INVESTING IN CHINA:THE INTERNET SECTOR

Two Best performing Chinese stocks in the last 10 years.

10

100

1,000

10,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

Baidu (52x) Tecent (62x)

Data: Yahoo Finance, prices are close prices of August 6, except for 2012 (April 5)

Big price-gainers since 2012

Data: imeigu.com, as of market close April 20

0

1

2

2

3

TUDO NQ RENN DANG KUTV QIHU YOKU PWRD NTES GAME

30%31%44%47%53%68%95%101%

124%

217%

Percentage of price gain

HOW TO FIND THESE STOCKS?•Good industry•Good product•Good monetization model

GOOD INDUSTRY• Large potential user scale

• Growing markets

• Lifelong/Frequent demands

Housing

Education

Relationship

Investment

MarriageHouse Maintenance

GOOD PRODUCT2.0 products, of course

•Open & Interactive

• User, not traffic

• UGC, not PPC

• Personality, not universality

• Long tail

WHAT DOES 2.0 DO?

• UX enhancement

• UGC re-org & re-use

• User relationships as an asset

•Monopoly (platform)

The runner-up is bound to die

• Closer to action, more profitable

• Sales budget outweighs marketing budget

GOOD MONETIZATION MODEL

WHEN IT COMES TO MONETIZATION MODEL...

• Charge for products > Traffic conversion

• Core services > Value-added services

• Commission-based > Ad services

• Performance ad > Brand ad

Good industryGood productGood monetization model

MONOPOLY PLATFORMSUsually growth guaranteed...

WHERE TO PUT YOUR MONEY?

BAIDUUnlimited market growthSimple business modelProblematic governance

0

325

650

975

1,300

2009 2010 20110

750

1,500

2,250

3,000

Operating incomeRevenue (in $thousands)

Data: Baidu (in $million)

TENCENTDeep moat built on social graphMonetization model less ideal

0

200

400

600

800

2007 2009 20110

7,500

15,000

22,500

30,000

IMAU Revenue

Data: Tencent (in RMB million)

ALIBABA GROUPGood product & governanceMonetization has just begunValued at $32b (Sep. 2011)

Data: Yahoo 20F (in $million)

-100

0

100

200

300

400

2009 2010 20110

750

1,500

2,250

3,000

Operating profit Revenue

POTENTIAL PLATFORMS Questionable monetization scheme

Risky business model

Not a platform

VERTICAL PLATFORMS

SOFTWARE/APPDEVELOPERS

CIGAR BUTTS• Portal

• Gaming

• E-commerce

• Search

• Video

WHY THE INTERNET SECTOR • Large potential user pool• Under expansion from media to

other businesses •Monetization models being

ungraded• Registered system lowers entry

barriers 0

150

300

450

600

2004 2006 2008 2010 2012

Data: World Bank 2011, CNNIC

China Internet Users (m)