sino hotspot series: internet finance

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CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

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02 January 2014

Asia Pacific/China

Equity Research

Macro / Financials / Software & Services

Sino Hotspot Series: Internet Finance

THEME

A force of creative destruction?

Figure 1: Money market funds (MMFs) take off along with Internet finance China US

Nov-13 2014E 2020E 1978 1980 1990

Rmb bn Rmb bn Rmb bn US$ bn US$ bn US$ bn

Money market funds (MMF) 633 2,454 5,382 11 76 493

Household demand deposits 16,823 15,141 13,458 201 238 451

Enterprise demand deposits 13,839 13,701 12,455 106 117 250

Total demand deposits 30,662 28,841 25,913 307 355 701

MMF as % of demand deposits 2.1 8.5 20.8 3.5 21.5 70.4

MMF as % of GDP 1.2 4.7 10.4 0.5 2.7 8.2

Demand deposits as % of GDP 59.1 55.6 49.9 13.0 12.4 11.7

Source: Federal Reserve, Asset Management Association of China, Credit Suisse estimates

■ The landscape of China Internet finance. Online payment, online

financing and financial product distribution are the three major businesses in Internet finance.

■ Internet companies: A new layer of service digitisation. Over the next

two years, we expect financial services to become a major area in the tide of

service digitisation in China. Major Internet companies such as Baidu,

Tencent and Alibaba enjoy the lead with large business scale, sticky traffic

base and solid service infrastructure, as they have operated in the market

for a longer period. Vertical leaders such as Soufun could leverage their

vertical expertise in offering tailor-made products. Emerging start-ups will

likely have more opportunities in areas of P2P loan, vertical search and

crowd funding.

■ Financial institutions: Evolution favours the fittest. Internet companies may

not pose too much competition to banks in the medium term, but in the long run

they could change the banking competitive landscape with new technology and

business models challenging the market positioning of banks. We view

Minsheng, ICBC and CMB as best positioned among banks to face these

challenges. Ping An enjoys first mover advantage with several new technology

companies in place including Lufax and Zhong An Insurance. The brokers could

be under pressure with the potential introduction of pure online brokerage.

■ Technology pushing reforms. Internet settlements should help money

market funds (MMFs) take off in China. MMFs could exceed Rmb2 tn by 2014

if 10% of household demand deposits can be mobilised. By compensating

small depositors under the current interest rate control regime, MMFs also

challenge the official road map for interest rate liberalisation.

Research Analysts

Vincent Chan

852 2101 6568

[email protected]

Victor Wang

852 2101 6730

[email protected]

Dick Wei

852 2101 7339

[email protected]

Evan Zhou

852 2101 6745

[email protected]

Frances Feng

852 2101 6693

[email protected]

Contribution by

Grace Chao

Hu Shen*

* Please refer to 'Technology pushing reforms'

(pages 38-48) for the contribution by Hu Shen

02 January 2014

Sino Hotspot Series: Internet Finance 2

Focus charts and tables Figure 2: The landscape of China Internet finance Figure 3: Internet finance exposure of major players

Sub-sectors Baidu Tencent Alibaba

Online

payment

Baipay Tenpay Alipay

Online

financing

P2P Loan N/A N/A N/A

Internet-enabled

SME loan

Baidu

SME

Loan

Licensed Ali Finance

Crowd funding N/A N/A N/A

Financial

product

distribution

8.Baidu.c

om

Stock App;

Co-ops

with fund

companies

Alipay MM

Fund (Yu'E

Bao), Mutual

funds Tmall

stores

Source: Credit Suisse research Source: Company data, Credit Suisse research

Figure 4: Third-party online payment (Rmb bn) Figure 5: Market share of third-party online payment

Source: iResearch Source: iResearch, 3Q13

Figure 6: Yu'E Bao return vs benchmark rates Figure 7: Size of Yu'E Bao

Customer Purchase Asset Investment per

number (Rmb) (Rmb) person (Rmb)

29-May 384 200.6 mn 200.6 mn 522,471

13-Jun Yu'E Bao was launched

30-Jun 2.5 mn 6.6 bn 4.2 bn 1,684

30-Sep 13.7 mn 102.9 bn 55.7 bn 4,069

16-Oct 16 mn+ 130 bn N/A N/A

14-Nov 29 mn+ N/A 100 bn+ 3,448

Source: CEIC Source: Tianhong Asset Management Website

Internet

Finance

Internet-enabled

SME Loan

Internet-enabled

P2P LoanCrowd

Funding

Online

Financing

Online

Payment

Financial

Product

Distribution

Alipay, 48.8%

Tenpay, 18.7%

ChinaPnR, 5.9%

China UnionPay Online, 11.7%

99Bill, 6.7%

ePayment, 2.9%

Yeepay, 3.4%Others, 1.9%

0%

1%

2%

3%

4%

5%

6%

7%

2-Nov 16-Nov 30-Nov 14-Dec

Yu'E Bao 7D avg return Current dep rate

1-yr dep rate 5yr dep rate

Shibor ON

02 January 2014


Internet finance: A force of creative destruction? In this thematic report, we examine different forms of Internet finance, the future path of

each business model, and analyse the impact they are going to have on all parties.

The landscape of China Internet finance Online payment, online financing (including P2P loans, SME loans and crowd funding) and

financial product distribution are the three major businesses in Internet finance.

Internet companies: A new layer of service digitisation We see financial products representing a new layer of services offered by China Internet

companies to users and business partners, on top of their existing offerings in tangible-

goods e-commerce, games and advertising. Although their near-term financial contribution

should be limited, improvement in the overall payment infrastructure could enable more

business and consumption activities to move from offline to online, especially with the

perfection of mobile payment processes. This should further enhance user stickiness of

major Internet companies and vertical leaders. Major Internet companies, such as Tencent,

Baidu and Alibaba, are enjoying the lead, with the likely reason being that they have a

larger business scale, a relatively sticky traffic base and a more proven service

infrastructure as they have been in the market for a longer period. Vertical leaders such as

Soufun could leverage their vertical expertise in offering tailor-made products. Emerging

start-ups will likely have more opportunities in P2P loan, vertical search and crowd funding.

Financial institutions: Evolution favours the fittest In the medium term, we believe Internet financing players will offer very little competition to

banks, but they may force banks to change their existing business models. Currently,

SMEs are not a major revenue source for most banks, and financial product sale on

Internet are mostly limited to less-profitable fixed-income products; so Internet finance is

unlikely to have meaningful earnings impact on banks. In the long run, however, given

their low cost base and improving data quality, Internet finance players could become

meaningful competitors of banks in niche business segments such as SME financing,

personal lending without collateral, and payment and cash management services. In the

future, bigger number of branches and counter staff could be drags on traditional financial

institutions. Online distribution of insurance is particularly feasible for simple products such

as auto and accident insurance and, indeed, the Chinese insurers are moving towards the

direct channel as well. Broker commissions have been under pressure given industry

competition and potential introduction of pure online brokerage.

Technology pushing reforms Development of Internet finance has accelerated the pace of interest rate liberalisation. The

effective settlement mechanism in Internet finance has allowed money market funds (MMFs)

to grow sharply, but this could not have happened without the substantial gap between short-

term interbank rate (4%-plus) and current deposit rate (less than 1%) in China. We believe

MMF assets would exceed Rmb2 tn by 2014 if 10% of current household demand deposits

could be mobilised. And we estimate the latter's assets will surpass Rmb5 tn by 2020, around

10% of GDP. In the US history, seven years after the birth of the first checkable MMF, their

assets grew from 1.5% in 1974, to almost half of household demand deposits.

Interest rate liberalisation is a good thing for China. However, if radical changes are

brought about in the realm of short-term and small deposits, whether the real economy

can afford them or not is an open question. On the other hand, lending to banks but

avoiding the 20% required reserve ratio (RRR) and growing MMFs could influence the

monetary multiplier and in fact increase money supply in the real economy.

Three key activities in

Internet finance

Major Internet companies

enjoy the lead with

significant business scale,

sticky traffic base and solid

service infrastructure

Internet companies could

become meaningful

competitors of banks in

niche business segments in

the long run

With the help of Internet,

MMFs could reach Rmb2 tn

in 2014 and surpass Rmb5

tn by 2020 …

… and they are challenging

the government roadmap of

interest rate liberalisations

02 January 2014


Stock recommendations China Internet companies

Figure 8: Valuation comparison

Closing Mkt cap P/E P/B PS ROE EV/EBITDA FCF yield (%)

Company Ticker Ccy price (US$ mn) 2013E 2014E 2015E 2014E 2014E 2014E 2013E 2014E 2015E 2013E 2014E 2015E

Tencent 700 HK HKD 467.2 112,098 39.6x 32.8x 25.7x 9.4x 9.0x 28.5% 31.7x 24.0x 18.7x 2% 3% 3.9%

SouFun SFUN US USD 75.7 6,124 22.7x 18.2x 14.4x 8.3x 8.2x 45.3% 18.6x 14.8x 12.2x -2% 5% 6.0%

Baidu BIDU US USD 168.3 58,878 31.6x 24.1x 18.7x 6.7x 8.8x 27.8% 24.4x 18.2x 14.0x 3% 4% 5.6%

Source: Company data, Credit Suisse estimates

Baidu (OUTPERFORM, TP US$200)

■ Baidu's investments in mobile Internet (R&D, marketing and acquisitions) began

paying off in 3Q13. The company has reported 130 mn daily users of its mobile

search; also, its native search app installation base has reached 330 mn (up 50%

QoQ). We expect Baidu’s organic mobile traffic to accelerate, with the introduction of

light apps, 91wireless integration and vertical search. Fundamentally, we maintain our

view that users have a strong need to perform general search on mobile.

■ While we have been positive on mobile search monetisation, we are encouraged to

see that 75% of mobile search spending is actively managed (which should minimise

concerns that advertisers are not aware of its mobile spending). With increasing

awareness among advertisers about mobile ads and the need of mobile websites,

together with a better 4G network, we expect the mobile and PC monetisation gap to

gradually narrow.

■ There is risk of revenue market share loss, but search market size continues to see

sustainable growth. We expect the search market to continue to see a healthy 22%

CAGR (over 2013-15) and Baidu to continue to benefit from this growth. Competition

between Qihoo and Sogou should lead to a smaller revenue share for each player. As a

result, both Qihoo and Sogou should see less traffic in optimising revenue per search.

■ Our target price implies 28.9x FY14E and 22.4x FY15E earnings, and implies a PEG of

1x, on the back of 20-25% long-term earnings growth. We believe it is still a good entry

opportunity for investors, given potential upside in mobile and vertical expansion.

Tencent (NEUTRAL, TP HK$440)

■ While most market watchers have focussed on WeChat mobile game monetisation in

the near term, we see greater long-term value being created by WeChat: global

expansion and O2O (Online2Offline e-commerce) opportunities. WeChat's

comprehensive offering of free and reliable basic services—communication, social

networks, entertainment and news information (public accounts)—have a strong

appeal for the next billion new global Internet users (from now to 2017). O2O should

help Tencent tap into offline services—payment, food and ticketing, etc.

■ Over the past few quarters, we have seen growth decelerate in the "social networks"

segment. We expect the segment growth to reaccelerate in 2014 with: (1) full launch

of Super VIP subscription that bundles PC and smartphone-based privileges and (2)

new subscription products on the mobile platform.

■ We expect Tencent to capture 33% and 40% of China’s mobile game market share in

2014 and 2015, respectively. We believe Tencent could eventually distribute a higher

portion of mobile game, given WeChat's unique social reach and features.

Mobile search usage should

accelerate

Deeper mobile monetisation

a key long-term driver

Growth in the search market

size despite Baidu

potentially losing market

share

Maintain OUTPERFORM

and US$200 TP

International and O2O to

create further value

2014 should be the

inflection point for social

networks’ revenue growth

Mobile games’ revenue

progression a near-term

catalyst

02 January 2014


■ Our target price implies 30.9x FY14E and 24.2x FY15E earnings. We expect Tencent

to trade close to 1x PEG on 25% long-term growth rate. While we are positive on

Tencent in the long term (through WeChat monetisation, international expansion,

O2O, etc.), we see lack of near-term share price drivers for the company.

SouFun (OUTPERFORM, TP US$87)

■ We expect demographic tailwinds to propel increasing online usage in the real estate

segment in the coming years. The usage shift should gradually migrate real estate

marketing, sales and consumer spending dollars from offline to online. We see

SouFun as the biggest beneficiary of this dollar migration as the leading real estate

vertical and service solutions site in China. We estimate total available marketing size

for SouFun to be US$8.7 bn.

■ We view SouFun's e-commerce and listing segments as its key growth areas in the

next two-three years, benefiting from increasing awareness of customers and

merchants using the online medium as an important real estate transaction channel,

as well as a healthy pick-up in China's secondary real estate market volumes.

■ Mobile brand ad has already contributed a revenue of Rmb14 mn, <5% of marketing

revenue in 3Q13. We expect mobile to account for >10% of marketing service revenue

in 2014. SouFun also started offering paid listing services on mobile in 2Q13. Given

the strong location-based service (LBS) element of the real estate discovery process,

we expect further penetration of SouFun mobile app/web to its users, with

monetisation tailwinds in the next two-three years.

■ Our target price of US$87 implies 21.0x FY14E and 16.5x FY15E diluted adjusted

EPS. The company has a strong cash position of US$294 mn (US$3.5 per diluted

share) in 3Q13.

Financial institutions

Figure 9: Valuation comparison

Close Mkt cap P/E P/B ROE, % DY, %

Company Ticker Ccy price (US$ mn) 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E

ICBC 1398.HK HKD 5.19 215,816 5.4x 5.1x 1.1x 1.0x 21.7 19.9 6.5 6.9

MSB 1988.HK HKD 8.63 35,750 4.5x 3.8x 1.0x 0.8x 23.8 23.9 4.7 4.7

CMB 3968.HK HKD 16.64 46,210 5.8x 5.6x 1.2x 1.0x 20.9 19.0 3.9 4.5

Ping An 2318.HK HKD 68.90 57,806 13.3x 12.8x 2.3x 2.1x 17.2 16.2 1.7 1.7


ICBC (OUTPERFORM, TP HK$7.00)

■ We have an OUTPERFORM rating on Industrial & Commercial Bank of China (ICBC).

We view ICBC as the best quality large-cap China bank, and advise long-term China

investors to treat it as their core-holding stock. On top of prudent credit policy, ICBC is

particularly competitive in IT systems, efficient cost control capabilities and leading

distribution network. These factors allow ICBC to better defend its profitability than

most peers, as we believe its funding cost is more stable, revenue structure more

diversified and cost pressure easier to manage given clear economies of scale.

■ Given most investors view ICBC as a proxy of China's macroeconomy, we believe

macroeconomic data points such as strong GDP data, fund inflows into the H-share

market and better LGFV lending disclosure are the likely catalysts for the stock.

■ Our target price is based on 1.32x 2014E P/B, implying 31% 12-month upside

potential. We view ICBC’s current valuation as attractive.

Maintain NEUTRAL and

HK$440 TP

Structural beneficiary of real

estate demand shift from

offline to online

E-commerce and listing as

key growth segments

Mobile as a new catalyst

Maintain OUTPERFORM

and US$87 TP

Top pick among large-cap

banks under our coverage

Short-term share price

driver is macroeconomic

improvement

We value ICBC at 1.32x

2014E P/B

02 January 2014


CMB (OUTPERFORM, TP HK$20.70)

■ CMB remains a high-quality bank but has de-rated meaningfully in the past few years.

We believe two positive catalysts could help unlock its potential and enable the bank

to better leverage its premium retail client base. They are: (1) the arrival of new senior

management with strong commitment to a restructuring business model, especially in

non-mortgage retail loans, branch working procedure and KPI reform, as well as

Internet financing; and (2) the Rmb35 bn A+H placements in 2013 lift CET1 CAR to

9.38% in 3Q13, removing the prolonged capital constraint.

■ CMB has always enjoyed a strong mobile banking platform compared with peers and it

has also grown MSE loan balance by 56% in the first three quarters of 2013 to

Rmb590 bn, accounting for 31% of total domestic loans. Further growth of MSE loans

could meaningfully change its loan-risk profile and overall yield, potentially pushing up

its ROE.

■ Our target price of HK$20.70 is based on 1.25x 2014E P/B, assuming 13.1% COE,

14% long-term ROE and 3.0% terminal growth rate. We view CMB as a premium bank

with meaningful restructuring upside and assign an OUTPERFORM rating.

Minsheng Bank (OUTPERFORM, TP HK$12.80)

■ MSB has a strong commercial culture focusing on profitability and accountability,

which is likely related to its private and diversified shareholding structure. During 2009-

12, MSB delivered a 46% profit CAGR and substantially lifted its ROA from 0.98% to

1.38%, due to: (1) substantial micro- and small-enterprise (MSE) lending (26% of total

loans by 1H13); (2) clear improvement of deposit acquisition (LDR down from 78% to

72%); and (3) strong fee momentum (64% 2009-12 CAGR). Further, we are

impressed by MSB's strong execution power, which should enable the bank to cope

with fast-evolving market conditions.

■ This alliance would allow Minsheng Bank to open direct banking system and offer

tailor-made wealth management products for Taobao users. Given MSB

management's strong execution track record in the past, we expect high synergies to

come out of this alliance. We also think that Internet finance will become an important

profit driver for MSB in the long term.

■ We value MSB at HK$12.80, based on 1.27x 2014E P/B, assuming 14.3% COE,

13.0% long-term ROE and 3% growth rate. MSB is our top pick among China banks.

We admit its business model inherits bigger volatility than large peers, but its strong

execution power, sufficient internal checks and balances and 17-year clean track

record convince us to believe in its strong potential.

Ping An (OUTPERFORM, TP HK$ 88)

■ We like Ping An given its best-in-class insurance business and strong growth

potential. We also highlight that Ping An has adopted a financial conglomerate model

and has started exploring the Internet finance space. It has started Zhongan Online

Insurance together with major internet companies Alibaba and Tencent, and also owns

Lufax (Lujiazui Financial Assets Exchange), an online P2P lending company.

Ultimately, Ping An wants to fully service its wide customer base by providing

comprehensive financial products. We appreciate its efforts and believe the company

has a first-mover advantage if executed well despite the fact that Internet finance is

still immaterial to the company right now.

Recent rights offer unlocks

CMB's potential

Catalysts: MSE lending and

Internet financing

TP implies 1.25x 2014E P/B

A unique player focusing on

the MSE business

Alibaba formed a strategic

alliance with MSB

A high-risk, high-return

stock

Ping An: The most active

player in Internet finance

02 January 2014


The landscape of China Internet finance The concept of 'Internet finance' is often used when people talk about what has happened in

China’s finance sector in recent years. Sometimes it refers to financial institutions moving

their businesses online to cater to the changing user behaviours. Yet, we believe another

type of Internet finance, that Internet companies start providing financial-related services, is

going to substantially reshape China’s finance ecosystem in the years to come.

These entrants bring in new thinking, big data capability, long-tail customers and low-cost

advantage. In this report, we take a close look at the finance innovations of Internet

companies, and how they resemble or differ from the products of traditional financial

service institutions.

The scope of Internet finance

We break down Internet finance products and services into the following three major

segments.

■ Online payment

■ Online financing, including:

− P2P loan

− Internet-enabled SME loan

− Crowd funding; and

■ Financial product distribution.

Figure 10: Scope of China Internet finance

Source: Credit Suisse research

(1) Payment

Online payment serves as the foundation for Internet-related finance activities. Besides

paying through online banking, users are increasingly adopting the use of third-party

online payment services as a more convenient way to handle money transactions online.

Internet

Finance

Internet-enabled

SME Loan

Internet-enabled

P2P LoanCrowd

Funding

Online

Financing

Online

Payment

Financial

Product

Distribution

Internet companies start

providing financial-related

services

Payment services the

foundation of Internet

finance

02 January 2014


In China, online payment has been the early enabler of a booming e-commerce market, as

more consumers complete the whole purchase process through online third-party payment

services. Although a fairly large proportion of online shoppers still adopts cash-on-delivery

(CoD) when buying goods online, products like utilities payment, credit card repayment,

cell-phone charging, etc., and functions such as express payment (快捷支付) to shorten

processes are migrating payment behaviour day by day.

Figure 11: Size of China's third-party online payment transactions (Rmb bn)

Source: iResearch

(2) Online financing

Financing activities outside the banking system has long existed, but Internet makes it

more versatile and accessible for individuals and small business owners. Within online

financing, there are three major areas of interest:

■ Internet P2P loan: Internet platforms that enable peer-to-peer lending by introducing

credit-worthy borrowers to return-seeking lenders.

■ Internet SME loan: Internet companies are acting as lenders to issue loans to SMEs

they have business relationship with—usually their suppliers, merchants on their

platforms and advertisers. For example, Alibaba’s small loan company successfully

converts trading data into credit records to support loan issuance.

■ Crowd funding: Emerging crowd funding websites organise fund raising on projects,

equities, debts, rights and even venture into private market share trading.

(3) Financial product distribution

In the offline world, banks, brokers and insurance companies own the most extensive

distribution network and dominate the sales of financial products, from mutual funds to

insurance policies. However, their reach may still not be comparable with that of Internet

companies which enjoy a fast-growing Internet population of 591 mn, as of mid-2013, with

464 mn on mobile, according to CNNIC.

Internet companies and finance vertical websites are beginning to change the financial

product distribution landscape. According to Sina News and Hexun News

(http://tech.sina.com.cn/i/2013-11-15/02398915454.shtml, http://stock.hexun.com/2014-

01-02/161090712.html), Yu'E Bao's Rmb100 bn-plus fund base and East Money's Rmb9

bn sales of Huoqibao (活期宝) in 3Q indicated that low-risk cash management products

have gained traction on the Internet. Fund management companies are rushing to Tmall to

open stores and sell their products.

175.7%

95.9% 100.1%

118.1%

67.0% 55.2%

49.1% 37.3%

25.8%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

0

2000

4000

6000

8000

10000

12000

14000

16000

2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E

Third Party Online Payment Transaction Value (RMB B) YoY Gth

Online payment the early

enabler of China's e-

commerce

Using transaction data to

evaluate credit

The reach of Internet may

reduce the role of traditional

financial product distribution

networks

Cash management products

are gaining traction on the

Internet

http://tech.sina.com.cn/i/2013-11-15/02398915454.shtml

http://stock.hexun.com/2014-01-02/161090712.html

http://stock.hexun.com/2014-01-02/161090712.html

02 January 2014


Figure 12: Key companies in China Internet finance

Segment Sub-segment Companies Activities Global Comps

Payment Online payment

and settlement

Alipay, Tenpay, ChinaPnR, 99bill, etc 250 licenses have been issued since 2011 by

PBOC.

Fund distribution 26 licenses issued to independent fund

distribution company.

Payment and

settlement for

fund sales

11 licenses issued to third-party payment

companies by October 2013.

Third-party e-

commerce

platform for fund

distribution

Alibaba Alibaba received the first license in October

2013.

Forex payment

for cross-border

e-commerce

17 pilot licenses issued by SAFE since

September 2013.

POS and offline

payment

China UnionPay, Lakala, Tencent,

Alibaba, etc

Square

Online Financing P2P Loan Lufax, My089.com, Renrendai.com,

Ppdai.com, dianrong.com, Yooli.com,

Renrenmoney.com, etc.

It is estimated by P2P lending watcher

Wangdaizhijia that over 500 websites are doing

the business. CreditEase is also a large player

but only part of its business is online lending

and it discloses very limited information.

Zopa, Prosper,

Lending Club

Crowd Funding Angel Crunch, Demo Hour,

Dajiatou.cn, Zhongchou.cn

Kickstarter

Financial

Product

Distribution

Distribution

Platform

Tmall.com, Howbuy.com, Fund123.cn,

dashu88.com

Distribute products including mutual funds, trust

products, wealth management products,

insurance, hedge funds, and PE/VC products.

Vertical product

search

Baidu.com, Rong360.com,

Haodai.com, 91jinrong.com,

qqw.com.cn

Help users to find the best credit card and loan

products and charge service fee on banks,

mainly smaller banks looking for more

customers.

Personal finance

management tool

Feidee (随手记), Cardniu, Tencent

Portfolio

Personal finance management and budgeting

apps/software trying to connect all bank

accounts of users and become a distributor of

products in future.

MINT

Others Financial social

networks

Xueqiu Xueqiu creates a community for investors to

discuss their investment ideas and socialize.

Seekingalpha.c

om

Credit loan to

gamers

Mo9.com.cn Offers instant loans to game players for virtual

item purchase

Mo9

Source: PBOC, CSRC, www.wangdaizhijia.com, Lufax, My089.com, Renrendai.com, Ppdai.com, dianrong.com, Yooli.com, Renrenmoney.com,

news.cnstock.com, Angel Crunch, Demo Hour, Dajiatou.cn, Zhongchou.cn, Tmall.com, Howbuy.com, Fund123.cn, dashu88.com, Baidu.com,

Rong360.com, Haodai.com, 91jinrong.com, qqw.com.cn, xueqiu.com, mo9.com.cn

Payment

Payment has always been a volume-driven business and differentiation is quite limited

here. Price is one of the key considerations for merchants. Leading payment services take

dominant share and enjoy better economics. As they grow larger, they are able to further

optimise their cost structures and lower price on a larger scale. Followers struggle with

market share and can barely break even. Smaller players have to focus on SMEs rather

than large accounts such as shopping malls and restaurant chains.

Business model

When a payment/transfer is made, third-party payment providers charge merchants a

service fee, (say 0.3-0.6%, on average less than 1%). On the cost side, third-party

payment providers connect to banks directly or through China UnionPay. They pay service

charges to banks at a lower rate (say 0.05%-0.3%, usually paid monthly or quarterly in a

packaged lump-sum). The spread they earned is their profit.

Payment is a scale business

Earn the spread between

what they get from

customers and what they

pay to banks

http://www.wangdaizhijia.com/

02 January 2014


Figure 13: Third-party Internet payment market share by transaction volume

Source: iResearch, 3Q13

Figure 14: Payment processing rate comparison

Payment service provider Payment processing rate

Alipay 0.7%-1.5%

Tenpay 0.8%-1.0%

99bill 0.5%-1.0%

ChinaPnR 0.5%-0.8%

ChinaPay 0.5%-0.7%

CUP POS 1.0%

Source: Alipay, Tencent,99bill, ChinaPnR, Sina News

Competition dynamics

There are mainly three categories of third-party payment companies.

(1) Internet companies' own online payment arm: Alipay, Tenpay, Shengpay, etc.

(2) Companies with certain backgrounds from traditional financial institutions: UnionPay

Online, 99bill, ChinaPnR, etc.

(3) Standalone third-party payment companies: Yeepay, Lefu, Fuyou, etc.

Since Alipay, Tenpay and UnionPay Online are taking lions' share in the market, smaller

players use different strategies to compete and differentiate.

■ Concentrating on specific verticals or customer segments: Focus on verticals—

for example, ChinaPnR provides air ticketing agents with convenience tools and loans

so that agents can pre-pay for tickets. Smaller third-party payment providers tend to

focus more on SMEs rather than large corporations.

■ Expanding into other areas in Internet finance, such as financial product

distribution and SME loans: ChinaPnR is among the first Internet companies to get

online fund selling license in 2010. With millions of merchants with POS machines and

basic payment services, online payment companies can provide value-added services

such as loans/credits as well as wealth management products.

■ Better services: quicker to implement. Third-party online payment companies operate

in a more efficient way. They can release POS machines within one-two days,

compared to two-three weeks for offline POS providers and banks.

Alipay, 48.8%

Tenpay, 18.7%

ChinaPnR, 5.9%

China UnionPay Online, 11.7%

99Bill, 6.7%

ePayment, 2.9%

Yeepay, 3.4%Others, 1.9%

Focus on specific customer

segments

Distribute financial products

in the platform

Faster payment than

traditional means

02 January 2014


Major online payment players

■ Alipay

Launched in 2004, Alipay is now the largest third-party payment service provider in

China (48.8% market share in the third-party payment market of China in 3Q13, according

to iResearch). On 11 Nov 2013, Alipay set a record for the highest daily number of

transactions, processing 170 mn payments during the 24-hour period with over Rmb35 bn

in transaction volumes, Alipay announced Alipay partners with more than 180 financial

institutions including leading national and regional banks across China as well as Visa and

MasterCard to facilitate payments in China and abroad. In addition to Taobao Marketplace

and Tmall.com, Alipay provides payment solutions for more than 500,000 merchants,

covering a wide range of industries including online retail, virtual gaming, digital

communications, commercial services, air ticketing and utilities. Alipay is an affiliate of the

Alibaba Group.

The capability of online payments has been re-defined since Yu'E Bao’s success. According

to Sina Tech Channel, the Rmb200 mn money market fund took 110 days to grow 278 times

to the country’s largest, and to over Rmb100 bn after the 11 Nov "Singles' Day" online

shopping carnival. With their money insured in full and decent return, users have begun to

put their cash in Alipay, as indicated from Yu'E Bao's Rmb100 bn-plus fund base. According

to Tencent Tech Channel, Alipay now owns a real-name account system, a group of users

with high stickiness, a data source for credit rating and idea generator for product design.

■ Tenpay

Tenpay is the second largest player in the online payments market after Alipay. With

Tencent lacking a strong online shopping context, Tenpay mainly set its foot into B2B

online transfer and consumer related usage in Tencent's various entertainment-related

services Entering the mobile era, Tenpay is able to leverage WeChat's vast, engaging

user base and long time spent to enable more innovative application scenarios and

contexts.

WeChat Payment uses Tenpay for its payment infrastructure. It recently launched various

personal financial services such as AA payment, Lottery, mobile phone recharges, utility

fee payment, movie ticketing, Q coin purchase, etc. WeChat Payment feature now boasts

around 20 mn users, with 200,000-300,000 daily new adds. In future, Tenpay may

introduce more products through WeChat such as Yu'E Bao-like financial products.

WeChat Payment's long-term goal is to eliminate the use of POS machines to enable

more streamlined online-to-offline transactions.

■ 99bill

Launched in 2005, 99bill is the third largest third-party payment service providers in

China (6.7% market share in the third-party payment market of China in 3Q13, according

to iResearch). 99bill specialises in providing working capital management solution and

services for various customers including Ping An, JD, Dangdang, Baidu, Lenovo, Dell, etc.

According to Guoguang Guan, CEO of 99bill, the company processed capital volumes of

over Rmb1.2 tn in 2011. It currently has 2.7 mn business partners in various industries

such as travel, insurance, e-commerce, logistic, etc.

Online financing

P2P loan

P2P loan, or peer-to-peer lending, is a service platform that directly connects fund-seeking

borrowers to return-seeking lenders. Borrowers submit their funding needs and

supplementary information for credit appraisals. P2P platforms perform various levels of

credit checks and analysis, approve, price and specify the details of the loans. Lenders

choose projects/loans to invest in and receive the principal and interest.

Alipay accounts for almost

49% of third party payment

market

The online payment platform

of Alipay paved the way for

Yu'E Bao's success

Tenpay to leverage the vast

user base of WeChat

WeChat Payment has

around 20 mn users

99bill the third largest player

with 6.7% market share

P2P loan connects

borrowers and lenders

directly on the Internet

02 January 2014


P2P platforms earn origination fees and/or service fees from borrowers and lenders as

their main revenue source. Ideally, P2P platforms do not establish a funding pool and earn

interest income out of the residual fund. Information shall be transparent to both sides.

Depending on different operation models, the P2P platforms may or may not provide any

forms of guarantee.

This business model was introduced in 2005 by a British company, Zopa.com, that

provides loans totalling £416 mn. Later in the US, Prosper and Lending Club took the

success and influence of P2P to greater levels. According to Sina News, China has over

500 P2P loan websites. It is reported that every day, there are over 20 P2P sites being set

up in China now-a-days.

Business models

Within P2P loan, companies operate in different business models.

(1) Pure online model

In this model, company operation is conducted online—no offline business development;

on-the-ground credit checks are performed. Paipai Dai (拍拍贷) was the first to introduce

this model into China and focus on a pure online model. PPdai believes that lenders and

borrowers will meet directly on the Internet and take responsibility for their own risks.

According to the company, PPdai.com’s loan balance reached ~Rmb1 bn by 3Q13.

Some other pure online platforms such as Renren Money went even further to host other

offline finance agencies (small loan companies, pawn shops, guarantee companies) to

locate local borrowers, perform credit checks and provide guarantees. They only act as

pure online platforms and collect very low service fees.

(2) Offline + online model

Majority of P2P companies operate in a hybrid model, incorporating both online and offline

elements. The online platform attracts lenders and a part of the borrowers, while the offline

team acquires a large portion of credit-worthy borrowers and performs necessary credit

checks on the entire borrower base.

Leading companies employing this model include Renren Dai, Sino Lending and Lufax.

■ Lufax (Shanghai Lujiazui International Financial Asset Exchange)

Established in September 2011, Lufax officially started its P2P lending business in

January 2013, and to some extent B2B and B2C lending businesses as well. It mainly

attracts borrowers online, i.e., around 70% with 30% from other offline channels while the

lenders are all online.

Lufax, a subsidiary of Ping An Group, is strong in risk management given its background,

and also cooperates with the group's guarantee company to better manage credit risks. It

also operates a secondary market, which allows online secondary transaction of the

products—this adds liquidity and is quite unique compared with other P2P lending models.

(3) Offline-intensive model (CreditEase)

During the course of business model evolution, some P2P loan companies adopted a

heavier, offline-intensive model to conduct a wider variety of financing and asset

management services.

■ CreditEase (宜信)

CreditEase is one of the largest P2P platforms in China, with loans exceeding Rmb10 bn

in 2012. It has a large business development team of 30,000 employees, who set up

booths in communities to look for borrowers and lenders. CreditEase adopted the concept

of P2P to start its business, but gradually added more offline component in wealth

management. The company packages various types of loans into fixed income products

and sells them to investors with 7%-10% annualised return. Borrowers and lenders are

P2P platforms earn

origination/service fees from

borrowers and lenders

Over 500 P2P websites in

China

PPdai.com's loan balance

reached Rmb1 bn by 3Q13

Renren Money to host other

offline finance agencies to

locate local borrowers

Most P2P companies have

both online and offline

activities

70% of Lufax's business is

online …

… a subsidiary of Ping An

Group

CreditEase has a large

offline component in its

business

02 January 2014


blind to each other and CreditEase earns the spread. It also sells various wealth

management products to investors.

Lack of regulatory oversight

A major issue that has been frequently talked about on P2P loan is the current regulatory

void. Until now, no formal regulations or policies have been formulated on P2P loans by

government authorities, including PBOC and CBRC. On one hand, lack of regulations

prompted new business models and encouraged the creation of innovative product

designs that are changing user experience and behaviour in a fundamental way.

On the other hand, proliferation of small P2P sites creates regulatory challenges. At

present, anyone can build a website and get into the business immediately, without any

approval or licenses from regulatory bodies. Going into 2014P2P websites are both

emerging and collapsing at a faster speed. According to Guangzhou Daily

(http://finance.sina.com.cn/money/bank/hykx/20131213/071917623122.shtml) and

Shanghai Business (http://www.shbiz.com.cn/Item/223307.aspx), about 50 sites ran into

problems since October, some involving funds of over Rmb100 mn and 1,000 investors.

The China government has clearly showed its resolve to curb shadow banking. In June,

Vice Finance Minister Zhu Guangyao stated that China needs to cautiously regulate

shadow banking and CBRC issued a document to warn banks of five types of external

risks: small loan companies, pawn shops, guarantee companies, informal financing and

illegal fund raising. In August, the inter-ministerial coordination institution of financial

supervision, led by PBOC and joined by CBRC, CSRC and CIRC, was established. A

research team of Internet finance development and regulation was soon formed and led by

PBOC and did surveys in major cities of China.

Figure 15: China's shadow banking—Aggregate Social Financing (ASF) and bank loans

Source: PBOC

Figure 16: Small loan company boom

Number of companies Capital Base (Rmb bn) Loans Outstanding (Rmb bn)

4Q 2010 2,614 178 282

1Q 2011 3,027 214 241

2Q 2011 3,366 246 287

3Q 2011 3,791 282 336

1Q 2012 4,878 387 445

2Q 2012 5,267 426 489

3Q 2012 5,629 466 533

4Q 2012 6,080 515 592

1Q 2013 6,555 567 636

2Q 2013 7,086 625 704

3Q 2013 7,398 666 753

Source: PBOC

0

500

1000

1500

2000

2500

3000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2012.01 2012.03 2012.05 2012.07 2012.09 2012.11 2013.01 2013.03 2013.05 2013.07 2013.09 2013.11

New ASF New bank loans Percentage of bank loans in ASF

Lack of regulatory oversight

in P2P business prompted

new business models and

innovation …

… but also created risks to

the system

Regulators started focusing

on this business

02 January 2014


According to our interviews, industry practitioners in banking and Internet industries

believe the market size of P2P might reach Rmb100-200 mn by 2014. Business volumes

of P2P financing are not included in any official statistics yet. During our interviews, many

P2P companies expressed concerns about the risk control capability of the entire sector.

Industry practitioners are calling for release of formal regulation in Internet finance,

especially regarding P2P and SME loans. Regulators are now facing the dilemma of

managing risks in this fast-evolving business while promoting non-SOE capital to

participate in social financing. Overall, we do see the digitisation of social financing to

provide a way to make offline shadow banking more transparent and essentially easier to

regulate.

We believe it is the right time to launch some regulations on Internet finance.

■ An inter-ministerial coordination institution led by PBOC has been set up as the top

supervisory body over China’s financial issues. In the past, no regulatory entities held

the responsibility of supervision, and this regulatory void was taken advantage of.

■ The business model of P2P lending has become clearer. Most companies have

taken the online + offline model, and provide guarantee/protection to investors to

varied extent.

■ The degree of urgency is increasing, since a large number of companies are having

troubles while alluring profitability of P2P business attracts more starters with very

poor knowledge about risk control.

■ Large financial institutions such as Ping An (Lufax) and China Merchants Bank

show strong interest in Internet finance, yet they face potential compliance issues.

It will be good for fair competition if game rules are made clear.

Recently an official at the PBOC mentioned some potential guidelines about regulating

P2P lending, including no explicit guarantee, no money pool, qualified investors, no public

deposit taking, no fraud, and clearly-defined third-party custody. See the 21st Century

Business Herald report (http://tech.sina.com.cn/i/2013-11-26/02198947595.shtml).

Although these may still be some preliminary views, we believe making clearer rules will

help in healthy development of the P2P loan sector.

Crowd funding

Beside debt financing companies can also seek equity financing through crowd funding

platforms. Crowd funding is a collective effort of individuals or investors who network and

pool their money to support projects initiated by other people or organisations. Crowd

funding is initially used to support a wide variety of activities, including disaster relief,

support of artists by fans, political campaigns, start-up companies, micro movies, free

software development, inventions development, scientific research and civic projects.

In the Internet finance area, crowd funding is used for funding of a company by selling

small amounts of equity to many investors.

Angel Crunch, Demo Hour and Dajiatou are the leading players. According to the

company, Angel Crunch has 8,000 projects and 800 qualified investors, and raised

Rmb250 mn for 70 projects to date. It issued a “lead investor” rule in Nov-13, trying to

clarify legal relationships in crowd funding. Its affiliated company 'IPO.la' is a share trading

platform for pre-IPO companies, with similar business model to SecondMarket and

SharePost in the US.

Again, regulations remain a key issue for crowd funding as well. Companies are exploring

their own projects and investor qualification and investor protection systems.

P2P market might reach

Rmb100-200 bn by 2014

Industry practitioners calling

for formal regulation of

Internet finance

Guidelines to regulate P2P

lending

Crowd funding is a collective

effort of individuals or

investors who pool their

money to support projects

Angel Crunch raised

Rmb250 mn for 70 projects

through crowd funding

02 January 2014


Financial product distribution

With strong traffic base and sticky user engagement, distributing financial products is a

natural business for Internet companies to tap into. Alibaba's Yu'E Bao, Baidu's Baifa and

other financial products are becoming increasingly available to online users with good user

experience and accessibility. Following the success of these pioneer products, almost all

major China Internet companies including Tencent, Sina, Soufun, NetEase, Shanda are

offering their version of cash management/fund investment products.

For product providers, Internet platforms usually charges less distribution fee and are

more transparent in user data sharing and other behavioural information. Product

providers can leverage Internet platforms to realise large business scale and do more

customisation to their target clients.

EastMoney (300059.SZ)

Figure 17: EastMoney fund distribution business overview

Product Sales revenue Number of Investment amount Sales revenue excluding

number (Rmb mn) purchases per transaction Huoqibao (Rmb mn)

July 20 2012 Fund distribution started.

Dec 31 2012 681 70 6,175 11,336 70

1Q 2013 893 445 49,561 8,979 445

1H 2013 995 2179 207,854 10,483 Huoqibao was launched.

3Q 2013 1,322 15123 962,246 15,716 5,320

Source: EastMoney

Fund distribution is a core business of EastMoney and represents 33% of its sales

revenue. EastMoney’ subsidiary Shanghai Tiantian Fund Distribution Company

(1234567.com.cn) is a licensed fund distributor. The company did fairly well in mutual fund

distribution since late 2012. In 1H13, the company sold Rmb2.2 bn funds and generated

revenues of Rmb10.3 mn. An average fee it received from distribution was 0.47%, based

on a rough calculation.

At present, Internet channels offer discount as low as 60% on fund distribution, while

banks offer 50% discount. However, charging methods vary case by case. For example,

Taobao charges 0.6% when you buy an equity fund (60% off discount), while banks

charge 1.5% when you buy it over the counter.

EastMoney launched a product called Huoqibao (活期宝 ) in May 2013, a tool that

facilitates users to buy money market funds. Huoqibao hit a sales record of over Rmb9 bn

in 3Q13. Distribution of other funds totalled Rmb5.3 bn. Net sales in the third quarter were

Rmb12.9 bn and generated revenues of Rmb21.3 mn. An average fee it received from

distribution dropped to 0.16%.

Baidu’s 8% return product started a competition for customers by offering higher returns. On

26 November, EastMoney launched a product promising 7% return, with a duration of three

months, and a Rmb1 mn threshold for a single investor. It raised Rmb135 mn in 24 hours.

Sina

Sina is mainly interested in two areas of Internet finance: financial product distribution, and

potentially online securities brokerage in the longer run. Sina received its third-party

payment license in July 2013. In financial product distribution, according to Tencent News,

Sina is planning on a financial product marketplace under the brand name of 'Cangshi (仓

石)'. It is also preparing Weibo version of Yu'E Bao products Weicaifu (微财富).

With strong traffic base and

sticky user engagement,

Internet companies start

distributing financial

products

Lower distribution fee and

more transparent in user

data sharing

Fund distribution accounted

for 33% of EastMoney's

revenue now, despite it only

starting in 2H12

Lower fund distribution fee

on Internet channels

Only 0.16% distribution fee

for EastMoney's products

Competition on yield as well

Sina received its third-party

payment license in Jul-13

02 January 2014


Feidee and Cardniu

Feidee(随手记) and Cardniu(卡牛) are sister companies that are focusing on development

of personal finance management and credit card management tools/apps, respectively.

Feidee is designed for users who are involved in various asset classes, while Cardniu’s

typical users are young generation who mainly deal with credit cards and debit cards.

According to the company, Feidee has 70 mn registered users and 3 mn DAU, of whom

300,000-400,000 are paying users.

By providing online personal finance analysis and management features, these two apps

will help users establish their personal balance sheets and generate personal financial

reports, evaluate users’ asset management ability and provide recommendations.

Business model would be like a supermarket of financial products, charging distribution

fees from various providers.

There are around 180 rivals offering similar services on the market; Feidee is the largest

and leaves the second largest far behind, according to the company. The company thinks

it is still early to monetise at the current stage. Currently, the priority task of Feidee and

Cardniu is to improve their users experience; for example, extending its cooperation to all

banks to read their mobile bank apps to get more accurate data.

Feidee and Cardniu focused

on personal finance and

credit card management

tools/apps …

… which help users

establish their personal

balance sheets

Feidee is the largest among

around 180 rivals in this

business

02 January 2014


Internet companies: A new layer of service digitisation We see financial products representing a new layer of services offered by China Internet

companies to users and business partners, on top of their existing offerings in tangible-

goods e-commerce, games and advertising. Although their near-term financial contribution

should be limited, improvement in the overall payment infrastructure could enable more

business and consumption activities to move from offline to online, especially with the

perfection of mobile payment processes. This should further enhance user stickiness of

Internet companies and vertical leaders.

Major internet companies are well-positioned in various aspects of Internet finance, with

their sizeable balance sheets, big data repository and rich accumulation of users and

merchants. Baidu has been actively developing finance products for both business

partners and individuals in recent months. Tencent's focus is more on the consumer side,

and service launches are carefully paced. WeChat payment application scenarios are

gradually expanding both online and offline. Mobile QQ payment will also likely be

released soon. Vertical leaders such as Soufun could leverage their vertical expertise in

offering tailor-made products. Emerging start-ups should have more opportunities in areas

of P2P loan, vertical search and crowd funding.

Figure 18: Core competitive advantages of leading Internet companies

Companies Core advantage(s)

Baidu Marketing power: No.5 website globally and No.1 in China, according to Alexa. Market share over 70% in China search engine

market. Baidu enjoys the largest traffic base in China on user side.

Advertisers relationship: Over 460,000 advertisers are doing online marketing on Baidu on a quarterly basis. This can serve

as a good customer base for Baidu's to-B financial products in future.

Tencent WeChat: Most popular mobile IM with 600 mn registered users. Although just launched in August, WeChat Payment fits well into

the usage scenario of impulse buying and social sharing.

SouFun Userbase: In 3Q13, SouFun has over 30 mn registered members, over 10 mn SouFun card members and over 100,000

SouFun card VIP members who have high demand on house purchase and house loan service.

Alibaba E-commerce and payment data: According to Sina Tech Channel, Taobao and Tmall annual sales volumes surpassed Rmb1

tn in 2012, ~5% of China's retail sales. According to iResearch, Alipay had a market share of about 50% in 3Q13. In Nov-11 this

year, transactions on Tmall via Alipay surpassed Rmb35 bn. Data repository on Alibaba sites provide a solid data base for credit

analysis for AliFinance.

Jingdong Supplier relationship: Jingdong has management efficiency and higher bargaining power over its suppliers.

Source: Alexa, iResearch, company data

Baidu, Tencent, SouFun, Alibaba and Jingdong put Internet finance in a strategic position.

Baidu has strong marketing power in product distribution. Tencent’s 'killer move' is

WeChat payment. SouFun has wide userbase that has strong demand in house loan

products. Alibaba, with its SME financial service group AliFinance, is taking initiative in this

sector, while Jingdong’s focus lies in supply-chain finance.

Figure 19: BAT's (Baidu, Tencent and Alibaba) exposure in Internet finance

Sub-segments Baidu Tencent Alibaba

Payment Baipay Tenpay Alipay

Online financing Internet P2P loan N/A N/A N/A

Internet SME loan Baidu SME Loan Licensed Ali Finance

Crowd funding N/A N/A N/A

Financial product distribution 8.Baidu.com Stock App; Co-ops with fund companies Yu'E Bao, Mutual funds Tmall stores

Source: Company data, Sina News, Credit Suisse research

Improvement in payment

infrastructure could enable

more business and

consumption activities to

move online

Leading Internet companies

are well-positioned with their

sizeable balance sheets, big

data repository and rich

accumulation of users and

merchants

Badi, Tencent, SouFun,

Alibaba and Jingdong have

put internet finance in a

strategic position

02 January 2014


Baidu: 300 mn daily financial queries

Figure 20: Baidu's Internet finance-related business

Global

Company Product/Service Activities comps

Baidu Payment 2013.7 Baifubao received third-party payment service license. PayPal

Small loan 2013.9 Shanghai Baidu Small Loan Company Limited received approval.

Credit card/loan search 2013.11 Jinrong.baidu.com was launched.

Financial product distribution 2013.10 The first product Baizhuan raised Rmb 1 billion in 1.5 hours on 8.baidu.com

2013.12 Launches Baifa with guarantee of 8% return.

Bank Potentially apply for a banking license.

Source: Company Data,8.baidu.com, Credit Suisse research

Baidu is No.1 Chinese search engine with 6 bn search queries on a daily basis, of which

5% are financial product related. Among those finance-related queries, a fair proportion is

from potential financial product buyers. However, these potential customers may easily

lose their appetite for buying when they get to destination sites with inferior page design

and unsatisfactory user experience.

To improve the conversion rate, Baidu decided to become more involved in the transaction

process. If Baidu can successfully convert part of these search requests into orders, it can

receive distribution fees from institutions such as fund management companies. On the

other hand, Baidu can leverage its large advertiser base (annually ~600,000 in 2012) to

provide credits on their daily operations. Baidu believes that finance will become an

important part of Internet and it wants to have its share to maintain its current leading

position. Baidu is stepping up effort to develop Baidu payment (BaiPay) directly as the

core of its Internet finance strategy.

In our view, Baidu’s Internet finance consists of three main segments: (1) 'to B' business,

(2) 'to C' business and (3) 'intermediary page' strategy.

'to C' business: Financial product distribution

Baidu launched its 'to C' Internet finance business with an eventful promotional campaign

on its new products. The company hopes these products would persuade users to set up

accounts and move their money out of banks into Baidu payment system—Baidu Wallet

(previously BaiPay 百付宝).

Baidu currently has three financial products:

(1) Baidu financial product B: This was previously named BaiFa (百发) but changed to

its current title due to a CRSC requirement. Baidu cooperates with the ChinaAMC money

market fund on this product. It guarantees 8% annual rate of return—4.5-5.0% rate of

return is provided by ChinaAMC, while the rest is compensated by Baidu. Due to its

impressive rate of return , it achieved total sales of Rmb1 bn in four hours of its launch.

(2) Baizhuan (百赚) is also a product bond with the money market fund of ChinaAMC but

offers a lower annual rate of return of 4-5%. Although its rate of return is comparable with

other money market funds, it still achieved total sales of Rmb600 mn in 12 days, according

to Tencent Finance, supported by Baidu's traffic advantage.

(3) Baifa phase II (百发二期) is a product provided by Harvest Fund to invest in bank

deposit agreement. Baidu involves 'group buying' mode into the sales process and

encourage users to register for Baidu wealth management account beforehand to get the

priority in actual subscription. Baidu doesn't give guarantee on rate of return this time but

still implies rate of return of 8% on its financial product vertical 8.baidu.com.

Around 5% of Baidu's

search is related to financial

products

Baidu wants to involve more

in the transaction process to

boost the conversion rate

Baidu tries to persuade

users to move their bank

deposits to its payment

system

Baidu financial product B

guarantees 8% annual

return to investors

Baizhuan is a money market

fund co-operated with

ChinaAMC

Baifa Phase II is a product

by Harvest Fund to invest in

bank deposit agreement

02 January 2014


Figure 21: Three types of licenses in fund distribution

Type Issue history Source

Fund sales 26 licenses issued to independent fund distribution

company.

http://www.csrc.gov.cn/pub/zjhpublic/G00306208/20131

1/t20131112_237741.htm

Payment and settlement

for fund sales

11 licenses issued to third-party payment companies by

October

http://www.csrc.gov.cn/pub/zjhpublic/G00306208/20131

1/t20131112_237742.htm

Third-party e-commerce

platform for fund sales

Taobao.com received the first license in October 2013. http://www.csrc.gov.cn/pub/zjhpublic/G00306208/20131

1/t20131112_237743.htm

Source: CSRC

Payment system is an infrastructure for Baidu’s 2B and 2C businesses. In the past, Baidu

failed to develop its e-commerce platform, so its payment service system construction also

lagged behind. Baifubao only received its license for third-party payment services from

PBOC in July 2013. Currently, it only links to the debit cards of seven banks. In the short

term, Baidu’s strategy is to focus on seeking cooperation with more financial institution

partners to offer more customised new-type products carrying “Internet characteristics”.

'to B' business

For to B business, Baidu has a small loan company located in Jiading district of Shanghai

which got approval from the Shanghai government in Sep-13. The company mainly targets

Baidu’s online marketing customers at the first stage. Baidu had about 464,000 active

online marketing customers in 3Q13, while revenue per customer was ~Rmb19,100. In the

long run, the company may look for a bank license.

Intermediary page strategy

On 5 November, Baidu Finance (jinrong.baidu.com) was officially launched. The financial

product search platform enables one-stop application for credit card and loans, including

home loans, auto loans, consumer loans and business loans. Haodai.com, a vertical loan

search engine, provides data and services for Baidu. Both parties share the service fees

paid by banks.

Earnings implication estimates

For Baidu, in the short to medium term, potential revenue could mainly come from two

sources in Internet finance.

(1) to B: based on latest annual advertiser base of ~600,000, Baidu can issue loans or

offer credit lines to these SMEs with marketing spend data supporting credit rating and

analysis.

(2) to C: Baidu would serve as a distribution platform and help distribute financial products

such as funds, trusts, WM products.

From our estimates below, we see potential revenue opportunities (interest income) for

Baidu's finance-related offerings reaching an annual run-rate of ~Rmb3 bn in a blue-sky

scenario.

Figure 22: Baidu Internet SME loan business scenario analysis

Bear case Base case Bull case

Revenue (Rmb mn) 22,306 22,306 22,306

# of advertisers (mn) 0.596 0.596 0.596

ARPU 37,426 37,426 37,426

Non-GAAP net income 10,668 10,668 10,668

Loan amount per advertiser 10,000 30,000 50,000

Advertiser loan penetration % 20% 50% 70%

Total loan amount (Rmb mn) 1,192 8,940 20,860

Annualized all-in interest rate 8% 10% 15%

Interest income (Rmb mn) 95 894 3,129

As % of Baidu 2012 revenue 0.4% 4.0% 14.0%

As % of Baidu 2012 net income 0.9% 8.4% 29.3%


Strategy: Co-operate with

financial institutions to

provide customised

products with "Internet

characteristics"

Small loan company targets

Baidu's online marketing

customers

Baidu Finance enables one-

stop application for credit

card and loans

02 January 2014


Tencent: Another layer of service to its strong user base

Figure 23: Tencent's Internet finance-related business

Global

Company Product/Service Activities Comps

Tencent Virtual currency Q coin

Payment 2011.5 Tenpay received third-party payment license. PayPal

2013.8 WeChat Payment was launched.

Insurance 2013.10 Zhongan Online Property Insurance Holding was established.

Tencent holds 15%.

Fund distribution 2012.5 Tenpay received a license for payment and settlement service for fund

sales.

2013.11 Four asset management companies may start selling money funds on

WeChat.

Bank 2013.9 Tencent was reported to be applying for a banking license.

Forex trading and currency exchange Tenpay receives a pilot license for cross-border e-commerce payment

business from SAFE

Online brokerage 2013.11 Sinolink Securities announced 2-year partnership with Tencent, which

covers online securities brokerage, online wealth management and offline

private wealth management.

Charles

Schwab

Source: Company data, Tencent News, Credit Suisse research

Tenpay, Tencent's payment service, has a share of 18.7% in the online payment market in

3Q13, according to iResearch, compared with 48.8% of Alipay. However, once integrated

with WeChat, which enjoys a user base of over 600 mn, Tenpay can become a strong rival

comparable with Alipay, especially in mobile application contexts.

Financial product distribution via WeChat

Tenpay received a third-party payment and settlement license for fund sales in May 2012.

Since 2013 it has been adding fund management companies as partners to the list. To

date, it has extended to ten asset management companies partners.

WeChat and Tenpay are different business units under Tencent's Corporate Development

Group (CDG). WeChat Payment was launched in August 2013, yet it is still far from

perfect. At present, users can buy from Yixun.com, Dianping.com, AA payment, Lottery,

mobile phone charges, utility fee payment, movie ticketing, Q coin purchase, etc. We see

WeChat adding more functions and business partners to its payment platform.

Tencent had been in talks with several asset management companies about cooperation

in fund distribution. According to Sina Tech, a WeChat wealth management platform will

be launched soon. Supported by Tenpay service, these asset management companies are

expected to sell their money market funds to WeChat users.

On services, many asset management companies established their official accounts on

WeChat to provide services. For example, by subscribing the service account of China

AMC, customers can complete operations like checking account balance, or purchasing

and redeeming certain money market funds.

Tenpay: Still pacing the roll-out

Tenpay is already running annual total payment value (TPV) of Rmb740 bn with a 20%-plus

third-party payment market share. WeChat payment enabled mobile payment application

scenarios that were previously impossible in practice. Mobile QQ payment is also likely to

be released soon. Tencent is still pacing the full-fledged commercial roll-out internally.

Tenpay user base is already more than 200 mn. Major payment application scenarios

include: (1) public account payment; (2) PC/Offline QR code scan payment; (3) in-app

payment such as cooperation with Dianping.

Tenpay could be a strong

rival to Alipay after it

integrates with WeChat

Tenpay has ten asset

management partners now

WeChat is likely to add

more functions and

business partners

A WeChat wealth

management platform will

be launched soon

Asset management

companies establishing

official accounts on WeChat

Tenpay is already running

annual total payment value

(TPV) of Rmb740 bn with

20%-plus third-party

payment market share

02 January 2014


Invest in Howbuy: To build a one-stop financial product platform

On 16 December, Howbuy, a third-party wealth management announced to receive B-

round financing from Tencent. Founded in 2007, Howbuy is the first batch third-party fund

sales license holder in China with one of the largest fund research teams. Howbuy now

provides over 2,000 third-party wealth management products and tailor-made investment

plan for its clients. We view such investment as part of Tencent's strategy in building a

one-stop financial product platform. By cooperation with Howbuy, Tencent can connect

with various fund companies once for all without negotiation with each company

separately.

Earnings implication estimates

We expect Tencent to be more active in the 'to C' part of the business, i.e., various

financial product distribution via its various traffic assets (QQ, WeChat, etc.) to its sizeable

user base. We think revenue/earnings contribution from these services will be limited in

the short run compared with Tencent's sizeable revenue base.

Over longer run, we think Tencent will be the most likely player among Internet companies

to provide online brokerage services, if such licenses become available. Tencent has

already signed a two-year strategic cooperation with Sinolink Securities. Potential areas of

cooperation include online brokerage, online wealth management and offline private

wealth management.

Investment in Howbuy will

have Tencent build a one-

stop financial product

platform

We expect Tencent to be

more active in the 'to C' part

of the business with limited

revenue/earnings

Tencent could be the most

likely player among Internet

companies to provide online

brokerage services

02 January 2014


SouFun

Figure 24: SouFun e-commerce service—from 1.0 to 5.0

Launch

Version date Theme Description

1 2000 Online auction Provides online auction services for real estate developers, such as Soho China.

2 2006 Group Buying SouFun is the first online RE portal to provide group buying services, host 1000-plus

projects since 2006.

3 2011 E-commerce platform (狂拍团) Provides various services such as online booking, payment, new house debut, real

image house preview.

4 2013 New house express (新房通) Provides a multi-function platform to connect new house resource with real estate

agents.

5 2013 Soufun Financial Service

Channel (8.soufun.com) Collaborates with various financial institutes to provide real estate relevant loan products to members.

Source: Company data, 8.soufun.com, Credit Suisse research

SouFun recently announced the launch of its financial services platform 'SouFun

Financial Services Channel' on 16 December. SouFun will provide various genre of

third-party financial products, such as home mortgage, home insurance and consumption

loan to meet the requirement of its members.

SouFun currently has over 15 mn registered members, over 500,000 certified agents and

more than 10,000 developers and home improvement clients. SouFun has already signed

strategy partnership contracts with ICBC and Ping An Bank in Dec-13. According to

Xiaogang Shen, executive of ICBC Shanghai Branch, ICBC will provide special discount

exclusively for SouFun members.

Currently, SouFun only provides financial services in Beijing and Shanghai. The main

services categories are: (1) loan search engine: search for suitable loan products under

certain criteria; (2) customised financial service for agents (Fang Dai Tong房贷通): special

services targeting agent clients (搜房帮 ), provides suitable financial products to help

agents in streamlining the transaction process.

We expect Soufun to see good conversion rate of its existing e-Commerce service users

to financial services users. We view SouFun card members as a user group with high

actual intention of house purchase, most of whom will have demand for loan products.

Given that members have already provided basic information to SouFun, we believe

Soufun can easily direct those home loan sales leads to banks (on user approvals). In

addition, some users can get pre-qualified home loans before joining Soufun’s group buy

tours. This will create synergy for both e-Commerce and financial services businesses of

Soufun.

SouFun could use its balance sheet for its own financial products in the future. Currently,

SouFun mainly cooperates with banks to launch loan products, with banks providing 100%

of loan. In the future, it is possible that Soufun would also underwrite some low-risk home

loans on its own, after accumulating enough experience in this area. However, this could

be few years away.

SouFun recently announced

to launch its financial

services platform

SouFun has already signed

strategy partnership

contracts with ICBC and

Ping An Bank

SouFun currently only

provides financial services

in Beijing and Shanghai

We are positive on user

base of SouFun's financial

services

SouFun could use its

balance sheet for its own

financial products in the

future

02 January 2014


Figure 25: SouFun Loan search engine—Search for

suitable loan products under certain criteria

Figure 26: Advantage of 'Fang Dai Tong (房贷通)'

Source: Company data, 8.soufun.com Source: Company data, Credit Suisse research

E-house also announced the launch of a consumption loan product Le Ju Dai (乐居

贷) with CITIC bank: E-house members can apply for mortgage loan (total amount up to

90% of valuation of house mortgage) for the purpose of house purchase/renovation, car

buying and travel, etc. By providing such service, E-house hopes to better explore the

consumption need of its members and better connection of its members and

realtors/renovation service providers.

Figure 27: Real estate online ad market share breakdown

by revenue (3Q13)

Figure 28: Monthly PV of major vertical real estate website

Source: DCCI Source: DCCI

Customized loan product

Fast loan approval process

Best house assessment

price

Best interest rate

SouFun72%

Sina eHouse

15%

Sohu Focus12%

Others1%

0

500

1,000

1,500

2,000

2,500

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

(mn)

SouFun Sohu Focus Sina eHouse

E-house announced the

launch of a consumption

loan product Le Ju Dai

(乐居贷) with CITIC bank

02 January 2014


AliFinance

“If banks don’t change, we’ll change the banks.” – Jack Ma, December, 2008

Figure 29: Alibaba's Internet finance-related business

Global

Company Product/Service Activities comps

Alibaba Payment May 2011: Alipay received third-party payment license. PayPal

Small loan March 2010: Alibaba established Zhejiang Alibaba Small Loan Company.

June 2011: Alibaba set up Chongqing Alibaba Small Loan Company.

August 2013: Chongqing Ali SME Small Loan Company was established.

Financial product distribution July 2012: Licai.taobao.com was launched and began to sell insurance products.

November 2013: The platform covers insurance and funds. Bank WMPs were in plan but

cancelled for compliance reasons.

March 2013: Ali SME Financial Service Group was established to incorporate all the

financial businesses in Alibaba Group.

Fund sales June 2013: Finance Prod was launched in cooperation by Tianhong and Alipay.

November 2013: 17 asset management companies opened their flagship stores on

Taobao to offer over 100 funds.

Fund management October 2013: Alipay’s parent company offered to buy 51% of Tianhong. The deal still

needs approval from CSRC.

Insurance October 2013: Zhongan Online Property Insurance Holding was established. It

announced the first product in November. Alibaba holds 19.9%.

Guarantee August 2012: Alibaba Hong Kong company founded Shangcheng Financing and

Guarantee Company in Chongqing.

August 2013: Chongqing Ali SME Financing and Guarantee Company was established.

Credit payment/credit card Credit payment was scheduled to launch in 2013 but Ali failed to meet this target.

Source: Company data, Sina Tech, Credit Suisse research

Alipay and Yu'E Bao

Alibaba’s finance business started with Alipay, which received its third-party payment

license in May 2011 after waiting for six years.

In December 2012, two special money market funds came into being in China, from China

Universal Asset Management Company and China Southern Asset Management

Company. The products achieved T+0 (it usually takes one or two days to cash out) for

the first time in the China market and targeted spare money in investors’ securities

accounts.

Tianhong designed a similar product in mid-2012, originally targeting money in custody.

According to Tianhong, Tianhong Asset Management has Rmb9.9 bn under management

and was ranked as the 50th largest fund company in China as of end-2012. Alipay and

Tenpay were two potential partners. Tianhong took a detailed plan to Alipay in December

2012. Both parties worked for three months together on development since March. In June

2013, Yu'E Bao was launched.

The low-risk and high-liquidity product offers decent returns. Money can easily flow

between users’ Yu'E Bao accounts and Alipay accounts. When it stays in Yu'E Bao, users

receive returns of a Tianhong money market fund, which stabilise around 5% annualised.

When users want to buy something online using Alipay, the funds will be redeemed and

their money immediately flows back into the Alipay account.

Two new successful

products achieved T+0 in

the China market and

targeted spare money in

investors’ securities

accounts

Yu'E Bao was launched in

June 2013 with the

cooperation of Tianhong

and Alipay

The low-risk and high-

liquidity product offers

decent returns

02 January 2014


Figure 30: Yu'E Bao, the first fund product customised for Internet

Customer Purchase Fund size Investment per

Number (mn) amount (Rmb bn) (Rmb bn) customer (Rmb)

29 May n.a. 0.2 0.2 n.a.

13 Jun Yu'E Bao was launched

30 Jun 2.5 6.6 4.244 1,684

30 Sep 13.7 102.85 55.653 4,068.5

16 Oct 16+ 130 n.a. n.a.

14 Nov 29+ n.a. 100 3,448.3

Source: Tianhong Asset Management Website

According to iFeng.com, total scale of Yu'E Bao reached Rmb180 bn in late Nov-13. To

further protect customer funds and ensure deeper cooperation with Tianhong, Alibaba

invested in a majority stake in Tianhong in Oct-13.

Yu'E Bao’s customers, aged 26 on average, are Alipay’s users instead of experienced

fund investors. Alipay already connects with most banks before Yu'E Bao, but previously

people don’t tend to keep money in their Alipay account, because they could also use

credit card or debit card for Alipay online payment. The launch of Yu'E Bao introduced the

asset class of money market funds to a new group of investors and built a convenient

bridge over bank deposits and money funds.

Alipay also benefited from increased user activities, particularly on mobile. Alipay Wallet

was launched as a mobile version in October 2009. By November 2013, Alipay Wallet was

reported to have a user base of close to 100 mn, and a third of Alipay payments were

processed on mobile phones, 800% higher than last year.

Financial product distribution on Taobao/Tmall

Before Yu'E Bao, Taobao prepared for years for fund distribution. It received a third-party

e-commerce platform license for fund sales in October. A financial product sales platform

Licai.taobao.com/88.taobao.com was put up in July 2012 and began selling insurance

products. The platform didn’t draw much attention. Available on this platform are insurance

products and mutual funds. The platform also hoped to sell bank wealth management

products in Nov-11, but cancelled the plan in the last minute. Its partner China Guangfa

Bank cited a compliance problem. In Nov-13, 17 asset management companies opened

their flagship stores on Taobao selling over 100 funds.

Insurance companies and fund managers prepared Internet-customised products offering

high returns and looked forward to big sales in Nov-11. However, according to Tencent

Tech Channel, the actual sales recorded were much lower than expected. Efund

Management Co Ltd allocated Rmb200 mn to offer buyers 6% annualised return, but after

two days of promotion, its sales recorded were about Rmb140 mn less than its lowest

expectation. According to a Taobao disclosure, within 15 hours, a product by Guohua Life

Insurance promising 7% annualised return was sold at most Rmb401 mn, while the 6%

Efund product sold at most Rmb151 mn—didn’t reach half of its targeted 468 mn. All the

other products on 88.taobao.com sold totalled Rmb130 mn.

Alibaba invested a majority

stake in Tianhong in Oct-13

Yu'E Bao built a convenient

bridge over bank deposits

Alipay benefited greatly from

its mobile App, Alipay Wallet

Before Yu'E Bao, Taobao's

fund platform didn’t draw

much attention

Sales of insurance and fund

products on Nov-11 were

below expectation

02 January 2014


Figure 31: Yu'E Bao and Taobao wealth management


In China's asset management industry, as of October 2013, 88 asset management

companies issued 1,466 mutual fund products, totalling Rmb2.8 tn. 84 funds of them, or

5.7%, are money market funds, with Rmb57.5 bn under management, or 20.5%. In the

third quarter, the total size of money market funds had net growth of Rmb185.1 bn, of

which Rmb51.4 bn was sold by Yu'E Bao, representing 27.8%. For fund companies,

distribution cost via Internet is lower than bank channels, but it also depends on different

charging models. Money market funds only take up a small percentage of the mutual fund

market and generate less profit. Fund companies are more interested to see the sales of

equity funds.

Figure 32: Money fund distribution

Mutual funds Money funds

Time number AUM (100 mn) number AUM (100 mn)

October 1466 28133.35 84 5754.48

September 1450 28053.44 78 4890.08

August 1411 27742.41 75 5098.96

July 1369 26549.04 74 4096.31

June 1345 25180.54 73 3038.69

May 1317 30037.2 73 5640.54

Source: Asset Management Association of China

Alibaba Small Loan Companies

Although Alibaba doesn’t have a comprehensive banking license, it owns three small loan

companies working as loan issuers for Alibaba suppliers:

(1) Zhejiang Alibaba Small Loan Company: In March 2010, Alibaba Zhejiang branch

established its first small loan company, Zhejiang Alibaba Small Loan Company, with

registered capital of Rmb600 mn. The investment was made together with other

investors.

(2) Chongqing Alibaba Small Loan Company: In June 2011, Alibaba’s overseas

subsidiary set up the second small loan company, Chongqing Alibaba Small Loan

Company, with three other investors.

(3) Chongqing Ali SME Small Loan Company: In August 2013, the third small loan

company under Alibaba, Chongqing Ali SME Small Loan Company, was set up as a

wholly owned company of Ali SME Financial Service Group.

There are several differences between a bank and a small loan company. The leverage of

a small loan company is restricted to 0.5; it can only lend on its own capital or borrow from

no more than two banks; it must have at least two shareholders, the biggest one can’t hold

over 30%; there is a cap on each loan and its business is restricted to local areas. The

three small loan company licenses Alibaba received were quite different, thanks to policy

In the third quarter, the total

size of money market funds

had net growth of Rmb185.1

bn, and 27.8% of which was

from Yu'E Bao

Alibaba has three small loan

companies working as loan

issuers for Alibaba suppliers

The three different small

loan company licenses

Alibaba received facilitate its

small loan business

02 January 2014


breakthroughs by local government. The first one allows Alibaba to lend to its suppliers

“nationwide” under a JV structure. The second one allows Alibaba to do Internet lending

business under a JV structure. The third one allows the group to be the sole shareholder.

Figure 33: Alibaba—small loan companies' business process

Source: Company data

Figure 34: Alibaba’s asset securitization Partner Time Size

Shandong Trust 2012.6 Rmb240 mn

2012.9 Rmb120 mn

Oriental Securities Asset Management Company 2013.7- present Five products totalled Rmb2.5 bn, another five valued Rmb500 mn each in plan, traded on Shenzhen Stock Exchange

Wanjia Gongying Asset Management Company under Wanjia Asset

2013.7 Rmb200 mn

Minsheng Tonghui Asset Management Company 2013.6-7 Rmb200-300 mn

China Merchants Bank N/A N/A

Source: Sina Tech Channel

Alibaba has two products for SMEs: credit loans and receivable loans. As of April 2013,

the first two small loan companies issued 8,030,800,000 loans totalling Rmb81 bn to

240,300 businesses. The average amount of each loan was Rmb10,126. As of April 2013,

114,800 outstanding loans totalled Rmb1.98 bn, with a customer count of 43,800. The

NPL ratio was 1.23%. The two companies have issued loans of over Rmb100 bn to date.

Ali SME Financial Service Group

At the end of 2012, Alibaba decided to restructure its financial business lines and set up

Ali SME Financial Service Group (“The group”). The current group is a transitional

arrangement. 40% shares of the group will be given as staff incentive, including no more

than 7.3% for Jack Ma, while 60% will be left for strategic investors.

The core strategy of the group, as CEO Lucy Peng explained, is to convert unconventional

Internet trading data into credit records that could be recognised and commercially used

for financial services. These trading data on Taobao and Alibaba are mostly from SMEs or

individuals. Thus Ali SME Financial Service Group focuses on SMEs as its core

customers.

Internet insurance

Zhong An Insurance officially opened to business in November 2013. The company had

several shareholders including Alibaba, Ping An, Tencent and Ctrip. Alibaba has the

largest holding of 19.9%, followed by Tencent and Ping An holding 15% each. Currently,

the company has about 70 staff, most of whom are working in product and business

development teams.

Risk control

Loan issuance

Credit model

Customer base

Receivables loan

Credit Loan

Commercial banks

Trust companies

Securities firms

Insurance companies

Ali small loan companies

Asset securitization Loan issuance via Alipay account system

Asset management companies

Alibaba has two products for

SMEs: credit loans and

receivable loans

Alibaba's financial business

lines restructure and set up

of "The group"

The core strategy of the

group is to convert

unconventional Internet

trading data into credit

records

Zhong An insurance

officially opened to business

in November 2013, with

Alibaba the largest

shareholder

02 January 2014


According to Zhong An Insurance, it plans to develop all types of Internet-related property

insurance business, not an online distribution channel for existing insurance products.

Zhong An released its first product on 25 November 2013, a contract execution insurance

policy targeting Taobao sellers. E-commerce delivery insurance and mobile payment fund

security insurance will also be served by Zhong An.

Zhong An will have competition with other insurance companies, including its shareholder

Ping An. Currently, delivery insurance for Taobao shopping is provided by Huatai

Insurance Group, Alipay fund security insurance by Ping An, and WeChat fund security

insurance by PICC.

Zhong An intends to

develop all types of internet

related property insurance

business

Zhong An also competes

with its shareholder, Ping An

02 January 2014


Jingdong (JD)

Figure 35: Jingdong's Internet finance-related business

Global

Company Product/service Activities comps

JD (360buy) Payment October 2012: JD acquired 100% stake in a third-party payment company China bank

Payments.

PayPal

Supply chain finance November 2012: Supply chain finance was launched in cooperation with banks and

securities firms and its own factoring license.

Factoring June 2013: Shanghai Banghui Commercial Factoring Company was set up.

Small loan September 2013: JD's application for a small loan company was cleared.

Fund and insurance sales In progress

Consumer loan company In progress

Financial leasing In progress

Source: Company data, Sina Tech, Credit Suisse Research

JD started its supply chain financing in late 2012. In the medium term, JD’s finance

business will consist of two parts, loans to businesses and individuals, and financial

product distribution. JD’s large business volume generates significant amount of accounts

payable, which it holds for ~45 days, according to the company. The idea of making best

use of these funds was the origin of JD’s finance business. Finance became one of the

main focus of JD group in 2013 in the form of JD Finance Group.

Figure 36: JD's lending model

Source: Company data, Credit Suisse research

JD secured Rmb15 bn quota of loans from top 15 banks and “retailed” them to suppliers.

The average amount of each loan was Rmb1 mn. JD negotiated borrowing rates with

banks, lent to suppliers at higher rates (9% on average, 12% the highest) and earned the

spread.

These loans were effectively secured by JD’s orders and within 45 days. The NPL ratio

was very low, thus JD decided to lend to best customers with its own capital. The scale of

JD’s own lending exceeded Rmb6 bn in ten months.

According to Sina Tech Channel, in 2014, JD plans to extend its lending services to

individual customers when its own payment system, Chinabank Payments acquired in

October 2012, is established. The company claims to have 200 mn customers and over

20,000 suppliers. The focus of JD lending is still facilitating faster development of JD’s e-

commerce business.

JD’s finance business will

consist of two parts

JD earns the spread

between bank rates and its

lending rates

JD loans were effectively

secured by its orders

According to Sina Tech

Channel, JD plans to extend

its lending services to

individual customers via its

own payment system,

Chinabank Payments

02 January 2014


Since Alipay launched Yu'E Bao, JD also started to build its financial product distribution

platform. Twenty two Insurance products are available on baoxian.jd.com.

Figure 37: Potential business structure of JD Finance Group

Source: JD’s online recruitment Information

JD started to build its

financial product distribution

platform after Yu'E Bao

02 January 2014


Financial institutions: Evolution favours the fittest Banks

Banks would be the first to be challenged by Internet finance, given they have been

dominating China's finance industry for decades. SME and uncollateralised personal

lending, some payment and cash management services, and fee incomes from financial

products' distribution are the major areas that would face intense competition from Internet

companies. We also see that some low-end depositors are putting money into liquid and

convenient online investment products, such as money market funds, potentially threating

banks' deposit acquisition.

ST impact limited…

We expect Internet finance players to bring very little P&L impact to banks in the next two

years, for the following reasons:

■ SME / Payment / Product distribution are not major revenue sources for banks

Currently, most Internet finance players target very small enterprises for their lending

business (typically unit lending size below Rmb0.5 mn), especially those who can

hardly get credit facility from banks (banks tend to do SME loans with >Rmb3 mn unit

size). These SMEs are not the targeted client segment for banks as of now; hence, we

see little impact in that area.

Online and mobile payment services are seeing strong growth, but as payment,

settlement and clearance tend to account for <5% of banks' total revenue, the impact

is also limited. Similarly, agency fee income has even smaller revenue contribution

and hence impact small.

■ Internet finance players have weak capital base and brand recognition

Further, with the exception of a handful large internet companies, most internet

finance players have very weak capital base or brand recognition. Thus, they may

record strong business volume growth, given the low base; however, their ability to

meaningfully gain financial product market share tends to be weak. This applies to

capital-intensive products—lending in particular, as the banking regulator is most likely

to require certain capital ratio.

■ Products' comprehensiveness is not yet comparable to banks

As of now, most internet finance companies are providing certain products that may

appear very attractive to customers. However, they cannot provide comprehensive

products, compared with banks, especially in the areas of corporate banking. In other

words, customers may put some funds to buy interbank financing products but they

are most unlikely to completely move their funds from banks to these players.

Banks are the first to be

challenged by internet

finance

SME/Payment/Product

distribution are not major

revenue sources for banks

Internet finance players

have weak capital base and

brand recognition

Products

comprehensiveness is not

yet comparable to banks

02 January 2014


…however, LT impact meaningful

That said, we do believe that in the long run, an interbank financing business model can

meaningfully change the banking competitive landscape and force banks to restructure

their business models. Ultimately, we believe internet finance players are creating

competitive pressure due to the following reasons:

■ Internet companies creating new customer behaviour

Internet companies are changing many things, including corporate/retail customer

behaviour. Banks need to understand how their customers invest, sell, consume and

invest in a new Internet era—this is a big challenge.

■ Internet companies conduct risk analysis, client acquisition and product promotion

based on behavioural analysis; hence, they are cheap and more precise.

Also, many Internet finance companies do lending business based on behavioural

analysis. For instance, a payment service provider can lend money to an SME based

on the respective POS transaction history; a B-to-C online mall operation can meet

merchants' financing needs based on their online sales trends, or promote personal

lending products based on personal shopping preferences of customers.

Such behavioural-based risk analysis is completely different from conventional risk

analysis framework, and arguably more reliable and definitely cheaper, given it

requires much less manual effort.

This also applies to cost management as internet finance players can do the same to

client acquisition or product promotion, ultimately providing them huge cost efficiency

and advantage versus conventional banking business model. In the long run, banks'

conventional advantage of network may turn out to be a cost burden if banks do not

actively transform their businesses and mitigate costs.

■ Internet companies have to bear much less regulatory burden

Currently, China banks are very tightly regulated, creating certain business

opportunities for Internet finance players. In particular, Internet finance companies can

provide faster service at lower costs, and can also explore some new business areas

such as peer-to-peer lending.

For instance, banks are required to have face-to-face meetings for any corporate

lending business to avoid mis-selling; however, internet finance lenders can conduct

risk analysis and lend money within minutes. An example is payment service. Banks

have to use the PBOC inter-bank settlement system to provide cross-bank payment

service, which carries a minimum charge; while third-party payment companies can

largely avoid such an expense.

■ Internet companies have very commercial and flexible corporate culture

Culture-wise, internet companies are much more commercial and flexible than

commercial banks, making them very nimble and fast-responding to market changes.

Ultimately, that also means that their ability to meet customer demands and product

R&D capability tends to be better than banks.

Minsheng, ICBC and CMB are better positioned, in our view

We do not suggest banks to follow everything internet players are doing, as banks have

much bigger operating size, bear meaningful regulatory burden and need to ensure their

internal IT/management/evaluation systems stay largely stable.

That said, we believe that currently most banks do not pay enough attention to the Internet

financing trend, as they tend to view Internet financing merely a new way of providing

service. They tend to underestimate the long-term impact of clients' behavioural change

Internet finance players are

creating competitive

pressure on banks

Internet companies creating

new customer behaviour

Internet companies conduct

risk analysis, client

acquisition and product

promotion based on

behavioural analyses;

hence, they are cheap and

more precise

Internet companies have to

bear much less regulatory

burden

Internet companies have

very commercial and flexible

corporate culture

Most banks do not pay

enough attention to internet

financing trend

02 January 2014


and their cost burden. They also worry about the potential cannibalisation, especially on

the funding side—they hesitate to introduce "Yu'E Bao equivalent" products.

As of now, we view Minsheng, ICBC and CMB as banks better-positioned to succeed in

the current Internet era. Minsheng has announced a strategic partnership with Ali Group,

which means the two are likely to share basic information on new customers and issue co-

brand credit cards, in our view. ICBC has a very advanced IT system and the strongest

profitability among peers, enabling the bank to continuously invest. CMB has premium

client base and long-established relationships with most domestic private equity firms, also

giving them some advantages.

Insurance

Online distribution

Online insurance distribution is mainly restricted to P&C products, in particular auto

insurance. Life insurance’s complexity makes it difficult to sell on the Internet, and it still

requires a face-to-face sales process, with only simple life insurance policies such as

accident insurance being sold online.

The direct channel is especially appealing to customers in that the price is attractive, given

the distribution/channel fee is saved. In China, typically the direct channel price is 15%

lower than the price of the traditional agency channel. Right now, we estimate around 20-

30% of the auto insurance sales are done directly with major companies, including PICC,

Ping An and China Pacific, which are the market leaders. However, direct sales mainly

constitute tele-marketing, with internet sales still being very small and there being no

website with sizable traffic.

Aggregator model: Destroys profit

The most powerful type of online distribution is the aggregator model, which now controls

more than 80% of the UK auto insurance market. In 2002, aggregator websites in the UK

started to appear. Aggregator websites control customers and allow for easy price

comparison among insurers. These websites also send renewal notices to customers.

Figure 38: Direct channel—bypassing brokers and partner Figure 39: Aggregator model—particularly powerful

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Pricing has been generally weak after the introduction of aggregator websites in the UK,

and only recently improved after very poor result. The rise of such websites made way for

smaller insurers, who can obtain high exposure for minimal marketing costs via

aggregators.

We view Minsheng, ICBC

and CMB as banks better-

positioned to succeed in the

current Internet era

Online insurance distribution

is mainly restricted to P&C

products

Direct channel is especially

appealing to customers as

the price is attractive

The most powerful type of

online distribution—the

aggregator model

Pricing has been generally

weak and results poor after

introduction of aggregators

in the UK

02 January 2014


Hence, we think the aggregator model is in particular very destructive to the insurance

industry. We understand that there are some similar websites in China that provide

products offered by different insurance companies. However, big insurance companies are

reluctant to go on such websites with smaller insurers as the main partners. We also

understand that the regulator is well aware of the potential destructive effect of the

aggregator model, and hence is very cautious.

Figure 40: Confused.com—UK aggregator Figure 41: Aggregator model killed profitability

Source: Company Source: Company data, Credit Suisse research

Figure 42: Profitability lower at aggregator stage


Ping An’s Internet model

Ping An is a large financial conglomerate group and has over 80 mn retail customers from

its insurance business. It has banking, trust and securities businesses as well. The

company targets to provide full range of financial services to its customers—it aims to be a

one-stop financial services supermarket.

The different businesses have substantial synergies, with 40% bank retail customers from

insurance and 50% trust customers from insurance. The Internet distribution channel also

fits well into Ping An's overall strategy. Hence, it has recently announced the set-up of

online insurance company Zhongan Insurance, together with Tencent and another major

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2009-

2010

2008-

2009

2007-

2008

2006-

2007

2005-

2006

2004-

2005

2003-

2004

2002-

2003

2001-

2002

2000-

2001

1999-

2000

Private - Comprehensive Private - Non-comp Motor Cycle Commercial

China insurance companies

and regulator are reluctant

and cautious of aggregator

websites

Ping An: A large financial

conglomerate group

providing full range of

financial services

Ping An recently announced

the set-up of Zhongan

Insurance, an online

insurance company

02 January 2014


internet company. It also set up Lufax more than two years ago, which mainly does P2P

lending business.

Figure 43: Ping An financial conglomerate business model Figure 44: Financial services supermarket

Source: Ping An company presentation Source: Ping An company presentation

Lufax

Established in September 2011, Lufax started officially to carry out P2P lending business

in January 2013, and, to some extent, B2B and B2C lending businesses as well. It mainly

attracts borrowers online, i.e. around 70%, with 30% from other offline channels, while the

lenders are all online.

Lufax, as a subsidiary of the Ping An Group, is strong in risk management, given the

background and it also collaborates with the group's guarantee company to better manage

credit risks. It also operates in a secondary market, allowing for online secondary

transaction of products, which adds liquidity, and is quite unique compared with other P2P

lending models.

Figure 45: New technology helps acquire customers Figure 46: Focus on serving customers using new

technology

Source: Company presentation Source: Company presentation

Monthly sales stood at around Rmb300-400 mn, with 8.5% guaranteed interest for

lenders, while the funding cost for borrowers could be as high as >20%.

Lafux started officially

carrying out P2P lending

business in January 2013

Lafux is strong in risk

management

02 January 2014


Competition

Currently, the internet finance race is between two models—(1) Internet companies with

strong retail customers doing finance and (2) financial companies building online capacity.

Overall, however, it is a big enough market. While other players are more about selling

other financial institutions' products, Ping An has strong risk management capability and

understands financial products.

Brokers

Global practice

Globally, we have seen the successful business models of online brokers such as E trade

and Interactive Brokers in the US. These brokers mainly provide a user-friendly online

trading system and low commission rates, and have grown rapidly. However, we highlight

that the success has been seen mainly in the retail investor space, while investment banks,

such as Goldman Sachs and Morgan Stanley, still dominate the institutional space, which

constitutes the majority of the market.

Chinese case

The Chinese brokerage industry is rather fragmented, with 114 brokers, and is mainly

dominated by retail investors with relatively small institutional market share, compared with

developed markets. The commission rate in China has been stable for the past two years

for the industry at 8 bp, with some smaller brokers struggling to make a profit at this level

due to scale.

Figure 47: Commission rate stable in China Figure 48: Brokerage business 30-40% of revenue

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

The commission level in China has been under pressure given the price competition and

the introduction of pure online customers. For example, we heard comments suggesting

that some smaller brokers charge as low as 3 bp commission for a pure online customer in

some cases.

However, we highlight that more than 90% of the secondary market trade is done via

Internet already, with the branch office and outlets now serving more as a servicing centre

rather than a trading one. The brokers have also started introducing “light outlets,” with an

intention to cut costs. Note that typically, the set-up cost for these light outlets is very low,

and there is often no sophisticated trading system in place—just certain employees

providing consultation services.

Chinese brokers also look to divert focus away from pure price competition and increase

client stickiness by providing more value-added services, such as allowing research

access, providing advanced products such as margin finance, and stock lending.

0.00%

0.03%

0.06%

0.09%

0.12%

FY10 FY11 FY12 1H13

Commission rate

0%

20%

40%

60%

80%

100%

Citic Haitong Galaxy

Rev

enu

e m

ix{%

)

Equity brokerage Future brokerage Trading Investment banking Assets management Private equity Oversea Interest incomeInvestment income Other

Two models of the Internet

finance race, Ping An is

stronger in risk management

Online brokers are only

successful in the retail

investor space

Chinese brokers mainly

dominate in retail investors;

commission rate has been

stable

Commission level in China

has been under pressure

More than 90% of

secondary market trade is

done via the Internet, and

brokers have started

introducing “light outlets”

Chinese brokers have

started increasing client

stickiness

02 January 2014


In the medium term, we do not think brokers’ model will be greatly challenged in China

with license control in place. However, we do think brokers need to improve their efficiency

given the extensive network, i.e. high cost base and the move towards the high-end

market, where price competition is not key.

The online insurance distribution is mainly restricted to P&C products; in particular, auto

insurance, and, to some extent, life insurance such as simple accident insurance policies.

Life insurance’s complexity makes it difficult to sell on the internet, and it still requires the

face-to-face sales process.

The direct channel is especially appealing to customers in that the price is attractive, given

the distribution/channel fee is saved. In China, typically the direct channel price is 15%

lower than the price of the traditional agency channel. Right now, we estimate around 20-

30% of auto insurance sales are done directly with major companies including PICC, Ping

An and China Pacific, which are the market leaders.

Chinese brokers' models will

not be greatly challenged,

but need improvement

Major attraction of direct

channel is the lower price to

customers

02 January 2014


Technology pushing reforms Internet finance is a rather new phenomenon, so there could be a number of new

companies, new phenomenon and new business models emerging in next few years, and

generating a new group of winners and losers. At the moment, an interesting development

in the Internet finance universe is the impact of the interaction of Internet finance, interest

rate liberalisation and financial disintermediation on the entire financial system, reflecting

in the strong sales growth of Yu'E Bao of Alipay in last few months (Figure 7 on p.2).

To start with, in the last few years, with the sharp rise in required reserve ratio (RRR) of

bank deposits, and the strong credit demand, overnight interbank credit is becoming tight

from late 2011 onwards, and in the last two years a significant gap has been created

between overnight SHIBOR and the interest rate banks gave to the current account of a

depositor. Therefore, it creates a room for the short-term money market fund to capture

market share from bank deposits as they could easily give investors a 4%-plus return

through such high interbank rate.

Figure 49: Overnight SHIBOR and savings deposit rate

Source: CEIC

Compared with other countries, the overnight SHIBOR is lower than that of Indian rupee

and Indonesian rupiah, slightly higher than Malaysian ringgit and Aussie dollar, but much

higher than other major currencies. However, China's Internet penetration is much deeper

than economies such as India and Indonesia, with a much more active e-commerce

market and the fund management industry is more developed as well. Therefore, when

Alipay offered the product Yu'E Bao; it effectively combined a spending account in one e-

commerce platform with an investment yield much higher than current deposit rates

offered by banks (see Figure 55 on p.43). This phenomenon is discussed in a speech by

Mr. XIE Ping, Vice Chairman of China Investment Corporation (former senior official in

PBOC), about the revolutionary nature of Internet finance. His view being that through the

combination of an effective payment settlement account and a reasonably high investment

yield, the Yu'E Bao account is challenging traditional banking (See

http://finance.caixin.com/2013-12-24/100621266.html).

0

1

2

3

4

5

6

7

8

9

1-Jan-07 1-Jul-07 1-Jan-08 1-Jul-08 1-Jan-09 1-Jul-09 1-Jan-10 1-Jul-10 1-Jan-11 1-Jul-11 1-Jan-12 1-Jul-12 1-Jan-13 1-Jul-13

Savings Deposit Overnight SHIBOR

%

Research Analysts

Vincent Chan

852 2101 6568

[email protected]

Contribution by

Hu Shen

Please refer to page 55 for

relevant disclosures for this

section

A big e-commerce platform

+ high yield money market =

instant success of Yu'E Bao

02 January 2014


Figure 50: Overnight interbank rate across different countries

* As of 18 December 2013.

Source: CEIC

Looking ahead, we see the following developments:

(1) Unless there is a meaningful change in China's monetary management system, there

will still be a gap between overnight interbank rate and savings deposit rate, and the

attractions of money market products will remain.

(2) Companies with large customer database have the ability to provide more functionality

to the investment account—for example, they can be used for daily consumption

activities—and will be in a very advantageous position. However, such products face

significant settlement challenge, and whether a company can deal with this problem

will go a long way in determining their success.

(3) The deposit franchise of commercial banks will face serious challenges. How they

react will be crucial to their business in a few years down the road.

(4) This development could change the roadmap of Chinese regulators on the interest

rate liberalisation in China. Under the government's stated plan, interest rate

liberalisation should start with long-dated deposits and deposits by larger depositors.

However, now in effect, interest rate liberalisation is forced on the banks for small

retail depositors on short-term deposits. Whether the regulators will impose control on

this development, and how are they going to do it, will go a long way in determining

winners and losers, as well as China's long-term financial system risks.

The US experience

It may be helpful to compare what's happening in China now with that in the US in the

1970s and 1980s, when MMFs played an important role in the process of interest rate

marketization.

In 1971, the Reserve Fund, the first money market fund in US history, was offered to small

depositors. It was a substitute for deposit account and bypassed Regulation Q, which

prohibited banks from paying interest to demand deposit accounts. Regulation Q also

imposed caps on interest paid to other types of bank accounts at the time.

0

1

2

3

4

5

6

7

8

9

10

CN

Y

USD

GB

P

EUR

JPY

AU

D

IDR

INR

HK

D

SGD

TWD

MYR

%

Large customer database

and the ability to provide

more functionality to the

investment account is key

Roadmap of interest rate

liberalization could be

affected

Money market funds created

in the US in 1971 to bypass

Regulation Q

02 January 2014


In May 1974, Fidelity Daily Income Trust (FDIT) was registered with the SEC and became

the first money market fund to support check writing. The innovative product sold more

than US$0.5 bn in 1974, representing 20% of the outstanding money market fund shares

in that year. Much of them were sold to new investors.

Figure 51: Development of money market funds in the US

Source: Federal Reserve Board Annuals

FDIT was very much like the 1974-versioned Yu’E Bao. The latter supports online

payment, mobile phone refill, credit card payment, bill splitting and money transfer.

Coincidently, Yu’E Bao also took up around 20% of the total size of Chinese money

market funds in its first year. More importantly, it has reminded people of such a big

interest rate gap that can easily be captured. More companies are eyeing the market of

Rmb16.7 tn household demand deposits now, and some of them like WeChat are well

capable of developing similar products, just like more money market funds emerged in the

1970s.

Figure 52: Substitution effect of money market funds and current deposits

Source: Federal Reserve Board Annuals

Money market funds developed most rapidly when CPI was very high (11.3% in 1979,

13.5% in 1980 and 10.3% in 1981; 4.8% in 1989 and 5.4% in 1990). Deposits kept

converting into money market fund shares. As a result of this alternative and other

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Money market fund asset Mutual fund asset

Y-Y%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Checkable deposits and currency Outstanding money market fund shares

% of disposable personal income

MMF which support check

writing in 1974 was a big

success

The multi-functionality of

Yu'E Bao is a key reason of

its success

MMF does well under high

inflation

02 January 2014


avoidances like NOW (negotiable Order of Withdrawal) account, almost all the interests

have been set free in 1986.

Money market funds continued developing. In 1997 outstanding money market fund

shares held by household sector for the first time exceeded household current deposits. In

2007, the money market shares held by household sector hit US$1.3 tn, over eight times

of household current deposits. In 2008, all the outstanding shares of money market funds

in the US recorded US$3.7 tn, a historical high. During the financial crisis they were also

hit by liquidity crisis and regulatory changes are still under discussion.

The development of money market funds also depends on the interest rate environment,

liquidity risks and policy changes. In July 2011, Paypal closed its money market fund, a

product quite similar to Yu’E Bao, due to low interest rate and poor performance. So did

some other money market funds.

Figure 53: US government long bond yields

Source: CEIC

The money market mutual fund shares held by household sector were around US$1 tn by

2012, 38% of total outstanding money market mutual fund shares, and 124% of household

current deposits.

Money market fund taking off

By October money market fund assets totalled Rmb575 bn in China, 1.9% of the total of

household and non-financial enterprises demand deposits. We expect money market

funds to take off in China and Internet is going to play an important role in the process.

A large proportion of fund investors are already Internet users. According to a 2012 survey

by Asset Management Association of China, over 70% of fund investors collected

information about mutual funds from the Internet but an ignorable number of purchases

happened on the Internet. Also, in the survey, 28% of investors said they were interested

in MMF.

0

2

4

6

8

10

12

14

16

18

1957/1 1963/1 1969/1 1975/1 1981/1 1987/1 1993/1 1999/1 2005/1 2011/1

US: Government Bond Yield: Long Term (IMF)

MMF bigger than household

current deposits in the US in

1997

Low short-term rate

environment not favourable

to MMF

MMFs only accounted for

1.9% of current deposits in

China

70% of Chinese fund

investors collect information

from internet

02 January 2014


Figure 54: Development of mutual funds and money funds in China

Mutual funds Money funds

Time Number AUM (Rmb bn) Number AUM (Rmb bn)

2013.11 1505 2916.987 85 633.174

2013.10 1466 2813.335 84 575.448

2013.09 1450 2805.344 78 489.008

2013.08 1411 2774.241 75 509.896

2013.07 1369 2654.904 74 409.631

2013.06 1345 2518.054 73 303.869

2013.05 1317 3003.720 73 564.054

2013.04 1282 2828.664 71 561.567

2013.03 1257 2795.376 70 512.729

2013.02 1215 2890.438 65 536.137

2013.01 1193 2785.474 63 571.728

2012.12 1173 2866.1 61 571.728

Source: Asset Management Association of China (AMAC)

We notice a gap between online shopping and online investment in China. According to

China Internet Network Information Centre, 271 mn Chinese, or 45.9% of Chinese

netizens, have shopped online. The size of Internet retails is going to reach Rmb1.8 tn by

2013, to exceed Rmb3 tn in 2015, according to estimates by MOFCOM.

Figure 55: 2012 net purchase by fund type

Fund Net purchase Individual net purchase Institutional net purchase

type (Rmb bn) (Rmb bn) (Rmb bn)

Stock fund 74.612 8.445 66.167

Hybrid -26.21 -7.026 -19.184

Bond fund 234.618 153.592 81.026

Money fund 244.084 130.165 113.919

QDIII 7.359 -0.693 8.052

Source: AMAC

An organic connection converted Taobao customers into Yu’E Bao investors. But soon the

asset of Yu’E Bao outgrew the spare money people left in Alipay for their next online

shopping. People are moving their demand deposits out of banks. Products that are

inherently associated with online shopping, offer fund security insurance, and support

convenient cash out and transfers, are likely to have an advantage—at least this is what

we expect.

If 10% of current household demand deposits and 1% of enterprise demand deposits can

be mobilised by 2014, it means Rmb2.3 tn MMF (money market fund) assets. If 20% of

current household demand deposits and 10% of enterprise demand deposits can be

mobilised by 2020, assuming no economic growth thus no change in deposit size, their

assets could surpass Rmb5 tn, equalling 10.2% of 2012 GDP. It’s not very difficult to

imagine. In the US history, seven years after the birth of the first checkable MMF, their

assets grew from 1.5% in 1974, to something equalling half of household demand deposits.

45.9% of Chinese netizens

have shopped online

Organic connection between

Taobao customers and Yu'E

Bao investors

We expect MMF to reach

Rmb2.3 tn in 2014 and over

Rmb5 tn by 2020

02 January 2014


Figure 56: How far can money market fund grow with the help of Internet finance?

China US

Oct'13 2014* 2020* 1978 1980 1990 2000 2010

Rmb bn Rmb bn Rmb bn US$ bn US$ bn US$ bn US$ bn US$ bn

Money Market Fund (MMF) 575 2,454 5,382 9 64 389 937 1,054

Household Demand Deposits 16,744 15,141 13,458

Enterprise Demand Deposits 13,610 13,701 12,455

Total Demand Deposits 30,354 28,841 25,913 201 238 451 405 425

MMF as % of Demand Deposits 1.9 8.5 20.8 4.4 27.0 86.4 231.3 247.9

MMF as % of GDP 1.1 4.7 10.4 0.4 2.2 6.5 9.1 7.0

Demand Deposits as % of GDP 58.5 55.6 49.9 8.5 8.3 7.5 3.9 2.8

* 2014 forecasts: Assume 10% of household demand deposits and 1% of enterprise demand deposits converted to MMF. 2020 forecasts:

Assume 20% of household demand deposits and 10% of enterprise demand deposits converted to MMF. To simplify the analysis, we assume

the economy in a static state, i.e. no growth in GDP, MMF, household and enterprise demand deposits (before diversion to MMF.

Source: Federal Reserve Board Annual, Asset Management Association of China, Credit Suisse estimates

Accelerating interest rate liberalisation

Money market funds are not allowed to join interbank lending market. A large portion of

their assets are invest in interbank deposits instead, interest rates of which are negotiable

and follow SHIBOR as benchmarks. When liquidity is tight on the interbank market, like

the year-end, the return of Yu’E Bao is higher than the highest five-year term deposit rate.

Please refer to Figure 55 below.

Figure 57: 7-Day average return of Yu’E Bao in one recent month, compared with the

current deposit rate

Source: PBOC and Yu’E Bao

Rapid development of MMFs may interfere with China’s official plan for interest rate

liberalisation. China has reiterated its goal of completion of interest rate liberalisation,

although the central government never stated an explicit timeline. According to the

Chinese government's plan, interest rate liberalisation should start with large and long-

maturity deposits. The most recent move is the launch of negotiable certificate deposits

(NCD) on interbank market in December. However, MMFs are replacing the short-term

and small deposits, and force short-term deposit rates to be priced closer to the market

0%

1%

2%

3%

4%

5%

6%

7%

2-Nov 9-Nov 16-Nov 23-Nov 30-Nov 7-Dec 14-Dec 21-Dec

Yu'E Bao 7-day average return Current deposit rate 1-year term deposit rate

5-year term deposit rate Shibor ON

Most assets of MMF are

invested in interbank

deposits

Rapid development of

MMFs could distort the

official roadmap of China's

interest rate liberalisation

02 January 2014


level. So in effect, interest rate liberalisation is forced on the banks for small retail

depositors on short-term deposits.

Banks themselves have long been aware of this trend. They issue high-return wealth

management products to absorb deposits. According to a report by China Banking

Association, assets of bank wealth management products (WMPs) totalled ~10 tn by 2012,

and the average return level of these products remained between 4.0% and 4.5% in recent

years.

MMFs like Yu’E Bao score over bank WMPs in three ways. First, the lower-limit on

duration of fixed-term bank WMPs is set to be 30 days, while shares of Internet-

customised MMFs can be redeemed within hours thus have better liquidity. Second, the

threshold of bank WMPs is set at Rmb50,000, while Internet-customised MMFs have no

real threshold. Finally, Internet distribution is much lower cost, more convenient, and often

greatly benefits from viral marketing.

Some asset management companies are permitted to offer MMF T+0 redemption service for

direct-sales customers starting 2012 (similar to Yu'E Bao). MMFs like Xianjinbao by Southern

Asset Management (http://www.nffund.com/main/campaign/sssh/index.html), and Super

Wallet by Guotai AMC (http://www.gtfund.com/2013/20130531supperwallet/index.html) score

over bank WMPs in three ways. First, the lower-limit on duration of fixed-term bank WMPs is

set to be 30 days, while MMFs enjoy better liquidity. Second, the threshold of bank WMPs is

set at Rmb50,000, while Internet-customised MMFs set no real threshold. Finally, Internet

distribution is much lower-cost and more convenient. However, they are still quite different

from Yu’E Bao, which greatly benefits from its association with a large e-commerce platform

and multi-functionality of the account.

Interest rate liberalisation is necessary and positive for China, in our view. Meanwhile,

“long-term and big deposit first” is understood as a principle to avoid volatility. We believe

until China removes interest rate caps on demand deposits, arbitrage opportunities will

exist in the twisted interest rate system, and banks will face small depositors leaving.

Overtime banks’ balance sheets and financing cost should change accordingly. If radical

changes first happen to short-term and small deposits, i.e., if household and non-financial

enterprise deposits, or 30% of China’s total deposits, are repriced very quickly, whether

the real economy can afford this is an open question.

Figure 58: Private sector interest rates

Source: CEIC

Banks have already issued

higher yield WMPs to

absorb deposits

Duration and minimum

amount of investment is

much smaller for MMFs

comparing to WMPs

Other money market funds

also have advantage over

bank WMPs

The rise of MMFs could be a

threat to banks' business

and the real economy

02 January 2014


Whether the regulators will impose control on this development, and how are they going to

do it, will go a long way to determine winners and losers, as well as China's long-term

financial system risks.

Figure 59: Percentage of household current deposits in China’s total deposits

Source: PBOC

On the other hand, inter-bank deposits are currently not included in 75% loan-deposit ratio,

or fall under 20% deposit reserve ratio requirement. However, in reality some of these

deposits leak through backdoor arrangements to become loans to enterprises. MMFs can

influence the monetary multiplier and may increase money supply in real economy.

Regulation on Internet financing

More lending activities are happening outside banks. Due to regulatory competition,

regulatory void, campaign for innovations and equal access, license requirements and

regulations for certain business are compromised. The traditional financial supervisory

framework based on license control works less effectively in internet world, which resulted

in different regulatory burden. A new effective regulation framework may take some time to

form. PBOC pays close attention to the development of internet finance by conducting

intensive surveys as early as 2011. We believe the key issue here is to strike a subtle

balance - to curb financial risk and avoid mass events without suffocating innovation.

License control compromised

China’s finance sector has been under the protection of license control. Institutions need

to have licenses to conduct financial business, thus licenses sometimes have market

value. Some argue that competition among licensed institutions is fierce. That’s true when

you compare it with the old days of windfalls, but it is still anything but easy to start a new

bank or a security firm. As a result, licensed institutions strictly follow government

instructions about what they can and can’t do.

When exploring financial business, Internet companies have received favourable policy

treatment from local governments to different extent, and done their business in a grey

area of regulatory framework, thus license requirements for certain financial business are

bypassed. Employing new technologies, using different charging methods or being

interpreted differently, dubious activities that could be identified as 'not allowed' have been

given green lights. Internet companies have a strong try-and-error culture and are not

afraid of testing and pushing forward bottom lines when they deal with regulators.

MMF can affect the money

multiplier as it is not subject

to RRR constrain

License requirements are

compromised with more

lending activities moving

outside the traditional

banking system

Market value of licence will

decline

New technologies could

bypass regulatory control

02 January 2014


Lack of applicable regulation gave Internet companies more flexibility in product design

and cost advantage without reserve requirement in place. Whatever these business

models are called, Internet companies are running most functions of banks, if not all.

Indeed, you can do the same business and earn the same profit without any license, if you

do it in a different way.

License value declining and deregulation benefits

These Internet-related financial product experiments are tolerated by regulators so far.

Deregulation and more opening up are one of the themes in China’s financial reform. They

echo the ideas China’s new leadership campaign, like a compacter administrative

approval system, reform, innovation and equal access for private capital.

Value of various licenses may gradually decline. Development of Internet finance may

reshape the market and competitions will be encouraged.

■ The essential role of banks in China financial system is the first to be challenged.

Banks used to be the largest asset centre, loan issuer and distributor. Now they are

turning to internet partners for promotion, customer searching and credit evaluation.

■ For brokers, licensed branches that use to be the most precious assets will slowly

lose their value and become a drag.

■ Asset management companies rush to offer customized products to internet

companies, in order to reach their next-generation customers.

It is common expectation that the first banking license for private capital will be issued

before March 2014. Although the idea of a pure internet banks sounds interesting, we

believe it is not going to happen very soon. It is quite possible that pilot private banks will

receive licenses for restricted business types or scope. Society stability is still the top

concern of China. We also doubt a pure online broker will be permitted any time soon. At

present, investor accounts opened on internet by traditional securities brokers are not

allowed to trade stocks.

Risks and new regulatory framework

Internet finance activities make the sector more vibrant. They also bring new challenges to

regulators, for they can take flexible forms, develop fast and hide in regulatory void. To

date, small loan companies’ lending data is included in aggregate social financing reading,

but no reliable data is available for P2P lending and crowd funding, and no one is

overseeing what’s happening.

Finance deregulation brought by Internet can be risky to China’s financial system. History

showed financial disintermediation was always a key factor leading up to financial crisis—

and financial disintermediation + Internet finance could make the regulatory tasks even

more difficult to tackle with. We understand it is not going to come out very easily, but

regulators will need to accelerate the pace. To a large extent, the last three major financial

crisis we have observed from 1980s onwards have somehow to do with financial

liberalization. Efficiency of the financial system and its safety are always in a very delicate

balance. In China today, it is the combination of technology (Internet finance) and de-

regulation which is challenging the status quo, and it may not be easy to manage.

Internet companies are

having more flexibility in

product design without

specific regulatory control

These Internet-related

financial product

experiments are tolerated by

regulators so far

A pure Internet bank or

broker is not likely anytime

soon

P2P lending and crowd

funding activities are not

captured in social financing

data

Financial dis-intermediation

was always a key factor

leads to financial crisis

02 January 2014


Figure 60: Comparing the last three financial crises East Asia Financial Crisis Japan Economy Bubble Global Financial Crisis

Loose Monetary Policy N/A Increase in monetary supply

translated into a rise in asset prices

and led to an investment boom in

real estate sector.

Excessive liquidity was lent to

creditors who are barely creditworthy

and increased investment in real

estate.

Interest rate High, boost foreign borrowing. Low, added to excessive liquidity. Low, added to excessive liquidity.

Exchange rate Dollar-pegged exchange rate

facilitates foreign borrowing, with

large amount flowing into non-

productive sectors.

The great appreciation on yen

dampened economic activity, and

reduced Japan's growth rate.

N/A

Financial Market

liberalization

Inappropriate sequence of

liberalisation allows a burgeoning

short-term private capital flowing in,

causing credit boom and funds

flowing into non-productive assets

like real estate.

N/A Policy deregulations to encourage

business; policies to boost housing

mortgages; policy support for

financial innovations.

Insufficient regulations Regulations and supervisions did not

keep pace with rapid capital inflows:

corporate debt-equity ratio rose to

high levels, little time screening the

integrity of owners and managers,

etc.

N/A Less oversight over activities and

less disclosure of information in

financial institutions. Financial

innovations also increased the

regulatory difficulties.


02 January 2014


Regulations

Figure 61: Regulations related to interest rates and internet finance Year Regulations Reference

1991 A document by China's Supreme Court regulated that interest rate in informal lending

should not be higher than four times of bank lending rate, or it is not protected by law.

<最高人民法院关于人民法院审理借贷案件的

若干意见>

2013.5 CSRC cracked down the first case of illegal stock issuance on internet. In January

2013 a Beijing company sold its stocks to 153 people on Taobao.com and raised

over 180,000. The company was required to refund to its investors.

国务院办公厅关于严厉打击非法发行股票和

非法经营证券业务有关问题的通知

http://www.gov.cn/zwgk/2006-12/21/content_475311.htm

2013.6 CSRC regulations on fund distribution 证券投资基金销售管理办法

:http://www.gov.cn/flfg/2013-

03/18/content_2356510.htm

2013.8 An inter-ministerial coordination institution of financial supervision, led by PBOC and

joined by CBRC, CSRC and CIRC, was established. It is the highest-level regulatory

body for finance supervision.

国务院关于同意建立金融监管协调部际联席

会议制度的批

复:http://www.gov.cn/zwgk/2013-

08/20/content_2470225.htm

2013.8 A PBOC document pointed out that internet finance is a good supplement for existing

financial system by providing characteristic services and various products, expanding

coverage of financial service especially for SMEs, entrepreneurs and residents.

http://www.pbc.gov.cn/image_public/UserFil

es/goutongjiaoliu/upload/File/2013年第二季

度货币政策执行报告.pdf

2013.8 An internet finance development and supervision research team, led by PBOC and

joined by CBRC, CSRC, CIRC, MIIT, MPS and State Council Legal Office, conducted

a survey in Shanghai and Hangzhou and visited Lufax and Alibaba. It was the largest

government survey on internet finance ever.

http://www.lufax.com/about/201308031547.

html

2013.8 PBOC deputy governor Liu Shiyu said P2P lending may become a money pool and

shadow banking if it extended to offline. He emphasized two bottom lines that are not

touchable: illegal deposit taking and illegal fund raising.

http://www.lufax.com/about/201308031547.

html

2013.9 PBOC deputy governor Hu Xiaolian said risk research and evaluation system should

be established. Internet finance like P2P, Yu'E Bao and small loan companies makes

new requirements for financial supervision, consumer protection and macro control,

she said.

http://finance.caixin.com/2013-09-

05/100578332.html

2013.9 PBOC governor Zhou Xiaochuan published an article and mentioned PBOC should

regulate and guide healthy development of internet finance.

http://economy.caixin.com/2013-09-

16/100582828.html

2013.10 PBOC said it was designing method for right protection in financial consumption.

Adequate risk alert and protection should be included in every internet finance

business.

http://www.pbc.gov.cn/publish/redianzhuanti

/4151/2013/20131009150037808457475/20

131009150037808457475_.html

2013.10 A P2P lending site in Hubei, xgtli.com, was investigated by local police for illegal

deposit taking after it collapsed.

2013.11 CSRC's interpretation for Baidu's cooperation with China AMC 关于华夏基金与百度合作开展互联网基金销

售业务

http://www.csrc.gov.cn/pub/newsite/bgt/xwfb

h/201311/t20131101_237381.htm

2013.11 Taobao.com receives the first third-party e-commerce platform in fund distribution 证券投资基金销售机构通过第三方电子商务

平台开展业务管理暂行规定

http://www.csrc.gov.cn/pub/newsite/flb/flfg/b

mgf/jj/jjxs/201310/t20131021_236636.htm;


h/201311/t20131108_237659.htm

2013.1 A new function of a money fund under China Universal Asset Management, which

supported 24-hour purchase and confirmation, was suspended by CSRC.


h/201311/t20131108_237659.htm

2013.11 The first local law to protect and regulate informal lending passed in Zhejiang. http://money.163.com/13/1122/17/9EA6OA7

100252G50.html

Source: Government announcements and company websites

02 January 2014


Appendix Figure 62: Internet finance business of major internet companies and financial institutions

Global


Baidu Payment July 2013: Baifubao received third-party payment service license. PayPal

Small loan September 2013: Shanghai Baidu Small Loan Company Limited received

approval.

Credit card/loan search November 2013: Jinrong.baidu.com was launched.

Financial product distribution October 2013: The first product Baizhuan raised Rmb1 bn within hours on

8.baidu.com

Bank Potentially apply for a banking license.

Alibaba Payment May 2011: Alipay received third-party payment license. PayPal

Small loan March 2010: Alibaba established Zhejiang Alibaba Small Loan Company.

June 2011: Alibaba set up Chongqing Alibaba Small Loan Company.

August 2013: Chongqing Ali SME Small Loan Company was established.

Financial product distribution July 2012: Licai.taobao.com was launched and began to sell insurance

products.

November 2013: The platform covers insurance and funds. Bank WMPs were

in plan but cancelled for compliance reasons.

March 2013: Ali SME Financial Service Group was established to incorporate

all the financial businesses in Alibaba Group.

Fund sales June 2013:6 Finance Prod was launched in cooperation by Tianhong and

Alipay.

November 2013 17 asset management companies opened their flagship stores

on Taobao to offer over 100 funds.

Fund management October 2013: Alipay’s parent company offered to buy 51% of Tianhong. The

deal still needs approval from CSRC.

Insurance October 2013: Zhongan Online Property Insurance Holding was established. It

announced the first product in November. Alibaba holds 19.9%.

Guarantee August 2012: Alibaba Hong Kong company founded Shangcheng Financing

and Guarantee Company in Chongqing.

2013.8 Chongqing Ali SME Financing and Guarantee Company was

established.

Credit payment/credit card Credit payment was scheduled to launch in 2013 but Ali failed to meet this

target. (need to check)

Tencent Virtual currency Q coin

Payment May 2011: Tenpay received third-party payment license. PayPal

August 2013 WeChat Payment was launched.

Insurance October 2013: Zhongan Online Property Insurance Holding was established.

Tencent holds 15%.

Fund distribution May 2012: Tenpay received a license for payment and settlement service for

fund sales.

November 2013: Four asset management companies may start selling money

funds on WeChat.

Bank September 2013: Tencent was reported to be applying for a banking license.

Forex trading and currency exchange Tenpay receives a pilot license for cross-border e-commerce payment

business from SAFE

Online brokerage November 2013: Sinolink Securities announced 2-year partnership with

Tencent, which covers online securities brokerage, online wealth management

and offline private wealth management.

Charles

Schwab

JD (360buy) Payment October 2012 JD acquired 100% stake in a third-party payment company

China bank Payments.

PayPal

Supply chain finance November 2012 Supply chain finance was launched in cooperation with banks

and securities firms and its own factoring license.

Factoring June 2013: Shanghai Banghui Commercial Factoring Company was set up.

Small loan September 2013: JD's application for a small loan company was cleared.

Fund and insurance sales In progress

(http://www.csrc.gov.cn/pub/zjhpublic/G00306208/201312/t20131211_239743.htm)

Consumer loan company In progress (http://tech.hexun.com/2013-08-13/157047267.html)

Financial leasing In progress http://www.wealink.com/zhiwei/view/11452683/

http://www.csrc.gov.cn/pub/zjhpublic/G00306208/201312/t20131211_239743.htm

02 January 2014


Figure 63: Internet finance business of major internet companies and financial institutions (continued)

Global


Sina Payment Sina received third-party payment license in July 2013.

Fund distribution Weibo Wallet. According to Sina management, it hopes to integrate

Weibo and Sina payment and promote the concept of social networking

payment

(http://finance.sina.com.cn/money/bank/20130718/193416170372.shtml)

Suning Online brokerage Charles

Schwab

Payment July 2012: Yifubao received third-party payment license. PayPal

Fund sales October 2013: Yifubao received license for fund sales payment.

Supply chain finance

EastMoney Fund distribution Huoqibao sold Rmb9.8 bn in Q3 2013.

Online brokerage Targeting an online securities brokerage license.

(http://www.21cbh.com/HTML/2013-3-27/1NMzE2XzY0OTU1NQ.html)

Charles

Schwab

China

Merchants

Bank

P2P loan Firstly launched in September, but soon suspended after 8 financing

deals completed.

Zopa,

Prosper,

Lending Club

Ping An Insurance October 2013: Zhongan Online Property Insurance Holding was

established. Pingan holds 15%.

P2P loan September 2011 Lufax started business. Lufax may extend its business

soon.

Zopa,

Prosper,

Lending Club

China

Minsheng

Banking

SME financing August 2013: Minsheng E-commerce company was set up as an

affiliated company of Minsheng Bank, to focus on internet financing

business.

UnionPay Fund distribution October 2013: A similar product to Yu'E Bao called Tiantianfu was

presented in cooperation with Everbright Pramerica.


02 January 2014


Companies Mentioned (Price as of 31-Dec-2013)

Baidu Inc (BIDU.OQ, $177.88) China Merchants Bank - H (3968.HK, HK$16.52) China Minsheng Banking Corporation (1988.HK, HK$8.61) China Pacific (2601.HK, HK$30.4) Ctrip.com International (CTRP.OQ, $49.62) East Money Information Co Ltd (300059.SZ, Rmb15.18) E-commerce China Dangdang Inc. (DANG.N, $9.55) Fidelity National Information Services (FIS.N, $53.68) Goldman Sachs Group, Inc. (GS.N, $177.26) Industrial & Commercial Bank of China (1398.HK, HK$5.24) Lenovo Group Ltd (0992.HK, HK$9.43) Morgan Stanley (MS.N, $31.36) NetEase.com (NTES.OQ, $78.6) PICC P&C (2328.HK, HK$11.5) Ping An (2318.HK, HK$69.45) Prosperity Bancshares, Inc. (PB.N, $63.39) Qihoo 360 Technology Co. Ltd. (QIHU.N, $82.05) Sina Corporation (SINA.OQ, $84.25) SouFun (SFUN.N, $82.41) Tencent Holdings (0700.HK, HK$494.6)

Disclosure Appendix

Important Global Disclosures

I, Vincent Chan, certify, , that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

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*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its cur rent share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

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Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

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*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

02 January 2014


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Neutral/Hold* 40% (50% banking clients)

Underperform/Sell* 15% (43% banking clients)

Restricted 3%

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Disclosure Appendix

Important Global Disclosures

The persons primarily responsible for this research report certify that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies and securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

As of December 10, 2012 Analysts’ stock rating are defined as follows:

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Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 43% (53% banking clients)

Neutral/Hold* 40% (50% banking clients)

Underperform/Sell* 15% (43% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factor s.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.


02 January 2014


Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (300059.SZ) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.

The non-U.S. persons, Vincent Chan, Victor Wang, Dick Wei, Evan Zhou, Frances Feng are not registered/qualified as research analysts with FINRA. They are not associated persons of CSSU and therefore are not subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Founder Securities Limited is a joint venture established in the People's Republic of China between Credit Suisse AG and Founder Securities Co, Ltd.


For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

02 January 2014

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