russian internet: economics and investor perception © Александр Балахнин. goldman...
TRANSCRIPT
Alexander Balakhnin OOO Goldman Sachs Bank +7 (495) 645 4016 [email protected]
Russian internet: Economics and investor perception
The Goldman Sachs Group, Inc.
May 2011
The Goldman Sachs Group, Inc. 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, see the end of the text. Other important disclosures follow the Reg AC certification, 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.
Goldman Sachs Research
Goldman Sachs Global Investment Research
2
Key internet activities
Key internet activities cover communication, entertainment and commercial needs of people
Normally, internet properties are involved in more than one internet activity
A variety of activities helps increase reach of product, improve relevance, build dominance
Some internet activities are more complementary than others
Source: Goldman Sachs Research
Goldman Sachs Global Investment Research
3
Drivers of internet properties’ success
We identify three drivers for the long-term success of internet properties: Dominance, Relevance and Monetization
While niche projects may exist, they are vulnerable in the long term, as dominance enables more time for business model adjustment
While monetization is the primary goal of any project, it may have a negative impact on relevance and building dominance
However, without monetization, it is nearly impossible to build relevance and dominanceSource: Goldman Sachs Research .
Goldman Sachs Global Investment Research
4
How are properties monetized?Internet monetization matrix
Source: Goldman Sachs Research
banner contextualsuper-
focusedlisting fees
API revenue sharing
virtual items paid service
social networking
communications
MMO
e-commerce
mobile VAS
portals
payment systems
search
ADVERTISING IVAS
Goldman Sachs Global Investment Research
5
Need to be an innovative leader to existInternet properties’ survival cycle
Long-term sustainability requires ongoing replication of previous success
Successful product may soon become profitable, but product life is short
Resting on laurels gives competitors an opportunity, which may push a property out of business
Monetization should be innovative, as it threatens dominance build-up
Product build-up may require inorganic development
Source: Goldman Sachs Research estimates
Goldman Sachs Global Investment Research
6
Reasons for high bargaining power of internet properties
Source: Goldman Sachs Research
Monetization is negative for business long termand hence inventory supply is managed wisely
Supply is less competitive than it may look
Competition risks are imminent for internet properties; but it is difficult to replicate somebody’s
success
Start-ups hit ratio is close to zero
Goldman Sachs Global Investment Research
7
Case study: Economics of successCash flow generation of Odnoklassniki and VKontakte
Source: Company data, Goldman Sachs Research .
Internet start-ups require sufficient investments for a long period of time
Profitability is high, but it is compensation for low initial visibility
Even after years of investment, success and dominance are not guaranteed
Odnoklassniki (US$ mn) Vkontakte (US$ mn)
-5.0
33.0
1.520.9
46.7
68.9
-3.1
-17.1
-21.8
-31.4
-4.0 -4.9
-7.4
-10.3
-15.0
-5.0
5.0
15.0
25.0
35.0
45.0
55.0
65.0
75.0- OK accumaluated cash flow
- Revenues
- Opex & taxes
- Capex
2008 2009 20102007
-2.0
3.3
5.3
27.3
47.4
-0.6
-3.2
-12.0
-25.9
-2.1-6.0
-10.9
-14.1
-15.0
-5.0
5.0
15.0
25.0
35.0
45.0- VK accumulated cash flow
- Revenues
- Opex & taxes
- Capex
2008 2009 20102007
Goldman Sachs Global Investment Research
8
Mail.ru profitability and cost structure
Source: Company data, Goldman Sachs Research estimates
Profitability structure (2010) Cost structure (2010)
Personnel expenses
51.6%
Depreciation and
Amortisation14.1%
Marketing expenses
11.2%
Server hosting expenses
6.1%
Other Costs16.9%
Personnel expenses
29.1%
Depreciation and
Amortisation8.0%
Marketing expenses
6.3%
Server hosting expenses
3.4%
Other Costs9.5%
EBIT43.7%
Goldman Sachs Global Investment Research
9
Odnoklassniki profitability and cost structure
Source: Company data, Goldman Sachs Research estimates
Profitability structure (2010) Costs structure (2010)
Personnel expenses
31.5%
Depreciation and
Amortisation19.5%
Marketing expenses
2.5%
Server hosting expenses
29.3%
Other Costs17.1%
Personnel expenses
12.9%
Depreciation and
Amortisation8.0%
Marketing expenses
1.0%
Server hosting expenses
12.0%
Other Costs7.0%
EBIT59.1%
Goldman Sachs Global Investment Research
10
Internet advertising geared to GDP growthAdvertising market drivers
Source: Goldman Sachs Research estimates
Russian GDP growth
Advertising penetration growth
Internet share growth
Russian GDP is growing rapidly on the back of high resource prices and booming domestic
consumer demand
Growing middle class and economic growth increase advertising
spending as a share of GDP
Internet share in total advertising budgets
increases as internet penetration expands
Goldman Sachs Global Investment Research
11
Internet advertising will benefit from GDP and penetration growth
10
100
1000
1,000 10,000 100,000
Argentine
Armenia
AustraliaAustria
Bahrain
Belgium
Brazil
Bulgaria
Canada
Chile
China
Colombia
Costa Rica
Croatia
Czech
Denmark
Ecuador
Egypt
Estonia
Finland
France
Georgia
Germany
Greece
Hungary
Indonesia
Ireland
IsraelItaly
J apan
Kazakhstan
Kuwait
Latvia
Lebanon
Lithuania
MalaysiaMexico
Nitherlands
New Zealand
Norway
Oman
Panama
Peru
Philippines
Poland
Portugal
Romania
RussiaSaudi Arabia
SingaporeSlovakia
Slovenia
South Africa
SpainSweden
Switzerland
Thailand
Turkey
UAE
UK
Ukraine
Uruguay
United States
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1,000 10,000 100,000
Argentine
Australia
Austria
Bahrain
Belgium
Brazil
Canada
Chile
China
Costa Rica
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Israel
Italy
J apanKuwait
Latvia
Mexico
Nitherlands
New Zealand
Norway
Oman
Peru
Poland
Portugal
Romania
Russia
Singapore
SpainSweden
Switzerland
Turkey
UAE
UK
UkraineUruguay
United States
Source: IMF, ITU, Zenith Optimedia, Goldman Sachs Research estimates.
Advertising spend per capita (y-axis) vs GDP per capita
(x-axis US$)
Ad spend as a share of GDP (y-axis) vs GDP per capita
(x-axis, US$)
Advertising spending in Europe, split by media Internet as a share of ad budget vs broadband penetration
30.3% 30.8% 30.6% 31.4% 31.7% 32.6% 32.4% 31.3% 30.8% 30.2% 30.4%
57.3% 55.9% 55.6% 54.3% 52.7% 51.1% 48.9%47.3% 45.4% 43.5% 41.1%
5.2% 5.3% 5.2% 5.4% 5.6% 5.7%5.7%
5.6%5.5%
5.5%5.6%
5.8% 6.0% 6.4% 6.6% 6.7% 6.4%6.7%
6.5%6.5%
6.5%6.3%
3.2% 5.4% 8.5% 11.1% 13.5% 15.9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
TV Print Radio Cinema / indoor Outdoor Internet
R² = 0.82
0%
5%
10%
15%
20%
25%
30%
5% 15% 25% 35% 45% 55% 65% 75% 85% 95%
Norway
Denmark
Sweden
Netherlands
Canada
France
Germany
FinlandUnited States
Hungary
SpainPoland
Czech RepublicRussia
Goldman Sachs Global Investment Research
12
Moscow is primary target for advertisersYet regions becoming more attractive
Source: GKS, Goldman Sachs Research estimates.
Disposable income per capita (2010E, monthly, Rub ‘000)Regional disposable income
Historically, Russian advertisers have predominantly focused on Moscow as it has substantially higher disposable income than the regions
However, regional income per capita is growing faster than Moscow, now exceeding US$500/month, making regions a more attractive target for advertisers
1,8562,514
3,2904,265
5,277
6,785
8,642
10,781
13,39812,718 14,524
4.3
4.1
3.83.9 4.0
3.7
3.43.3
2.62.4
2.3
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E
Disposable income per capita, regions (monthly, Rub) Convergence Moscow/regions
32.7
20.1
16.4 16.1 15.914.7 13.7 13.4
12.0
0
5
10
15
20
25
30
35
Moscow Ural region Far Eastern region
North-West region
Russia, avg Central region (ex Moscow)
Siberian region
Volga region Southern region
Goldman Sachs Global Investment Research
13
GDP growth, expansion in the regions will drive internet advertising spending
Internet ad spend, internet as a share of total ad spend
Source: Zenith Optimedia, GroupM, CIA World Factbook, Company data, Goldman Sachs Research estimates.
Split between contextual and display advertising in Russia
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E
DisplayAd Market share in Total Internet Ad Market
ContextualAd Market share in Total Internet Ad Market
Search as a share of GDP Regions’ share in local SE revenues and search requests
13 bps13 bps
12 bps
6 bps
4 bps 4 bps 4 bps3 bps
United Kingdom
Korea United States World Rest of world J apan Russia China
12.7 17.6 19.025.9
37.1
53.4
72.2
92.4
116.2
0.4% 0.4% 0.5% 0.6% 0.9% 1.2% 1.6%
5.4%6.4%
9.3%
10.8%
12.2%
14.0%
15.8%
17.6%
19.4%
0%
5%
10%
15%
20%
25%
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E2011E2012E2013E2014E2015E
Internet Ad Spend (RUB bn) as a % of total
25%28% 30%
33%37%
47%
57%
66%
2006 2007 2008 2009 2010
Regions share in local SE revenues Regions share in search requests
Goldman Sachs Global Investment Research
14
Reg AC
I, Alexander Balakhnin, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
DisclosuresMay 24, 2011
Goldman Sachs Global Investment Research
16
Disclosures
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Global
Buy Hold Sell
32% 53% 15%
Buy Hold Sell
49% 41% 40%
As of April 1, 2011, Goldman Sachs Global Investment Research had investment ratings on 3,191 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 view s and related def initions' below .
Goldman Sachs Global Investment Research
17
Disclosures
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: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. Canada: Goldman Sachs & Co. has approved of, and agreed to take responsibility for, this research in Canada if and to the extent it relates to equity securities of Canadian issuers. Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. 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. 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 Services 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. Brazil: Disclosure information in relation to CVM Instruction 483 is available at http://www.gs.com/worldwide/brazil/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.
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/client_services/global_investment_research/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research.
Goldman Sachs Global Investment Research
18
Disclosures
Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer under the Financial Instrument and Exchange Law, registered with the Kanto Financial Bureau (Registration No. 69), and is a member of Japan Securities Dealers Association (JSDA) and Financial Futures Association of Japan (FFAJ). 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, and pursuant to certain contractual arrangements, 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.
Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282.
Copyright 2011 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