中国在线广告：重申复苏迹象.docx

13 March 2020China online advertisingExpert call reaffirms signs of advertising recoveryEquitiesInternet Software & ServicesChinaBinnie Wong,Head of Internet Research, Asia PacificThe Hongkong and Shanghai Banking Corporation Umitedbinnie.wonghsbc .hk+852 282 22590Carson Lo,Associate, Internet ResearchThe Hongkong and Shanghai Banking Corporation Limited carson.Iohsbc .hk +852 2822 4337Cleo Zhang*Associate, Internet ResearchThe Hongkong and Shanghai Banking Corporation Limitedcleo.zhanghsbc .hk+852 2914 9935, Employed by a r)on-US affiliate of HSBC Secunties (USA) Inc. and is not registered,f qualified pursuant to FINRA regulabonsAsiamoney Global RMB Poll 2020Voting opens 2nd - 27Ih March 2020If you value our service and insight, please voteClick here to voteTencent remains most resilient given diversified base of advertisers; saw 20%-plus yoy rise in 1Q amid falls for peers Initial signs show recovery for e-commerce platforms in March with smaller merchants and OTAs likely to follow in 2QTencenfs premium ad inventories on WeChat helping it to weather headwinds and Bytedance and Kuaishou competitionExpert call reaffirms ad recovery post COVID-19: We turn more positive on ad recovery after our investor call with the general manager of the largest ad agency for Tencent and Bytedance on performance-based ads, which we understand might depict trends of just part of the industry. The expert suggested that ad demand from e- commerce platforms and online travel agencies (OTAs) will recover sooner to capture the business volume growth post-COVID-19. The expert believes Tencent will fare better vs peers from the impact of COVID-19 because in the expert's view Baidu is likely to see flattish revenue growth and Weibo is likely see further declines. In our coverage, we like Tencent given 1) its more diversified advertiser base and 2) the higher ROI for its WeChat properties; we expect Tencent's ad revenue to rise by 20% yoy in 2020e on healthy 26% yoy growth in social ads but offset by flattish growth in media ads.Investment implications: Tencent's social ad business remains the most resilient, in our view, as 1) some of its key account advertisers, such as Pinduoduo, are increasing their 2020 ad budgets despite weaker top-line growth; 2) performance ad demand from KA advertisers impacted by COVID-19 (like OTAs) will likely resume first; and 3) engagement is increasing in WeChat with the daily average time spent rising to 93 minutes in February 2020. Baidu is likely see soft ad revenue growth in 2020 as weak search demand (down 10-15% yoy per the expert) offsets growth in news feeds. Yet, a potential catalyst for Baidu is that the company is refocusing its resources into search, according to the expert.Performance by verticals: The expert noted that gaming and K-12 online education ad demand has increased in the first two months of the year on better ROI from the increase in traffic to social media platforms. Also, the expert is seeing initial signs of a recovery in ad demand from e-commerce platforms with recoveries for smaller e-commerce merchants and the travel industry likely to come later in April and May, respectively.Bytedance and Kuaishou remain structural challengers: Bytedance and Kuaishou has gained shares of social ad budgets on the increasing popularity of the short video apps (16.7% time share in February). Kuaishou's total revenue reached RMB50bn (USD7bn) in 2019, of which ad revenue reached RMB13bn (USD2bn), already surpassing Weibo. The growing supply of ad inventories has led to pricing pressure, but Tencent is weathering the competition better than peers with stable pricing on its WeChat properties. For 2020, we expect Bytedance and Kuaishou to further tap into e-commerce vertical by leveraging on the live streaming and KOLs they have for better user conversion.Issuer of report: The Hongkong and Shanghai Banking Corporation LimitedView HSBC Global Research at: s:/ research.hsbc Disclosures & DisclaimerThis report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it.Weibo BaiduiQiyi Tencent VideoWeChat TikTokSource QuesiMotute. Data as" the week ending 135 2020.Exhibit 19: Daily average time spent for TikTok and Kwai have ramped up as wellWeChat TikTok KwaiWeibo Baidu iQiyi Tencent VideoSource QuestMobitePricing pressure remains, but Tencent likely to fare better vs peersThe ramping up of the ad inventories provided by TikTok and Kwai has created pricing pressure for the entire industry, and the effective CPM (eCPM) was on a downward trajectory in 2019. We expect the trend to continue given the continued increase in traffic for the short video platforms. Apart from the increase in traffic, we believe that the monetisation for Kuaishou still has plenty of room to increase. If Kuaishou were to further step up its monetisation effort in 2020, it could place further downward pressure on ad pricing.We have performed an analysis on the monetisation levels across different ad platforms, using ad revenues for 2019 and MAU (monthly active users) for December 2019 for the flagship apps as per QuestMobile (thus, our MAU calculation methodology is identical across platforms).Based on our analysis, Kuaishou's current ad revenue per MAU at RMB34 is relatively low vs those of its peers, while Bytedance's monetisation level at RMB195 is at the high end, coming in only second to Alibaba's at RMB262.We think Tencent should fare better vs peers amid the oversupply of ad inventories and the decline in eCPM as the ad inventory that Tencent has on hand (especially within WeChat) was well received by advertisers as being of high quality in terms of both user reach (1,151m MAU on WeChat in 3Q19 as per Tencent) and better targeting capabilities. This is in evidence by the higher pricing WeChat charges for ads vs other ad platforms.Monetisation in Kuaishou still has room to further improve in 2020Dec 2019 MAU per QuestMobile (m)2019 ad revenue (RMBm)Ad revenue/MAU (RMB)NoteBytedance614120,000195Use combined MAU of TikTok and Toutiao, net of the overlapping usersKuaishou37913,00034Alibaba667174,609262Use MAU of Taobao as proxyBaidu50169,822139Use MAU of Baidu app as proxyTencent93968,65673Use MAU of WeChat as proxyPinduoduo38726,81469Meituan Dianping28614,68851Use MAU of Meituan app as proxyWeibo43312.54529iQiyi5538,27115Note: 2019 ad revenues for Bytedance and Kuaishou are based on news sources while those for Tenoent ard Meiluan Danpng are based on HSBC estimates as their 4Q resets have yectobe announced Source: Company data. QuesiMoble. HSBC estmatesExhibit 20: Monetisation level of Kuaishou looks to have room to grow as it is still at a low level vs Bytedance's and those of other listed ad playersTaking ads on WeChat Moments as an example - its minimum CPM (RMB30) is multiple times higher than those of other platforms (ranging from RMB4-15), which should help Tencent avoid price competition. In fact, according to our expert, Tencent's eCPM was relatively stable in 2019.The minimum bidding price of WeChat Moments ads is the highest vs peersExhibit 21: WeChat Moments having the highest ad pricing reflects its high ROIPlatformCost per thousand impressions (CPM)Tencent: WeChat MomentsRMB30-300KuaishouRMB15 minimumWeiboOptimised CPM is RMB15-100; RMB5 minimumiQiyiRMB5 minimumBytedance: DouyinRMB4 minimumSource. Company dataE-commerce ads likely be another focus in 2020 for Bytedance and KuaishouWe believe both Bytedance and Kuaishou will further tap into the e-commerce ad vertical in 2020 as they should be able to leverage on their live streaming functions and the KOL on their platforms to help merchants to promote their products to followers more effectively.In October 2019, Kuaishou upgraded its ad platform (磁力弓I 擎)with one focus being to better connect merchants with the content and users on Kuaishou's platform. Over 200k content providers of Kuaishou have shared ad revenue in 2019, and Kuaishou targets to share RMBIObn to its content providers in 2020. In 2019, the KOL marketing product of Kuaishou (快 接单)connected advertisers with over 30k content providers on Kwai and achieved over RMBIbn in revenue sharing with these content providers. Moreover, the number of merchants on Kuaishou had reached 1m in December 2019 (covering over 20 industries), up from 600k in September 2019.On the other hand, in February 2020, Ocean Engine (巨量引擎),the ad platform of Bytedance, launched new functionality to help advertisers better select the KOL for their marketing campaigns in Bytedance.Kuaishou: building up the KA ecosystemKuaishou's advertiser base mainly comprises SMEs historically due to the initial position of Kwai to focus on lower tier cities. Yet, as an app with 300m DAU (daily active users) in January 2020, Kuaishou is now a marketing platform that the big brands cannot overlook any longer. With the upgrade of its ad platform in October 2019, Kuaishou can now better serve the advertising needs of its key accounts (KA) and ad agencies to further develop its KA business. In 2019, there were over 1,000 KAs and 100 ad agencies on Kuaishou's platform, and the number should continue to ramp up in 2020.Exhibit 22: Kuaishou's key operating metrics for its ad platform2019Number of key account （KA） customers1,000+Number of ad agencies100+Content providers with ad revenue sharing200.000+Active merchants1,000,000+Source: Company dataBytedance: ambition in search ads in early stageSearch ads is another area of interest for Bytedance, which launched a content search function within its Toutiao app in 2019 and an independent Toutiao Search app （头条搜索）in February 2020. While the effort is still at too early of a stage for Bytedance to grab search budget share, its large content library within its ecosystem may help Bytedance to be a formidable competitor to the existing players, such as Baidu.The front page layouts of both the Toutiao Search app and Baidu app are similar with search, news feeds and a separate entry point provided for the video content. Yet, in terms of search content, Toutiao Search currently relies mainly on the content within Bytedance's ecosystem, including the content available in the Toutiao Account （头条号）.Exhibit 23: Similar front page layout for Toutiao Search and Baidu app头条关注推甫拉瞥标出技,林学 0 &习近平这样徘氏布住与病比菽，如何才能跑出加速度i。新型过状肮炎全国疫中遇报关注 抵号 抗击师炎 视频 浓点 三胡疫生产两手孤习近平这狂排兵布匹 KJ 习近平X S干部碍土遗践假设求 K.« ：»y-h走进君守所：18岁少女被判死刑,我求一封 逋书.法院当庭无罪再求孙日的炎先成11明这体制剖：不仅郭给受2个网，女校常以母毁掉个孩子步快的方式.就是在送4件于 上放纵21>Source: Company data段烹.七不买三不交,散户记住这一方法: 专用！Ad platforms likely to impose stricter requirement for gaming adIn late February, Apple's app store announced a requirement for game developers to provide banhao (license for monetisation) by 30 June 2020 for paid games and games with in-app purchases on the China app store. Bytedance's Pangle platform 穿山甲广告联盟(ad platform covering 30k apps, 700m daily active users and 6.8bn daily impressions, as per Bytedance) also announced a similar banhao requirement for both domestic and imported games.If banhao requirements are implemented strictly, we expect ad demand from smaller game developers and publishers will likely decline as some of their games may not be eligible to market on these platforms. The expert suggested that a 20% decline in gaming ad demand is likely if the banhao rules are implemented strictly.For the large developers, like Tencent and NetEase, the impact should be limited as they have a significant pipeline of games with baohao already. They may even benefit from the stricter banhao requirement as the user acquisition cost on these platforms would likely be lower.The gaming sector is one of the few verticals that is still see growing ad demand in 1Q20 and remains a key vertical for performance ads on app downloads. According to App Growing data, gaming ads accounted for 44% of the entire ad spending on performance ads for app downloads and 52% of the ad budgets are spent on the iOS platform.Exhibit 24: Gaming accounted for 44% of ad spending on performance ads for app downloads in 2019.Exhibit 25: .with 48%/52% spilt between Android and iOS Gaming adOthec ad Gaming adOthec adSource: App GrowingSource: A 卬 GracingDetailed transcript of the expert callQ1: In terms of the impact from COVID-19, which industry verticals are being impacted the most? And which verticals are seeing growing ad demand?Industries with increasing ad demand: 1) Ad demand from gaming has increased significantly during the outbreak. The time spent on social media platforms has increased during the period, leading to the improved ROIs for gaming companies. 2) K-12 online education has also see material growth, especially for the KA customers like TAL, Yuanfudao (猿辅导)and Zuoyebang (作 业帮)as they launched free trial courses to gain market share during the outbreak. Zuoyebang spent RMB38m in ad dollars per day over CNY whereas in past years, K-12 online education companies paused their ad deployment during CNY. 3) Insurance companies have increasingly engaged in performance-based ads to acquire new users since 2H19, following the successful results from Shuidi Insurance (水滴，peak ad spend of RMBIOm per day) and ZhongAn Insurance (众安，peak ad spend of RMB7m per day). Ping An is also active in advertising but has been more focused on Baidu search and brand ads.Industries negatively impacted by COVID-19:1) Ad budgets for the travel industry have been suspended although CNY was historically a high season for OTA to do marketing. 2) E-commerce normally see bottlenecks in logistics during CNY while Alibaba and JD are faring relatively better on the fast recovery in logistics capacity so they should see ad demand from e-commerce platforms return following the resumption of the logistics capacity (now recovered to 70-80% of normal capacity). But for smaller e-commerce merchants, they still face bottlenecks for production so may need more time to recover.Q2: We note Baidu and Weibo guided for weak 1Q revenue; does Tencent fare relatively better vs peers?The advertiser base of Tencent is much more diversified compared against Baidu (more concentrated in medical, adult education and franchising) and Weibo (more concentrated in 020 and OTA). Therefore, Tencent's performance should be relatively better than peers as the temporary headwinds from COVID-19 in certain industry verticals can be covered by other verticals.Q3: What is the latest trend in auto ads?Ad budgets for the auto industry experienced y-o-y declines in 2019 on the slower sales volume growth. Auto OEMs normally re