China Internet Sector

Transcription

China
Information Technology
2 August 2016
China Internet Sector
ChinaJoy wrap: online games, long may they reign
 Positive outlook on mobile game revenue growth unchanged; expect
recent regulation to accelerate mobile game industry consolidation
 Tencent and NetEase already dominate respective mobile hard-core
genres in China; both have strong mobile game pipelines in 2H16
 Top picks in the China Internet sector: Alibaba and Tencent
John Choi
(852) 2773 8730
[email protected]
Alex Liu
(852) 2848 4976
[email protected]
What's new: We attended ChinaJoy, Asia’s largest digital entertainment fair
and World Mobile Game Conference (WMGC), in Shanghai on 29-31 July. We
are more optimistic on large online game players including Tencent (700 HK,
HKD184.50, Buy [1]) and NetEase (NTES US, USD202.71, Outperform [2])
after the event. We expect both to meet, if not beat, our and the consensus
mobile game revenue growth forecasts in their upcoming 2Q16 results.
What's the impact: Big players getting bigger. We expect mobile game
market consolidation to continue, ultimately benefiting the large players like
Tencent and NetEase. Specifically, Tencent plans to launch fewer mobile
game titles but with a higher quality to cover the majority of China’s mobile
game population. Its leadership in the mobile multiplayer online battle arena
(MOBA), casual, and first person shooter (FPS) genres is largely intact, in our
view. Separately, we believe NetEase is in a league of its own in terms of the
mobile role playing game (RPG) genre in China, and is ready to expand into
new genres including Dance and Card & Action. Its PC licence game
portfolio, including the recently launched Overwatch and the upcoming WoW
7.0, also look like they would offer good monetisation potential.
Tightened regulation favours established players. The State Administration
of Press, Publication, Radio, Film and Television’s (国家广电总局) (SARFT)
recent requirement for mobile game developers to submit games for review
before publishing will greatly increase compliance costs, lengthen the
production development cycle and disadvantage small developers. We expect
the regulation to lead to an acceleration of mobile game industry consolidation
in the next few quarters.
Pan-entertainment taking shape. The leading online game companies
are all talking about exploiting the value of popular intellectual property (IP)
via movies/TV series/literature, etc. In our view, the few players that have
control over upstream content production to downstream content
distribution will grab the most value from the IP monetisation process. We
see Tencent as the best positioned on this front.
What we recommend: Within the China online game sector, we believe
NetEase and Tencent will continue to harvest the market and gain share at
the cost of the smaller players. Our top picks in the China Internet Sector
are Tencent and Alibaba (BABA US, USD84.34, Buy [1]). Our long-term
positive secular growth thesis on Alibaba still stands. For Baidu, we expect
a muted short-term performance given the low visibility on its business
recovery and lack of share-price catalysts.
How we differ: We are more confident than the street on the secular growth
potential for ecommerce and online game players.
See important disclosures, including any required research certifications, beginning on page 21
China Internet Sector: 2 August 2016
Internet sector valuations (as of 1 August 2016)
Ticker
Short Name
Rating
Market price
(local curr')
Market cap
(USDm)
FY1E
PER (x)
FY2E
FY3E
FY1E
P/S (x)
FY2E
FY3E
FY1E
184.50
163.23
202.71
43.09
34.04
54.73
39.13
5.06
22.36
43.09
28.00
51.76
30.00
58.83
37.91
221,109
57,180
26,652
19,508
7,241
3,823
2,150
2,405
2,564
6,762
1,690
7,328
4,343
4,758
1,466
32.2
34.9
15.8
149.7
59.9
66.4
13.6
n.a.
13.9
23.9
22.2
n.a.
n.a.
41.6
n.a.
26.3
21.7
13.9
38.8
36.9
37.5
11.3
46.0
11.5
19.2
14.5
34.2
54.6
27.9
n.a.
21.7
15.5
12.3
23.2
23.9
23.8
n.a.
18.2
9.5
15.5
10.5
22.2
23.9
20.5
n.a.
10.2
5.2
4.8
6.6
10.9
3.9
1.9
1.9
2.2
3.9
1.9
5.4
5.4
4.9
0.8
8.3
4.3
4.0
5.3
8.3
3.4
1.3
1.5
1.7
3.4
2.8
4.2
4.0
3.7
0.7
7.0
3.6
3.4
4.3
6.0
2.9
1.1
1.1
1.1
2.9
2.3
3.0
2.9
2.8
0.7
20.1
24.2
10.8
n.a.
52.0
22.7
10.3
n.a.
11.4
17.2
13.2
58.2
n.a.
31.2
6.2
43.1
28.2
18.5
4.7
3.8
3.0
33.6
n.a.
22.1
10.1
26.6
42.4
17.8
6.2
21.0
19.8
13.7
5.5
13.0
0.8
1.0
0.4
9.1
0.6
0.8
0.3
21.9
23.3
15.0
3.8
12.8
22.8
31.7
71.2
20.3
16.6
80.0
33.3
173.2
23.8
41.6
56.0
21.5
25.7
19.0
43.3
11.8
19.3
24.5
47.4
17.3
15.1
70.3
29.5
79.7
17.8
31.6
44.7
21.0
19.9
17.1
31.1
10.7
16.6
19.8
34.7
15.0
13.7
65.7
23.0
45.3
14.7
24.3
35.5
19.1
16.1
14.9
24.6
2.6
6.9
11.3
2.4
6.2
3.9
10.4
4.4
4.1
1.9
6.3
6.7
4.9
2.1
2.9
5.1
EV/EBITDA (x)
FY2E
FY3E
ROE %
FY1E
15.9
14.9
8.9
37.1
31.3
14.7
8.6
28.5
8.3
13.8
8.6
21.0
84.9
20.2
2.5
12.7
9.6
7.3
18.0
16.7
9.3
n.a.
15.1
7.3
11.4
6.5
12.5
29.6
13.8
2.1
37.7
12.2
33.5
8.5
7.4
2.2
34.3
(23.9)
23.7
17.1
(7.3)
(19.3)
n.a.
21.7
(3.2)
23.1
21.3
12.3
10.3
7.2
0.5
0.7
0.2
24.0
n.a.
15.4
2.8
18.7
46.0
10.0
1.6
13.7
15.2
6.9
1.4
24.6
58.8
3.4
2.7
2.2
14.0
19.1
7.8
21.7
2.5
6.5
9.8
2.2
5.5
3.8
10.1
4.1
3.8
1.8
5.6
5.8
3.7
0.0
3.3
4.6
2.4
5.6
7.3
1.8
4.8
3.6
10.0
3.6
3.0
1.5
4.8
4.9
3.3
0.0
3.1
4.0
6.0
12.8
19.8
22.9
16.7
10.4
39.8
14.0
81.3
12.0
23.0
23.8
14.5
2.3
9.3
20.6
5.8
11.0
14.8
17.0
14.3
9.9
35.9
11.9
42.2
9.6
18.1
19.2
11.6
1.9
8.4
15.4
5.5
9.5
11.7
13.4
12.4
9.3
34.4
10.0
25.9
8.1
14.5
15.5
10.2
1.6
7.6
12.6
37.9
15.0
13.4
13.6
29.3
14.7
(15.8)
(9.3)
6.3
5.7
12.3
(4.0)
10.2
7.8
22.6
10.6
China Internet
700 HK Equity
BIDU US Equity
NTES US Equity
CTRP US Equity
WB US Equity
SINA US Equity
YY US Equity
SFUN US Equity
ATHM US Equity
EDU US Equity
BITA US Equity
WUBA US Equity
QUNR US Equity
XRS US Equity
SOHU US Equity
TENCENT
BAIDU INC-SP ADR
NETEASE INC-ADR
CTRIP.COM-ADR
WEIBO CORP-ADR
SINA CORP
YY INC-ADR
SOUFUN HOLDI-ADR
AUTOHOME INC-ADR
NEW ORIENTAL-ADR
BITAUTO HOLD-ADR
58.COM-ADR
QUNAR CAYMAN-ADR
TAL EDUCATIO-ADR
SOHU.COM INC
Average
China E-commerce
BABA US Equity ALIBABA GRP-ADR*
JD US Equity
JD.COM INC-ADR*
VIPS US Equity
VIPSHOP HOLDINGS*
JMEI US EQUITY JUMEI INTERNATIO
Average
Global Internet
AAPL US Equity
GOOG US Equity
FB US Equity
AMZN US Equity
PCLN US Equity
EBAY US Equity
YHOO US Equity
TWTR US Equity
NFLX US Equity
EXPE US Equity
TRIP US Equity
LNKD US Equity
035720 KS Equity
4755 JP Equity
4689 JP Equity
Average
APPLE INC
ALPHABET INC-C
FACEBOOK INC-A
AMAZON.COM INC
PRICELINE GROUP
EBAY INC
YAHOO! INC
TWITTER INC
NETFLIX INC
EXPEDIA INC
TRIPADVISOR INC
LINKEDIN CORP-A
KAKAO CORP
RAKUTEN INC
YAHOO JAPAN CORP
Buy
Hold
Outperform
Buy
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Buy
Buy
Buy
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Non-rated
Buy
Non-rated
Non-rated
84.32
21.84
14.33
4.08
106.05
772.88
124.31
767.74
1,356.08
31.25
38.80
16.64
94.37
117.37
70.45
193.09
91,000.00
1,184.00
446.00
206,626
29,948
8,257
598
571,444
539,559
356,935
363,965
67,315
35,282
36,857
11,777
40,459
17,572
10,265
26,014
5,540
16,627
24,975
Source: Bloomberg, *Daiwa forecasts
2
Table of contents
Tencent: highlights from ChinaJoy ........................................................................ 4
Mobile games: focusing on premium titles .........................................................................4
PC games: pipeline less exciting than mobile games .........................................................8
NetEase: highlights from ChinaJoy .......................................................................12
Mobile games: role playing game king .............................................................................12
PC Games: licensed titles are the bright spot ..................................................................14
Industry themes: key highlights from ChinaJoy...................................................16
Recommendation and risks ....................................................................................18
3
Tencent: highlights from ChinaJoy
Long may Tencent reign




Tencent’s mobile pipeline in 2H16 looks strong to us
Tencent is taking an open stance on sourcing and operating mobile games
developed by other smaller content providers (CPs)
Tencent’s PC game pipeline looks less exciting than its mobile game pipeline;
existing PC titles likely to be main revenue contributors heading into 2H16
Pan-entertainment strategy and eSport initiatives help expand game life-cycle
Mobile games: focusing on premium titles
Focus on game quality
and life cycle
Tencent announced its “Premium Game 3.0 (精品游戏 3.0)” strategy in March 2016, which
emphasises individual game quality over number of game launches. We saw fewer newly
launched mobile games in 1H16 vs 2H15 (1H16:13 games, 2H15:19 games), but a good
performance (implying a higher success rate) from these titles. For example, Tencent’s
MOBA genre mobile game WeHero (王者荣耀), while being a top-5 game in terms of gross
revenue over the past few months, has gradually rolled out an eSports initiative for
WeHero that further enhances core gamer engagement.
Tencent’s management has said the company plans to launch c.15 new games in 2H16, a
similar pace to 1H16.
We selected a handful of mobile games in the pipeline that we believe are worth watching:
Contra Mobile (魂斗罗)
Strong IP; expect good
performance; limited
contribution in 2H16
 Launch date: closed-beta testing to start from August 2016; scheduled to launch in
4Q16
 Characteristics: action genre; licensed from KONAMI
Our take: Our test play showed good visual quality and speed control for this title. We
believe that given the strong popularity of the Contra game among post-80&90 generations
in China, the mobile version of Contra should be able to attract a fairly large gamer
population after launch. Nevertheless, we expect an immaterial revenue contribution from
this game in 2H16. 1
Tencent: screenshot of Contra test run
Tencent: screenshot of Contra test run
Source: Company, Daiwa compiled
1
The authors would like to thank Yishuo Liu for her valuable contribution to this report.
4
JX3: pocket version (剑网 3 指尖江湖)
Good IP; another mobile
game adapted from the
popular PC version of
the JX Series
 Launch date: closed-beta testing to start from August 2016; expected to launch in 4Q16
 Characteristics: ARPG genre; licensed from Kingsoft; the story background of the
mobile version is directly based on the JX3 PC version
Our take: JX3: the pocket version is Kingsoft’s second mobile game title derived from the
JX series PC game. The first case of such adaptation, JXQY (剑侠情缘手游版), which was
also developed by Kingsoft and operated by Tencent, has been getting good traction since
being launched in 2Q16 and is currently ranked within the top-10 games on China’s iOS
grossing chart. We expect a good performance from this title after launch.
Tencent: screenshot of JX3: pocket version test run
The World of Legend (传奇世界手游)
Good IP; another mobile
title derived from the
popular Legend PC
version
 Launch date: closed-beta testing to start from August 2016; estimated to launch in
4Q16
 Characteristics: MMORPG genre; licensed from Shanda Game; the story background
of the mobile version is directly based on the Legend PC version
Our take: similar to the JX series mobile game, The World of Legend is Shanda’s second
mobile game title derived from the Legend PC game. The first case of such adaptation,
RXCQ (热血传奇手游), which was also developed by Shanda Game and operated by
Tencent, has been getting good traction since being launched in 1Q16 and is currently
ranked within the top-20 games on China’s iOS grossing chart. We expect a good
performance from this title after launch.
Tencent: screenshot of World of Legend test run
Tencent: screenshot of World of Legend test run
5
MHZX (梦幻诛仙)
Good IP; mobile title
derived from the popular
online novel Zhuxian
 Launch date: scheduled to launch in 4Q16
 Characteristics: turn-based RPG genre; licensed from Perfect World; the story
background of the mobile version is directly based on the Zhuxian PC version
Our take: We note that MHZX is based on the Zhuxian PC game series (developed by
Perfect World), which was ultimately derived from the popular online novel Zhuxian. We
see a big existing fan base for this game and believe the timing of the launch is good given
that the TV drama, Zhuxian (诛仙青云志), is currently on air and can be watched via
Tencent Video. On the other hand, competition for this game is likely to be fierce given that
Perfect World is also planning to launch a mobile game based on the same IP, called
Zhuxian Mobile (诛仙手游), in early August 2016.
Other mobile game titles in the pipeline:
Xianjian OL Mobile (仙剑 OL 手游 )
 MMORPG genre
 In-house-developed title based on the popular Xianjian PC game series
Tencent: screenshot of Xianjian OL Mobile test run
Crazy Arcade (泡泡堂)
 Casual game
 Licensed from Nexon; based on the popular Crazy Arcade PC version (operated by
Shanda Game)
 Unlimited testing expected to start November 2016
Dragon Nest (龙之谷)
 ARPG genre
 Licensed title from Shanda Game; based on the Dragon Nest PC version
6
Tencent: screenshot of Dragon Nest test run
One of the most
anticipated mobile
games for 2H16
DNF Mobile (地下城与勇士手游)
 MMORPG genre
 Adapted from the popular DNF PC version (one of the key PC game revenue
contributors for Tencent right now)
 Expected to launch in 2H16
TLBB Mobile (天龙八部手游)
 MMORPG genre
 Adapted from the popular TLBB PC version (developed and operated by Changyou)
 Expected to launch in 1Q17
Jueji (爵迹手游)
 Mobile game derived from the popular novel written by Guo Jingming
 Expected to launch in 1Q17
YLZT (御龙在天)
 MMORPG genre
 In-house developed by Tencent
 Expected to start unlimited testing in August 2016
Tencent: screenshot of YLZT test run
7
Hello Fishing (捕鱼来了)
 Casual game
 Licensed from Guangxi Ligang
Efunfun (弹弹堂)
 Casual game
 Adapted from the popular web-game; to be published together with The 5th Avenue
Tencent: mobile game pipeline (as of August 2016)
Game Title
Naruto Mobile (火影忍者)
Timi Run Everyday 3D (天天酷跑 3D)
Tian Tian Qiao Pai (天天桥牌)
Tencent Wei Qi (腾讯围棋)
Tencent Qiao Pai (腾讯桥牌)
Blade & Soul Mobile (剑灵)
Tian Mo Huan Xiang (天魔幻想)
Dragon Ball Z (龙珠激斗)
Zheng Tu (征途)
Jian Xia Qing Yuan (剑侠情缘)
Carrot Fnatasy 3 (保卫萝卜 3)
Asura (全民斗战神)
Puzzle and Dragon (智龙迷城)
The World of Legend (传奇世界)
Yu Long Zai Tian (御龙在天)
Hello Fishing (捕鱼来了)
Meng Huan Zhu Xian (梦幻诛仙)
Contra (魂斗罗)
Dragon Nest (龙之谷)
Xian Jian online (仙剑 online)
JX3 (剑网 3)
DDTank (弹弹堂)
Crazy Arcade (泡泡堂)
DnF Mobile (地下城与勇士)
TLBB (天龙八部)
Jue Ji (爵迹)
Huan Le Pin San Zhang (欢乐拼三张)
Ensemble Stars (偶像梦幻祭)
Infinity Blade Saga (无尽之剑命运)
Tian Tian Huan Ling (天天幻灵)
Infinity Blade Saga (无尽之剑 - 命运)
6L 3D (六龙争霸 3D)
FIFA Online Mobile (足球在线)
Xun Long Zhan Ji (驯龙战机)
Zhu Gong Ting Zhu (主公挺住)
Stoneage (石器时代)
Launch Date
1Q16
1Q16
1Q16
1Q16
1Q16
1Q16
1Q16
2Q16
2Q16
2Q16
2Q16
2Q16
2Q16
2H16E
2H16E
2H16E
2H16E
2H16E
2H16E
2H16E
2H16E
2H16E
2H16E
2H16E
1Q17E
1Q17E
2Q16E
2Q16E
2Q16E
3Q16E
TBC
TBC
TBC
TBC
TBC
TBC
Game Genre
Action
Action
Card
Board & card
Board & card
Card
RPG
RPG
RPG
MMORPG
Tower Defense
ARPG
RPG
MMORPG
MMORPG
Casual
Turn-based RPG
Action
ARPG
MMORPG
MMORPG
Shooting
Casual
Action
MMORPG
MMORPG
Board & card
EDU
RPG
Card
ARPG
Strategy
Strategy
Shooting
RPG
RPG
Developer
Licensed
In-house
In-house
In-house
In-house
Licensed
In-house
Licensed
Licensed
Licensed
Licensed
In-house
Licensed
Licensed
In-house
Licensed
Licensed
In-house
Licensed
In-house
Licensed
Licensed
Licensed
Licensed
Licensed
In-house
In-house
Licensed
Licensed
In-house
In-house
Licensed
Licensed
Licensed
Licensed
Licensed
PC games: pipeline less exciting than mobile games
We generally feel less excited about Tencent’s PC game pipeline compared to its mobile
game pipeline. For now, we expect Tencent’s top-3 games – League of Legends, Cross
Fire and DNF – to continue as the main PC revenue pillars heading into 2H16.
We are not particularly concerned about the competition from NetEase’s Overwatch
as: 1) the gamer profile and game genre are different, and 2) Overwatch’s pay-up-front
model reduces adoption among relatively low income players. We do believe Overwatch is
likely to grab existing Tencent gamers; however, we would consider this the natural
maturing of the game’s life cycle. As the following table shows, in June 2016 (first full
month launch of Overwatch), Tencent’s games still occupy the top-3 positions in terms of
net cafe game usage.
8
China: PC game ranking in terms of net cafe usage, June 2016
Tencent’s core PC titles
still retain high
engagement despite the
sharp rise of Overwatch
in June 2016
Ranking Game title
Genre
Company
In-house/
Licensed
No. of times it is played in
Internet cafes (indexed)
MOBA
FPS
Tencent
In-house
100.0
Tencent
Licensed
20.5
Fighting
Tencent
Licensed
14.8
1
League of Legends (英雄联盟)
2
Cross Fire (穿越火线)
3
Dungeon and Fighter (地下城与勇士)
4
QQ Speed (QQ 飞车)
REC
Tencent
In-house
3.9
5
Ni Zhan (逆战)
FPS
Tencent
In-house
3.4
6
OverWatch (守望先锋)
FPS
NetEase
Licensed
2.4
7
8
9
10
QQ Dance (QQ 炫舞)
MUG
SPG
MOBA
MOBA
Tencent
Tencent
Perfect World
Electronic Soul
Co-published
Co-developed
Licensed
In-house
1.5
1.1
0.9
0.8
11
World of Warcraft (魔兽世界)
MMORPG
NetEase
Licensed
0.7
12
Call of Duty Online (使命召唤 Online)
FPS
Tencent
Licensed
0.6
13
HearthStone (炉石传说)
CARD
NetEase
Licensed
0.6
14
天涯明月刀
MMORPG
Tencent
In-house
0.5
15
16
17
Blade & Soul (剑灵)
FIFA Online3
World of Tanks (坦克世界)
MMORPG
SPG
TPS
Tencent
Tencent
Kongzhong
Licensed
Licensed
Licensed
0.5
0.5
0.4
18
Fantasy of West Journey (梦幻西游)
MMORPG
NetEase
In-house
0.4
19
FreeStyle (街头篮球)
SPG
T2 Entertainment
Licensed
0.4
20
Counter-Strike Online (反恐精英 Online)
FPS
Tiancity
Licensed
0.3
NBA2KOL
Dota2
Dream of Three Ancient Kingdoms2 (梦三国 2)
Source: Shunwang
We selected a handful of Tencent’s PC games in the pipeline that we believe are worth
watching:
MapleStory2 (冒险岛 2)
Large fan base in China
 Launch date: closed-beta testing started on 28 July
 Characteristics: RPG & sandbox genre; licensed from Nexon
Our take: MapleStory2 is an upgraded version of the popular MapleStory PC version. The
game allows players to explore the virtual world and is less intense compared to some
other MMORPG titles. We note that many Mainland players are already playing on the
Korean servers, pointing to the quality of the game. We are optimistic about the game’s
performance after its official launch in China, expected in 2H16.
Need for Speed OL(极品飞车 OL)
A proven global title
 Launch date: closed-beta testing from 17 August
 Characteristics: car-chase genre; licensed from Electronic Arts (EA)
Our take: Need for Speed is a renowned title globally. We believe the game will further
enhance Tencent’s advanced casual PC games portfolio, which includes FIFA Online
(licensed from EA) and Call of Duty OL (licensed from Blizzard).
Transformer OL (变形金刚 OL)
Globally recognised IP;
executing a panentertainment strategy
 Launch date: closed-beta testing to start in August 2016
 Characteristics: FPS genre; developed in-house by Tencent
Our take: We view this game as a part of Tencent’s pan-entertainment strategy, whereby
the company, through investing or developing in-house, is looking to further exploit the
value of its popular IP via various types of media formats, including movies, games, music,
and other derivative products. The game will be released before the premier of
Transformer 5 (expected in 2H17).
9
Tencent: screenshot of a test run for Transformer online
Other PC game titles in the pipeline:
Zero (代号零)
 Tencent’s latest in-house developed turn-based game
 Still under technical testing
Master*Master (全职大师)
 Action genre advanced casual game
 Licensed from NCsoft
 Currently under closed-beta testing
Iron Knight (刀锋铁骑)
 Real-time RPG genre
 Developed in-house by Tencent
 Currently going through second round of closed-beta testing
Tencent: screenshot of a test run of Iron Knight
10
Tencent: PC game pipeline (as at 1 August 2016)
Game Title
Advanced Casual Games (ACG)
Call of Duty Online (使命召唤)
Orc Must Die (兽人必须死)
SMITE (神之浩劫)
War Thunder (战争雷霆)
Need for Speed (极品飞车)
Master x Master (全职大师)
Core Fight (炫斗之王)
Metro Conflict: Presto (重火力)
Three Kingdoms (霸三国 Online)
HON (超神英雄)
Massively Multiplayer Online Games (MMOG)
Moonlight Blade (天涯明月刀)
Monster Hunter Online (怪物猎人 OL)
AtcheAge (上古世纪)
Lost Saga (王牌对决)
Maplestory 2 (冒险岛 2)
Path of Exile (流放之路)
Yu Long Zai Tian (御龙在天)
Kritika (疾风之刃)
Sura (天刹)
MX (勇者大冒险)
Iron Knight (刀锋铁骑)
Lost Ark (失落的方舟)
Rising Fire (火源计划)
Transformers (变形金刚)
Launch date
Genre
Developer
Testing statues
1Q15
1Q15
2Q16
2Q16
TBC
TBC
TBC
TBC
TBC
TBC
High-end First-Person Shooter (FPS)
3D Multiplayer Online Battle Arena (MOBA)
3D MOBA
Third-Person Shooter (TPS)
Car chase action game
3D MOBA
2D side-scrolling fighting game
Science fiction theme FPS
Real Time Strategy
3D MOBA
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
In-house
Licensed
In-house
Licensed
Open-beta testing
Open-beta testing
Open-beta testing
Open-beta testing
4Q15
4Q15
2Q16
2Q16
2Q16
2Q16E
2Q16E
TBC
TBC
TBC
TBC
TBC
TBC
TBC
3D martial arts style MMORPG
3D fighting Massively Multiplayer Online Action Gams (MMOACT)
3D fighting Massively Multiplayer Online Role Play Game (MMORPG)
Arcade game style action MMOG
3D cartoon style MMORPG
3D Real time MMORPG
3D Real time MMORPG
3D cartoon style fighting action
3D next-generation high-end fighting MMOG
ATM (Action, TPS, MMORPG)
FPS
3D MMORPG
Shooting RPG
FPS
In-house
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
In-house
Licensed
Licensed
In-house
Open-beta testing
Open-beta testing
Open-beta testing
Closed-beta testing
Closed-beta testing
Source: Company, Daiwa
11
NetEase: highlights from ChinaJoy
Focusing on “craftsmanship”



NetEase’s mobile pipeline in 2H16 looks robust to us
NetEase’s dominant position in the mobile RPG genre market is unlikely to see
any material challenges in 2H16
NetEase’s licensed PC game pipeline also looks solid, with a new version of
WoW and continuing healthy user momentum for Overwatch
Mobile games: role playing game king
Following the conference, we are now marginally more confident on the life cycles of FWJ
and WWJ, NetEase’s 2 major mobile titles. We are encouraged to see the company’s
experience in the RPG genre (including MMO, action, real-time and/or turn-based) pay off
amid the mobile age, and believe no other player in the market will be able to match
NetEase, in terms of both the quality and quantity of its mobile RPG genre games, in the
near term.
We have selected a few of NetEase’s mobile games in the pipeline/recently launched that
we believe are worth watching:
Tianxia (天下手游)
Outstanding visual
quality thanks to new
in-house developed
game engine
 Launch date: iOS version launched on 29 July
 Characteristics: MMORPG genre; developed in-house by NetEase; derived from the
popular Tianxia PC version
Our take: Tianxia (iOS platform only) was launched on 29 July. The game ranked No.4 on
17173.com’s most anticipated game list, and now ranks No.3 on the free game chart at the
China iOS store. We have seen initial positive gamer feedback on the responsiveness of
game action partly due to the adoption of NetEase’s new game engine. We are optimistic
on the monetisation potential of this game, and believe the performance of Tianxia could
be a near-term share-price catalyst for NetEase.
NetEase: screenshot of Tianxia
NetEase: screenshot of Tianxia
Audition (劲舞团)
Highly anticipated title
adapted from popular PC
title
 Launch date: finished multiple testing on Android; currently undergoing iOS closedbeta testing; expected to launch in 3Q16
 Characteristics: Dance genre; licensed from T3; derived from the popular Audition PC
version (operated by Jiuyou in China)
Our take: Audition is one of the most popular dance-genre PC game in China over the
past decade. We see great potential for this game as: 1) the dance genre in general has a
large user base, as evidenced by the success of the PC version of Audition and Tencent’s
casual dance game DA (节奏大师), 2) there is currently no direct competition for the mobile
12
version of Audition, 3) and Audition has a good track record of monetisation and long-life
cycle (over CNY200m in annual revenue despite having been available in China for the
past 10 years).
NetEase: screenshot of an Audition test run
NetEase: screenshot of an Audition test run
Some of the other mobile games titles in the pipeline:
Datang (大唐无双手游)
 MMORPG genre
 Developed in-house by NetEase; based on NetEase’s popular PC title Datang
 Expected to be launched in 4Q16
HIT: Heroes of Incredible Tales (我守护的一切)
 ARPG genre
 Licensed from Nexon; top mobile game title in Korea
 Expected to be launched in 4Q16
XLFD (小李飞刀手游)
 MMORPG genre
 Developed in-house by NetEase; derived from popular Chinese martial art fiction written
by Gu Long; part of NetEase’s 5 Gu Long adaptation programme (NetEase will launch 5
mobile games based on Gu Long’s novels)
 Expected to commence open testing in August 2016
NetEase: PC game pipeline (as of August 2016)
Name
Heroses of Tang Dynasty
HIT
Demon Seals
Audition Dance Battle
Just Dance
Onmyoji
Da Tang You Xian Ji
Wu Xian Huan Dou
San Shao Ye De Jian
Xiao Li Fei Dao
Jue Dai Shuang Jiao
Fu Mo Zhou
Zhan Hun
Girl Sword
Rich Man
Mushroom Wars Online
Dai Hao Star
P1
Rong Yao Dui Jue
Wu Xian Zhan Zheng
S7
Dai Hao Kuang Ye
Chinese Name
大唐无双
我守护的一切
镇魔曲
劲舞团
舞力全开
阴阳师
大唐游仙记
无限幻斗
三少爷的剑
小李飞刀
绝代双骄
伏魔咒
斩魂
妖刀少女异闻录
大富翁 9
蘑菇战争：太空战记
代号 star
P1
荣耀对决
无限战争
S7
代号狂野
Genre
MMORPG
ARPG
MMORPG
Action
Action
Card RPG
MMORPG
ARPG
RPG
RPG
RPG
MMORPG
格斗
格斗
棋牌
对战推塔手游
MMORPG
ARPG
MMORPG
RPG
FPS
-
13
Licensed/In-house
In-house
Licensed
In-house
Licensed
Licensed
In-house
In-house
In-house
In-house
In-house
In-house
Licensed
In-house
Licensed
Licensed
Licensed
In-house
In-house
-
Current testing stage
Closed-beta testing
First test was on 28 June 2016
Closed-beta testing
First test was in late July 2016
PC Games: licensed titles are the bright spot
During our visit to the conference, we could certainly feel how popular Blizzard games are
in China, in particular WoW, Hearthestone, and most recently, Overwatch. The 3-hour
queues to get into the NetEase/Blizzard exhibition area suggests to us that the success of
the Blizzard franchise should continue, as well as the level of mindshare that both
companies have acquired among hard-core gamers.
We selected a handful of NetEase’s PC games in the pipeline/currently operating that we
believe are worth watching:
Overwatch (守望先锋)
Initial success; in-game
item sales, game play
innovation and user
retention are its next
focus areas
 Launch date: 26 May 2016
 Characteristics: FPS shooting genre; licensed from Blizzard
Our take: We believe the successful launch of Overwatch (over 1m copies sold in the first
24 hours) will positively impact NetEase’s 2Q-4Q16 PC game revenue. Despite the initial
success, we would focus on Overwatch’s subsequent monetisation opportunity from ingame item sales and the enhancement of game play (for example, the recent introduction
of a competitive mode), which we believe, if executed well ,will lead to a prolonged game
life cycle and further revenue upside for NetEase.
NetEase: audience watching screens in front of the NetEase/Blizzard exhibition area
War of Worldcraft (WoW，魔兽世界)
New version should
boost revenue in the
next few quarters
 Launch date: Version 7.0 (WoW: Legion) to be launched on 1 September 2016
 Characteristics: RPG genre; licensed from Blizzard
Our take: During ChinaJoy, Blizzard and NetEast announced the new version of WoW,
which is scheduled to be launched on 1 September. We note there has been a recent pickup in users of WoW, given the public release of WoW: the movie in June 2016. We expect
the new version of WoW to further boost the revenue outlook of WoW in the coming
quarters. Separately, NetEase and WoW announced a change in the payment model for
WoW. Starting from 4 August 2016, the pay-per-minute option will be replaced by a
monthly/quarterly/annual subscription package. We consider this change in payment model
as an ASP increase and expect a minor drop in users as a result. Nevertheless, we believe
the new version should boost WoW’s revenue in the next few quarters.
14
Hearthestone (炉石传说)
New expansion package
to support monetisation
 Launch date: 1 September 1 2016
 Characteristics: card genre; licensed from Blizzard
Our take: During ChinaJoy, Blizzard and NetEast announced their new expansion
package called Hearthestone: One night in Karazhan. The expansion will be officially
online on 11 August 2016. We noticed that the press conference for the global release of
this expansion package was held in China, suggesting Blizzard’s key focus on the China
market and a testimony for NetEase’s operation of Blizzard games in China.
NetEase: mobile game pipeline (as at 1 August 2016)
Name
Wang Yi Quan Ming Xing
Legend of Rhythms
Pirates: Treasure Hunters
Wu Jin Zhan Qu
Ni Shui Han
War Rage
Hero Wars
War Rage
Chinese Name
网易全明星
战音 OL
夺宝联盟
无尽战区
逆水寒
战意
最强军团
战意
Genre
3D MOBA
2.5D RPG
3D MOBA
3D MOBA
3D MMORPG
3D Real-time MMORPG
2.5D Real-time MMORPG
3D Real-time MMORPG
Licensed/In-house
In-house
In-house
Licensed
In-house
In-house
In-house
Licensed
In-house
15
Current testing stage
First closed -beta test (activation code needed) on 12 Aug. 2016
Closed-beta test (activation code needed) finished on 13 Jan. 2015
First closed-beta test (activation code needed) finished on 12 May 2016
Closed-beta test for Chihun (炽魂) finished on 15 Apr. 2016
Industry themes: key highlights from ChinaJoy
When we talk about intellectual property, what are we talking about?
We consider IP a
marketing strategy

IP is marketing and it saves on user acquisition costs
IP has been a buzz word among online game industry participants since 2014. We
consider spending on popular IP and adapting games to them as a marketing strategy.
If potential players resonate with popular IP, which they tend to do, this reduces their
marketing expenses.

Online game companies are becoming entertainment companies
We have noticed a clear secular trend: the online game companies are investing in or
transforming into digital media companies, and digital media companies are investing
in online game companies. An example is Tencent, which has invested/participated in
the production of film/online games/TV series that have been adapted from existing
PC games or popular online literature. Many have tried to replicate Tencent’s
integrated approach – full control from idea generation to media distribution, but we
doubt that many will succeed.
Small developers facing tough times

IP price too high for many to bear
As we have already mentioned, many game developers, large and small, have rushed
to acquire popular IP over the past 2 years. This has driven up the IP price
significantly. Based on our discussions with a mid-size game developer, buying 1
popular IP-adapted mobile game requires an upfront payment of around CNY10m20m and subsequent 10% revenue sharing.

New regulations negative for the smaller CPs
SARFT recently announced tighter regulations on mobile game development. All
mobile game developers will be subject to regulatory scrutiny and obtaining a licence
number (版号) before their games are published. The Major app stores in China,
including the Apple iOS store, have announced that mobile games without a valid
licence number will be excluded from distribution, effective 1 October 2016.
We talked to some CPs during ChinaJoy, and they expressed concerns about the
uncertainty surrounding these regulatory changes, as it is not clear what the criteria for
the regulatory review will be. There is also no clear timeline for the review. Some said
the reviews could take up to 6 months. The higher compliance cost (both in terms of
monetary cost and time cost) will greatly disadvantage small CPs in competing with
the large players, including NetEase and Tencent. This could result in a greater
number of small developers working with the large operators vs. publishing games
themselves, as they did before.

Going overseas
Many of the smaller CPs said they are turning to the overseas market to avoid
domestic regulations. It is also easier for the CPs to publish games overseas given
they only have 2 channels for distribution: Google and Apple. On the flip side, their
major concerns in going overseas are related to possible IP infringement and having to
pay potential penalties as a result.
Virtual reality/augmented reality
Another buzz word we heard from industry players was “VR” (virtual reality) and “AR”
(augmented reality). The hardware players in particular are keen to launch their own
branded VR/AR hardware at ChinaJoy this year. For example, Sony launched official PS
VR gear, for a price tag of around CNY3,000 per item, much cheaper than many expected.
16
In our opinion, commodity-like hardware, such as standalone VR gear lacks the necessary
differentiating features and therefore do not have much value. Content, on the other hand,
is the key arena for VR competition in the next few years, in our view. We believe we are
still at the accumulation stage for VR/AR content.
We note that Tencent has been relatively quiet on the VR front, although we suspect the
company is watching the industry dynamics carefully and waiting for an inflection point to
get in. NetEase announced that it has become a preferred partner of Google’s Daydream
VR initiatives. We are upbeat on VR becoming the next “running operating platform”, after
PCs and smartphones, but believe we are unlikely to see significant VR adoption in the
next 1-2 years.
17
Recommendation and risks
Tencent
Tencent is our top pick
in the China Internet
sector
We reaffirm our Buy (1) rating on Tencent. The key risk to our call on Tencent would be
higher-than-expected marketing and content expenses.
NetEase
We also reiterate our Outperform (2) on NetEase. The key downside risks on our positive
call on the stock would be: 1) slower-than-expected mobile-game roll-outs, 2) faster-thanexpected declines in revenue from its legacy PC-game titles, and 3) regulatory uncertainty
over its Kaola platforms.
18
Daiwa’s Asia Pacific Research Directory
HONG KONG
SOUTH KOREA
Takashi FUJIKURA
(852) 2848 4051
Regional Research Head
[email protected]
Sung Yop CHUNG
(82) 2 787 9157
[email protected]
Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles;
Shipbuilding; Steel
John HETHERINGTON
(852) 2773 8787
[email protected]
Regional Deputy Head of Asia Pacific Research
Mike OH
(82) 2 787 9179
[email protected]
Banking; Capital Goods (Construction and Machinery)
Rohan DALZIELL
(852) 2848 4938
[email protected]
Regional Head of Asia Pacific Product Management
Iris PARK
Consumer/Retail
Kevin LAI
(852) 2848 4926
[email protected]
Chief Economist for Asia ex-Japan; Macro Economics (Regional)
(82) 2 787 9165
[email protected]
Jonas KAN
(852) 2848 4439
Head of Hong Kong and China Property
[email protected]
SK KIM
(82) 2 787 9173
[email protected]
IT/Electronics – Semiconductor/Display and Tech Hardware
Cynthia CHAN
Property (China)
[email protected]
Thomas Y KWON
(82) 2 787 9181
[email protected]
Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game
(852) 2773 8243
Kevin JIN
Small/Mid Cap
Leon QI
(852) 2532 4381
[email protected]
Banking (Hong Kong/China); Broker (China); Insurance (China)
(82) 2 787 9168
[email protected]
[email protected]
TAIWAN
Anson CHAN
(852) 2532 4350
Consumer (Hong Kong/China)
[email protected]
Rick HSU
(886) 2 8758 6261 [email protected]
Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design
(Regional)
Adrian CHAN
(852) 2848 4427
Consumer (Hong Kong/China)
[email protected]
Christie CHIEN
Banking; Insurance (Taiwan); Macro Economics (Regional)
Jamie SOO
(852) 2773 8529
Gaming and Leisure (Hong Kong/China)
[email protected]
Steven TSENG
(886) 2 8758 6252
IT/Technology Hardware (PC Hardware)
Yan LI
Banking (China)
(852) 2773 8822
[email protected]
Dennis IP
(852) 2848 4068
[email protected]
Power; Utilities; Renewables and Environment (Hong Kong/China)
Christine WANG
IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer
John CHOI
(852) 2773 8730
[email protected]
Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap
Kylie HUANG
IT/Technology Hardware (Handsets and Components)
Kelvin LAU
(852) 2848 4467
[email protected]
Head of Automobiles; Transportation and Industrial (Hong Kong/China)
Helen CHIEN
Small/Mid Cap
Brian LAM
(852) 2532 4341
[email protected]
Transportation – Railway; Construction and Engineering (China)
Thomas HO
Custom Products Group
PHILIPPINES
Patricia Tamase
Banking
(852) 2773 8716
[email protected]
INDIA
Punit SRIVASTAVA
Head of India Research; Strategy; Banking/Finance
[email protected]
Saurabh MEHTA
Capital Goods; Utilities
(63) 2 797 3024
(886) 2 8758 6254
(91) 22 6622 1009
[email protected]
[email protected]
SINGAPORE
Ramakrishna MARUVADA (65) 6499 6543
[email protected]
Head of Singapore Research; Telecommunications (China/ASEAN/India)
Royston TAN
(65) 6321 3086
Oil and Gas; Capital Goods
[email protected]
David LUM
(65) 6329 2102
Banking; Property and REITs
[email protected]
Shane GOH
(65) 64996546
[email protected]
Property and REITs; Small/Mid Cap (Singapore)
Jame OSMAN
(65) 6321 3092
[email protected]
Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)
19
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the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this
publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the
securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation,
opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and
employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to,
or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.
Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have
other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and
other services for the issuer of such securities. The following are additional disclosures.
Ownership of Securities
For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationship
For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Japan
Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.
Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc.
Investment Banking Relationship
Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the
securities of the following companies: Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK).
*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa
Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital
Markets Korea Co., Ltd.
Hong Kong
This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures
Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.
Relevant Relationship (DHK)
DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
Singapore
This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional
investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of
investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to
disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets
Singapore Limited in respect of any matter arising from or in connection with the research.
Australia
This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act.
Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.
India
This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange
Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save
as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation
for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix
disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report.
There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.
Taiwan
This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed
recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to
Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.
Philippines
This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines
Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the
research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory,
tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of
the markets mentioned in the publication or may have performed other services for the issuers of such securities.
For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.
Thailand
This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).
This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not,
and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any
of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential
loss arising from any use of this research or its contents.
The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa
Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or
warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions
contained in this report shall be at the sole discretion and risk of the user.
Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa
Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities
mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform
investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest
that may affect the objectivity of this research.
United Kingdom
This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital
Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended
for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United
Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by
the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.
Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at
http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.
Germany
This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for
21
the conduct of business in Germany.
Bahrain
This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm –
Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452
Fax No. +973 535113
United States
This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views
at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to
update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any
recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine
whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of
DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S.
entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local
jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a
process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report
should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).
Ownership of Securities
For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships
For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
DCMA Market Making
For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Research Analyst Conflicts
For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared
this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the
issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the
past 12 months except as noted: no exceptions.
Research Analyst Certification
For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any
and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views
of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual
analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months.
"2": the security is expected to outperform the local index by 5-15% over the next 12 months.
"3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months.
"4": the security is expected to underperform the local index by 5-15% over the next 12 months.
"5": the security could underperform the local index by more than 15% over the next 12 months.
Disclosure of investment ratings
Rating
Percentage of total
Buy*
65.8%
Hold**
21.8%
Sell***
12.4%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 June 2016.
* comprised of Daiwa’s Buy and Outperform ratings.
** comprised of Daiwa’s Hold ratings.
*** comprised of Daiwa’s Underperform and Sell ratings.
Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law
(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the
following items.
 In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in
the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
 In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
 For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the
amount of the transaction will be in excess of the required collateral or margin requirements.
 There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,
real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.
 There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
 Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.
*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content
of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions
regarding the signing of the agreement with us.
Corporate Name: Daiwa Securities Co. Ltd.
Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108
Memberships:
Japan Securities Dealers Association, The Financial Futures Association of Japan
Japan Securities Investment Advisers Association
Type II Financial Instruments Firms Association
22

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