing needs to improve

Among big banks, we believe ICBC has a better than peer retail and SME banking franchise, IT capability, and management focus in

terms of internet finance initiatives, as:

ICBC has one of the largest retail banking client base, credit card issuance and branch network among big banks. ICBC has a

large user database with 135mn mobile banking users and 95mn credit cards in issuance, all ranking No.1 as of 1H14.

Its IT team also ranks in the top tier among banks, with strong capability to deal with over 50mn transactions per second.

We also believe ICBC’s payment tool “Express Payment” could differentiate it from BAT payment tools, with a good balance

between user experience and security. It attracted 22mn users as of August 2014.

Nevertheless, we believe ICBC needs to improve its datamining capability, and refine its targeted marketing. For instance, ICBC’s

credit card business units have plenty of daily banking card transaction data for ICBC to do datamining (e.g. which customers buy

what goods) and then target their marketing efforts. However, the datamining team of ICBC credit card center is very small, and

such efforts so far have remained limited.

Minsheng Bank: reasonably strong SME/IT capability; trial in direct banking and O2O services

Minsheng Bank has strong SME banking franchise and focus, and strong management incentives to compete with internet finance

and reasonably good IT capability. Its recent moves into direct banking and its trial of O2O services associated with community

outlets are interesting moves, and worth watching.

Minsheng recently launches O2O services associated with community outlets. It provides online localized services like

networking, transportation, payment services and financial products for community residents, while the offline community

outlets will support online product promotion, transportation, a help-desk staffed by real people for elderly people, etc.

We believe such O2O services may have the potential to deliver differentiated local information and payment scenarios by

leveraging its offline outlets. However, the implementation and business model success remains to be closely monitored.

Minsheng is the early-mover into online direct banking to compete with online T+0 money market fund WMPs such as

Yu’ebao Its direct bank sells money market funds and structural deposits, and is going to launch online instant consumer loans

secured by clients’ financial assets.

While this helps it retain and attract retail customers, we believe this could raise its funding costs. It may also be difficult for its

direct bank to attract a large number of sustainable customers given the lack of payment scenarios and mobile traffic.



Industrial Bank: potential in developing internet WMP platform, retail/SME franchise weak

We believe Industrial bank may have potential in developing the internet WMP platform, thanks to its strong product innovation

capability and interbank platform. However, we think it may still face marginalization risk in consumer banking and SME banking

given its relatively weak retail/SME banking franchise and focus, and IT capability.

Industrial Bank recently develop an online bank WMP platform named “Bank Bank Platform” (YYPT in Chinese), which sells in-

house and third-party bank WMPs, MMFs and other mutual funds.

The platform’s MMF AUM quickly expanded to Rmb52bn and become comparable to the Rmb62bn AUM of WeChat MMF in 1H14,

thanks to its high return.

Baidu may direct traffic to YYPT based on their strategic cooperation contract.

Bank of Beijing: cooperation with Xiaomi in NFC; value-added marketing services at an early stage

Bank of Beijing (BOBJ) has a reasonably strong retail banking and SME banking franchise in its home market, Beijing City, partly as

it historically mainly serve SMEs in Beijing, and partly as Beijing local government provides access for BOBJ to handle retail

customers’ pension and medical care bank accounts.

Despite its relatively weak IT capability, it recently launched several interesting internet finance initiatives by cooperating with

Xiaomi Company (the 3rd largest cellphone manufacturer worldwide in 3Q14)

BOBJ launched NFC payment and LBS coupon recommendation in Xiaomi cellphones. Xiaomi is a leading smartphone

manufacturer offering cost-effective smartphones and their inhouse-designed cellphone operating system. Xiaomi also aims to

develop its own ecosystem similar to Apple’s such as APPs, payment tools, etc.

We believe Xiaomi could help BOBJ improve the user experience of its NFC-wallet application and introduce Xiao’mi clients

who may quickly embrace new payment tools.

We believe the LBS coupon application (Location Based Services) could be a value-added service, albeit very new. The success

or otherwise of its further implementation remains to be seen.

BOBJ direct bank model combines offline non-manual outlets offering bankcard issuance, video face-to-face interview and 24/7

services with online banking services and leverages the experience of ING Direct bank. Its board approved the setting up an

individual company for the direct bank.

CNCB: actively developing mobile code payment and POS loan; strategy unproven

CBCB has been actively developing mobile code payment products and new SME loans named POS loans. However, we believe the

effectiveness of this new strategy remains to be seen especially after CNCB changed its President in May 2014.

We think CNCB is at some long-term risks of being marginalized in consumer banking and SME banking, given its relatively weak

franchise, and that its initiatives may not be sufficient enough to change this.



CNCB launched its code payment app named Cyber Payment in 2013 which supports several offline and online payment

scenarios in both PC and mobile banking. However, we believe its payment scenarios are weaker than BAT and could face

regulatory uncertainty after PBOC halted code payment.

It also launched online POS loan products targeting on small and micro merchants based on the data mining of POS data.

CNCB select POS merchants by data mining POS transaction data bought from UnionPay and then market their SME working

capital loan products to those selected merchants. The selected merchants can apply for loans online within several hours and

CNCB will quickly decide loan approval/quota based on their risk management programs, POS flow, ID and entity data. For post-

loan management, CNCB monitors POS transaction data and updates its risk programs per two months. This POS loan,

launched in 2013, earns c.12% loan yield with less than 1% NPL ratio and about Rmb 900mn loan balance as of 1H14.

We appreciate its innovation and good utilization of data mining for SME loans. However, we note that as the POS data

cooperation with UnionPay is non-exclusive, the entry barrier is low and hence the model has been duplicated by many peers

already.

SPDB: early mover in NFC with China Mobile but user experience remains a key issue

SPDB is the NFC payment early mover with over 1.2mn NFC cards issued as of year-end 2013, cooperating with its shareholder

China Mobile. The NFC chip is embedded in China Mobile’s SIM card rather than in the cellphone (as per the ApplePay and CMB

models).

However, our tests suggest that its NFC product has more complicated process than CMB/ApplePay, for instance, users have to go

to China Mobile outlets to apply NFC-SIM card and sign-off. As such, we believe SPDB will need to improve its user experience in

NFC payment services.

We also believe its NFC payment service may not be sufficient to offset its weak retail, SME banking franchise, IT capability and

management incentives in enhancing competitiveness as it faces the threat coming from internet players and other banks.



Stock ratings, target prices and risks

We rate Ping An Group H/A shares Buy (Conviction list), with 12 month target prices of HK82.24/Rmb66.62 on 1.36x 14E P/EV. Key

risks for Ping An include: macro hard landing; too rapid expansion of Ping An Bank’s loan book that could hurt Ping An’s credit risk

profile and capital positions.

We rate CMB H/A shares Buy, with 12 month target prices of HK17.1/Rmb13.6 on 1.1x 14E P/B.

Key risks: macro hard landing, CMB’s EPS and asset quality misses.

We rate ICBC H/A shares Buy, with 12 month target prices of HKD5.9/Rmb4.7 on 1.13x 14E P/B.

Key risks: macro hard landing, CMB’s EPS and asset quality misses.

We rate Minsheng H/A shares Neutral/Sell, with 12 month target prices of HK7.17/Rmb5.67 on 0.83x 14E P/B.

Key risks: Minsheng’s EPS and asset quality improvement

We rate Industrial Neutral, with 12 month target prices of Rmb10.9 on 0.88x 14E P/B.

Key risks: macro hard landing, severe capital and provision requirement on its loan securitization books; Industrial’s EPS and asset

quality misses and beat

We rate BOBJ Neutral, with 12 month target prices of Rmb6.67 on 0.79 14E P/B.

Key risks: macro hard landing, BOBJ’s EPS and asset quality beat or misses

We rate CNCB H/A shares Neutral/Sell, with 12 month target prices of 5.0/Rmb3.9 on 0.69x 14E P/B.

Key risks: macro hard landing, CNCB’s EPS and asset quality beat or misses

We rate SPDB Neutral, with 12 month target prices of Rmb10.4 on 0.81 14E P/B.

Key risks: macro hard landing, BOBJ’s EPS and asset quality beat or misses



Disclosure Appendix

Reg AC

We, Ning Ma, Jessica Wu, Piyush Mubayi and Nan Li, CFA, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies

and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth,

returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage

universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI,

ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month

volatility adjusted for dividends.

Quantum

Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make

comparisons between companies in different sectors and markets.

GS SUSTAIN

GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well

positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on

quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the

environmental, social and governance issues facing their industry).

Disclosures

Coverage group(s) of stocks by primary analyst(s)

Ning Ma: China Financials. Piyush Mubayi: Asia Pacific Media, Asia Pacific Telecoms. Nan Li, CFA: China Brokers, China Financials.

Asia Pacific Media: 58.com Inc., Alibaba Group Holding Ltd, Astro Malaysia Holdings Berhad, Autohome Inc, Baidu.com, Inc., Changyou.com, Ctrip.com International, Info Edge India Ltd, Jumei

International Holding Limited, Just Dial Ltd, Makemytrip Ltd, New Oriental Education & Technology, Nord Anglia Education, Inc., Qihoo 360 Technology Co. Ltd., Qunar.com, SINA Corporation,

Sohu.com, SouFun Holdings Limited, TAL Education Group, Tarena International, Inc., Television Broadcasts, Tencent Holdings, Vipshop Holdings Limited, Weibo Corporation, Xueda Education Group,

Youku Tudou Inc..

Asia Pacific Telecoms: Axiata Group Bhd, Chunghwa Telecom, Digi.com, Far EasTone, HKT Trust, Hutchison Telecommunications HK, Indosat, KT Corp, KT Corp (ADR), LG UPlus, M1 Ltd, Maxis

Berhad, PCCW Limited, PT XL Axiata, Singapore Telecommunications, SK Telecom, SK Telecom (ADR), SmarTone, StarHub, Taiwan Mobile, Telekom Malaysia, Telekomunikasi Indonesia.

China Brokers: China Galaxy Securities, China Merchants Securities, CITIC Securities (A), CITIC Securities (H), Everbright Securities, Haitong Securities (A), Haitong Securities (H).

China Financials: Agricultural Bank of China (A), Agricultural Bank of China (H), Bank of Beijing, Bank of China (A), Bank of China (H), Bank of Chongqing, Bank of Communications (A), Bank of

Communications(H), Bank of Nanjing, Bank of Ningbo, China Cinda Asset Management Co Ltd, China CITIC Bank (A), China CITIC Bank (H), China Construction Bank (A), China Construction Bank (H),

China Everbright Bank, China Life Insurance Company (A), China Life Insurance Company (H), China Merchants Bank (A), China Merchants Bank (H), China Minsheng Banking (A), China Minsheng

Banking (H), China Pacific Insurance (A), China Pacific Insurance (H), China Taiping Insurance Holdings, Chongqing Rural Commercial Bank, Far East Horizon, Hua Xia Bank, ICBC (A), ICBC (H),

Industrial Bank, New China Life Insurance (A), New China Life Insurance (H), PICC Group, PICC Property and Casualty, Ping An Bank Co., Ping An Insurance Group (A), Ping An Insurance Group (H),

Shanghai Pudong Development Bank.

Company-specific regulatory disclosures

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant

published research

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe



Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 32% 54% 14% 42% 36% 30%

As of October 1, 2014, Goldman Sachs Global Investment Research had investment ratings on 3,649 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment

Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage

groups and views and related definitions' below.

Price target and rating history chart(s)

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant

published research

Regulatory disclosures

Disclosures required by United States laws and regulations

See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or

other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or

specialist role. Goldman Sachs usually makes a market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.

The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their

households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes

investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer,

director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and

therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts.

Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if

with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html.

Additional disclosures required under the laws and regulations of jurisdictions other than the United States

The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: Goldman Sachs Australia

Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking

business, in Australia. This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman Sachs. In

producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and other meetings hosted by the issuers the subject of its research

reports. In some instances the costs of such site visits or meetings may be met in part or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the

specific circumstances relating to the site visit or meeting. Brazil: Disclosure information in relation to CVM Instruction 483 is available at http://www.gs.com/worldwide/brazil/area/gir/index.html.

Where applicable, the Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 16 of CVM Instruction 483, is the first author named at the beginning of

this report, unless indicated otherwise at the end of the text. Canada: Goldman Sachs Canada Inc. is an affiliate of The Goldman Sachs Group Inc. and therefore is included in the company specific

disclosures relating to Goldman Sachs (as defined above). Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for, this research report in Canada if and to the extent that

Goldman Sachs Canada Inc. disseminates this research report to its clients. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on

request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private

Limited. Japan: See below. Korea: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither "registered banks" nor "deposit takers" (as defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This

research, and any access to it, is intended for "wholesale clients" (as defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman Sachs. Russia: Research reports distributed in the

Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within

the meaning of the Russian legislation on appraisal activity. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore)

Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their own investment risk.

Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of

the Financial Conduct Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that

have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International

on request.

European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available at

http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research.

Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho 69, and a member of Japan Securities Dealers

Association, Financial Futures Association of Japan and Type II Financial Instruments Firms Association. Sales and purchase of equities are subject to commission pre-determined with clients plus

consumption tax. See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities

Finance Company.



Ratings, coverage groups and views and related definitions

Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a

stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review

Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular

coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the

potential return or the likelihood of the realization of the return.

Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all

covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership.

Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one

of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The

investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12

months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage

group's historical fundamentals and/or valuation.

Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic

transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because

there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and

price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The

information is not meaningful and is therefore excluded.

Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices

around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia

by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by either Goldman Sachs Canada Inc. or

Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by

Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company

Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United

Kingdom and European Union.

European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, has

approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated

by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany.

General disclosures

This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is

accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports

published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment.

Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a

substantial percentage of the companies covered by our Global Investment Research Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).

Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are

contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the

recommendations or views expressed in this research.

The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may discuss in this report, trading strategies that

reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analyst's published

price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock's return

potential relative to its coverage group as described herein.

We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or

derivatives, if any, referred to in this research.

The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do not necessarily reflect those of Global Investment

Research and are not an official view of Goldman Sachs.

Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the products mentioned that are inconsistent with

the views expressed by analysts named in this report.

This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal

recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this



research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income

from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have

adverse effects on the value or price of, or income derived from, certain investments.

Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options

disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option

strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request.

All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or

available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For research, models or other data available on a particular

security, please contact your sales representative or go to http://360.gs.com.

Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282.

© 2014 Goldman Sachs.

No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.

china: financial services -...

Documents