Further Product Optimization and User Expansion, "Accumulate"

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1 Weibo Corporation (WB US) Internet Sector Equity Research 股 票 研 究 公 司 报 告 证 券 研 究 报 告 互联网行业 Equity Research Report : Weibo Corporation (WB US) 公司报告 : 微博 (WB US) Jason Zhou 周桓葳 (852) jason.zhou@gtjas.com.hk Further Product Optimization and User Expansion, "Accumulate" 进一步的产品优化与用户扩张, 收集 2Q18 results came in higher than market expectations with 80.2% yoy growth in non-gaap net profit, due to further improvement in gross margin. Weibo also posted 3Q18 revenue growth guidance ranging between USD465 million to USD475 million, representing yoy growth of 49% to 52%. We estimate FY18-FY20 advertising and marketing revenue grow by 55.7%/ 34.1%/ 33.2%, respectively. 2Q18 advertising and marketing revenue grew 69.4% yoy, driven by SME and KA customers. Weibo MAU reached 431 million in Jun. 2018, up 19.4% yoy. We expect that Weibo s MAU can maintain double-digit growth due to amplifying content and further penetration in low-tier cites. Operating margin is expected to be affected by higher channel marketing and content costs. Non-GAAP operating margin slightly decreased by 0.3 ppt to 39.2% yoy in 2Q18, due to the increase in spending on marketing fees and product development costs. Weibo is increasing spending on channel marketing and content acquisition to improve user growth and user adoption. We forecast non-gaap operating margin in FY18-FY20 to be 40.0%/ 39.2%/ 37.6%. We set the Company's investment rating as "Accumulate" and the TP as USD We expect that Weibo will benefit from higher revenue contributions from both KA and SME customers due to further product optimization and user expansion. The TP represents 30.7x FY18 non-gaap PER, 24.1x FY19 non-gaap PER and 19.4x FY20 non-gaap PER 财年第 2 季度业绩好于市场的预期, 非 GAAP 净利润同比增长 80.2%, 因不断改善 的毛利润 微博还公布了 2018 年第 3 季度收入增长指引, 收入范围在 4.65 亿美元至 4.75 亿美元之间, 代表 49% 至 52% 的同比增长 我们预期 2018 财年至 2020 财年广告和营销收入增长为 55.7%/ 34.1%/ 33.2% 受到中小 企业和大客户的推动, 第 2 季度广告和营销收入同比增长 69.4% 2018 年 6 月微博月活 跃用户数达 4.31 亿, 同比增长 19.4% 我们认为由于微博对于内容的不断丰富和对低线城 市的不断下沉, 其用户增长依然能保持双位数 预计营利率会受到渠道营销和内容成本提高的影响 第 2 季度非 GAAP 经营利润率同比轻 微下跌 0.3 个百分点至 39.2%, 是由于不断上升的市场营销费用和产品创新费用 微博正 在增加渠道营销和内容成本支出, 以改善用户增长和用户的体验 我们预计 财 年非 GAAP 运营利润率为 40.0%/39.2%/37.6% Rating: 评级 : Accumulate 收集 6-18m TP 目标价 : US$90.00 Share price 股价 : Stock performance 股价表现 [Table_QuotePic] 50.0 % of return (10.0) (20.0) (30.0) (40.0) [Table_PriceChange] Change in Share Price 股价变动 Abs. % 绝对变动 % Rel. % to NASDAQ Index 相对纳指变动 % Avg. Share price(us$) 平均股价 ( 美元 ) 1 M 1 个月 Source: Bloomberg, Guotai Junan International. 3 M 3 个月 US$ (50.0) Nov-17 Feb-18 May-18 Jul-18 Oct-18 NASDAQ Index WB US Equity 1 Y 1 年 (1.2) (19.9) (32.8) 4.3 (14.0) (41.6) 微博 我们将公司的投资评级定为 收集, 目标价为 美元 我们认为微博将因其产品的不 断优化与不断增长的用户进而在大客户与中小客户中获得更高的收入 新的目标价相当于 30.7 倍 2018 年非 GAAP 市盈率,24.1 倍 2019 年非 GAAP 市盈率和 19.4 倍 2020 年非 GAAP 市盈率 [Table_ Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (US$ m) (US$ m) (US$) ( %) (x) (US$) (x) (US$) (%) (%) 2016A (68.5) A 1, F 1, F 2, F 3,174 1, [Table_BaseData] Shares in issue (m) 总股数 (m) Major shareholder 大股东 Sina Corporation 45.7% Market cap. (US$ m) 市值 (US$ m) 14,419.8 Free float (%) 自由流通比率 (%) month average vol. 3 个月平均成交股数 ( 000) FY18 Net gearing (%) FY18 净负债 / 股东资金 (%) Weeks high/low (US$) 52 周高 / 低 (US$) / See the last page for disclaimer Page 1 of 8

2 2Q18 Results Review Weibo Corporation s ("Weibo" or the "Company") 2Q18 results came in higher than market expectation, due to increasing user engagement during the FIFA world cup and increasing recognition of Weibo social marketing capability. Non-GAAP net profit grew by 80.2% yoy in 2Q18 thanks to further improvement in gross margin and advertising revenue growth. Advertising revenue grew 69.4% yoy in 2Q18 thanks to strong growth of key accounts revenue at 91.0% yoy and the historical high growth rate of per key account customer spending, which was over 50.0% yoy. Revenue contributed by SME recorded solid growth of 48.0% yoy to USD185.2 million. VAS revenue grew 61.7% yoy in 2Q18 due to membership fee contributions. Gross margin reached 85.5% in 2Q18, up 5.4 ppt yoy. Weibo MAU reached 431 million in Jun. 2018, up 19.4% yoy. Weibo is expected to further increase its operational expenses in 2018 to improve user growth through channel marketing and to improve user adoption with better content. Weibo also announced its 3Q18 revenue guidance to be between USD465 million to USD475 million, representing yoy growth of 49.0% to 52.0%. Table-1: Weibo s Income Statement Analysis USD 2Q18 2Q17 YoY 1H18 1H17 YoY Comments (Million) Net revenue % % -Advertising & marketing revenue % % Driven by both an increase in ARPA and the expansion of Weibo s advertiser base -Weibo VAS revenue % % Driven by membership services fee contributions Cost of revenue (61.8) (50.4) 22.7% (124.7) (96.8) 28.8% Gross profit % % S&M expenses (139.9) (59.4) 135.8% (245.8) (106.5) 130.8% Driven by increase in channel marketing spending and investment in collaboration with several online variety shows and the investment on the promotion of Weibo Lite. R&D expenses (60.6) (45.5) 33.1% (121.1) (84.7) 43.0% Due to increase in personnel-related costs. G&A expenses (9.3) (10.1) -8.2% (20.5) (20.7) -0.8% Operating profit Non-GAAP operating profit Non-operating income Shareholder s net income Non-GAAP Shareholder s net income Basic EPS (USD) % % % % % % % % % % % % Gross profit margin 85.5% 80.1% 5.4ppt 83.9% 78.6% 5.3ppt See the last page for disclaimer Page 2 of 8

3 We estimate Weibo s FY18-FY20 advertising and marketing revenue to grow by 55.7%/ 34.1%/ 33.2%, respectively, due to further optimization of Weibo s products under increasing competition in the advertising market. 2Q18 advertising and marketing revenue grew 69.4% yoy, better than expectations, driven by outstanding performance of both key accounts and SMEs. Weibo has diversified its advertising and marketing solutions tailored to different customer segments, from individuals to SMEs and key accounts, and has generated higher investment return for the Company s customers. KA revenue surged 91.0% yoy in 2Q18, driven by increasing amount of key advertisers and the surge in per key account customer spending. SME customers advertising revenue grew 48.0% yoy in 2Q18. Growth was primarily driven by improved result rates after introducing the new app inventory, and the continued optimization of Weibo s app algorithm, which could help SME customers more efficiently achieve marketing goals. Excluding revenue from KAs and SMEs, revenue from Alibaba (BABA.US) recorded strong growth at 137.0% yoy due to seasonal promotion investment. The cooperation between Alibaba (BABA.US) and Weibo is expected to continue and we estimate that the percentage of advertising revenue contribution by Alibaba (BABA.US) will stabilize at 13.3%/ 13.1%/ 12.7% in 2018F-2020F. Faced with increasing competitor advertising feeds on other platforms, such as Tik Tok, Weibo has further optimized its advertising products via the following three aspects: 1) an increase in sales rate of new advertisement inventories that Weibo adds in video feeds and feeds in the main page; 2) enhancement in Weibo s advertisement algorithm, especially on new advertisement inventories to boost targeting capability in different categories, as well as improvement in ad conversion rate; 3) further expansion in customer base and deployment of tailored products and marketing solutions to advertisers in different vertical markets. By further optimizing its products, we expect that Weibo s monetization capability will be further strengthened. Table-2: Advertising Contributions from Alibaba and SME & KA Customers to Weibo US$ (Million) 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Alibaba advertising revenue YoY (71.4%) (48.8%) (29.7) 3.1% 173.8% 55.4% 238.0% 137.0% SME & KA advertising revenue YoY 101.1% 100.7% 83.3% 79.4% 70.6% 80.1% 71.3% 65.1% Source: the Company. Figure-1: Weibo s Annual Advertising and Marketing Revenue and YoY Growth Figure-2: Weibo s VAS Revenue and YoY Growth USD(Million) Advertising and Marketing revenues (LHS) yoy (RHS) 3, % 2,772 2, % 2,081 2, % 1,552 1,500 1, % 33.2% A 2017A 2018E 2019E 2020E 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% USD(Million) Value-added services revenues (LHS) yoy (RHS) % % % 28.4% % A 2017A 2018E 2019E 2020E 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% User base is expected to maintain double-digit growth because of content amplification and low penetration in cities. In 2Q18, Weibo became the primary platform for users to consume FIFA World Cup related content, which brought over 100 million users to Weibo. Apart from sports events, Weibo also collaborated with online variety shows, such as Produce 101, which could further solidify Weibo s competitive edge in content distribution and increase user engagement. With content amplifying, Weibo expanded its content category to 60 vertical channels and partnered with approx. 1,900 multi-channel networks (MCN). The vertical expansion of Weibo s content could build stronger engagement throughout every level platform. Weibo MAU reached 431 million in Jun. 2018, up 19.4% yoy, representing a large net increase since 2Q17. DAU reached 190 million, up 19.5% yoy. Weibo continued to increase its channel coverage and low-tier city penetration by cooperating with key domestic smartphone manufacturers and TV programs. See the last page for disclaimer Page 3 of 8

4 Figure-3: Weibo s User MAU and YoY Growth Figure-4: Weibo s User DAU and YoY Growth Million % % 361 MAU (LHS) % 25.2% yoy (RHS) % 19.4% 17.0% 16.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% Million % % DAU (LHS) 25.0% 23.7% yoy (RHS) % 19.5% 18.0% 18.0% 30% 25% 20% 15% 10% % 50 5% 0 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18E 4Q18E 0.0% 0 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18E 4Q18E 0% With the further improvement on Weibo s feed advertisement products and expected double-digit user growth, we expect that gross margin of Weibo will be further stabilized and FY18-FY20 gross margin is expected to be 84.6%/ 84.7%/ 84.4%, respectively. 2Q18 gross margin further improved by 5.4 ppt yoy to 85.5%, thanks to high revenue contributions from SME and KA customers. Furthermore, by launching the uni-marketing program with Alibaba (BABA.US), Weibo is expected to help its advertisers to more precisely reach their target customers and have a better understanding on their app conversion. Non-GAAP operating margin slightly decreased by 0.3 ppt yoy to 39.2% in 2Q18 due to increasing spending on marketing fees and product development costs. S&M expenses as a percentage of revenue was 32.8% in 2Q18, up 9.4 ppt yoy, due to increasing channel marketing spending, investment in several online variety shows and investment in the promotion of Weibo Lite. Moreover, the spending on sales and marketing is expected to increase due to the increasing channel coverage, especially in low-tier cities and alongside cooperation with variety shows. Therefore, non-gaap operating margin in FY18-FY20 is expected to be 40.0%/ 39.2%/ 37.6%. We believe that Weibo can remain stable in its leading position in the social platform market, even when facing fierce competition from other social and entertainment products, such as Tik Tok, in the short term. Internet companies are in a battle for users time spent on their products. The user percentage time spent on ByteDance increased by 6.2 ppts in 2Q18 from 2Q17 while Sina products, including Weibo, increased by 0.7 ppts. We believe that Weibo s leading position in the social platform market will not be unshaken according to the following three aspects: 1) Opening up of platforms; easy for information distribution, 2) ease of forming the "water drop" effect, in which important news or key opinion leaders views can trigger a big amount torwards forwards and interaction, and 3) relatively big amount of advertisement exposure. See the last page for disclaimer Page 4 of 8

5 Figure-5: 2Q18 User Time spent on the Five Main Chinese Internet Mobile Group APPs Tecent Products Bytedance Products (inclusing Tik Tok) Sina Products (Including Weibo) Alibaba Products Baidu Products Others % 6.4% 10.1% 7.4% 3.6% 24.8% % 6.7% 3.9% 7.9% 2.9% 24.3% Source:QuestMobile, Guotai Junan International. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Risks We believe that the key risks for Weibo are: 1) increasing cost of both content innovation and improvements; 2) rising cost of further penetrating low-tier cities; 3) the slowing down of MAU growth rate because of the high user base and the bottle neck effect of growth of the Chinese internet population; and 4) fierce competition, especially in the short video market. Profit Estimates FY18-FY20 non-gaap EPS is expected to grow by 59.7%/ 27.1%/ 24.3%, respectively, due to advertising revenue forecasts. Due to further optimization of products, Weibo is expected to attract more advertisers and strengthen advertising marketing revenue growth. With increasing channel coverage and content amplifying, user base of Weibo is expected to expand and maintain double-digit growth. Our earnings forecasts for FY18-20 non-gaap EPS are USD2.94/ USD3.73/ USD4.64, respectively. Valuation We set the investment rating as "Accumulate" and TP as USD Although Weibo s financials may be impacted by higher spending in channel marketing and content, better user experience and user growth can maintain a healthy platform ecosystem. We expect Weibo to benefit from higher revenue contributions from both KA and SME customers. However, due the recent market climate, the peers PE of both US and Hong Kong-listed internet companies have overall decreased. The new TP represents 30.7x FY18 non-gaap PER, 24.1x FY19 non-gaap PER and 19.4x FY20 non-gaap PER. See the last page for disclaimer Page 5 of 8

6 Table-3: Peers Comparison PER (x) PBR (x) P/S PEG Market Cap Company Ticker Currency Price 18F 19F 20F 18F 19F 20F 18F 18F-20F Local currency (million) US Online Game Companies Changyou CYOU US USD Electronic Arts Inc EA US USD ,183 Activision Blizzard Inc ATVI US USD ,599 Netease NTES US USD ,242 Simple Average Weighted Average HK Online Game Companies Tencent HK HKD ,890,808 Boyaa Interactive Int HK HKD n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1,401 IGG HK HKD ,767 Netdragon HK HKD n.a ,861 Simple Average Weighted Average Advertising Companies Momo Inc-Spon Adr MOMO US USD ,241 Bilibili Inc-Sponsored Adr BILI US USD (60.9) n.a. 4,019 Sohu.Com Ltd-Adr SOHU US USD n.a. n.a. n.a Weibo Corp-Spon Adr WB US USD ,449 Bitauto Holdings Ltd-Adr BITA US USD ,375 Cheetah Mobile Inc - Adr CMCM US USD n.a , Com Inc-Adr WUBA US USD ,252 Fang Holdings Ltd - Adr SFUN US USD Phoenix New Media Ltd -Adr FENG US USD Sina Corp SINA US USD ,733 Facebook Inc-Class A FB US USD ,708 Simple Average Weighted Average E-commerce Companies Pinduoduo Inc-Adr PDD US USD (55.5) n.a. 22,566 Alibaba Group Holding-Sp Adr BABA US USD ,580 Vipshop Holdings Ltd - Adr VIPS US USD ,859 Ebay Inc EBAY US USD ,760 Jd.Com Inc-Adr JD US USD ,495 Amazon.Com Inc AMZN US USD ,392 Simple Average Weighted Average Search Engine Companies Sogou Inc-Adr SOGO US USD ,506 Alphabet Inc-ClA GOOGL US USD ,074 Baidu Inc - Spon Adr BIDU US USD ,162 Simple Average Weighted Average Overall Average Overall Weighted Average Source: Bloomberg. See the last page for disclaimer Page 6 of 8

7 Financial Statements and Ratios Income Statement Year end 31 Dec (USD m) 2016A 2017A 2018F 2019F 2020F Total revenue 656 1,150 1,790 2,394 3,174 Cost of revenue (171) (231) (276) (367) (494) Gross profit ,514 2,027 2,680 Sales and marketing (148) (276) (554) (748) (1,009) Product development (154) (193) (269) (358) (481) General and administrative (41) (42) (45) (59) (80) Operating profit ,111 Gain on sale of and impairment on (40) (5) (6) (6) (6) investments, net Interest and other income (expenses), net Profit before tax ,194 Income tax (4) (67) (105) (148) (191) Profit after tax ,003 Non-controlling interest Shareholders' profit / loss ,007 Basic EPS (USD) Non-GAAP shareholders' Profit ,095 Non-GAAP EPS (USD) Balance Sheet Year end 31 Dec (USD m) 2016A 2017A 2018F 2019F 2020F Property and equipment, net Intangible assets and goodwill, net Long-term investments Other assets Total non-current assets Short-term investments ,255 1,632 2,040 Accounts receivable, net Prepaid expenses and other current assets Amount due from SINA Cash & cash equivalents 365 1,001 1,149 1,516 2,059 Total current assets 597 2,048 2,793 3,673 4,796 Total assets 1,037 2,562 3,441 4,332 5,467 Accounts payable Accrued liabilities Deferred revenues Total current liabilities Cash Flow Statement Year end 31 Dec (USD m) 2016A 2017A 2018F 2019F 2020F Profit after tax ,003 Depreciation and amortization Stock-based compensation Other non cash gain and losses Working capital change Cash from operating activities ,119 Convertible debt Other long-term liabilities Total non-current liabilities Total liabilities 280 1,367 1,657 1,768 1,893 Total shareholders' equity 753 1,193 1,780 2,559 3,566 Minority interest Total equity 757 1,195 1,784 2,564 3,573 Investing activities CAPEX (13) (20) (31) (42) (57) Change of short term investments 59 (743) (464) (510) (561) Change of long term investment (143) (52) (110) 0 0 Others Cash from investing activities (97) (815) (605) (552) (617) [Table_FinancialRatio] Financial Ratios 2016A 2017A 2018F 2019F 2020F Non GAAP gross margin 73.9% 79.9% 84.6% 84.7% 84.4% Non GAAP operating margin 27.2% 39.7% 40.0% 39.2% 37.6% Non GAAP net margin 28.0% 35.3% 37.0% 36.0% 34.5% Financing activities Proceeds from convertible notes Others Cash from financing activities Net changes in cash Cash at beg of year ,001 1,149 1,516 FX change (15) Cash at end of year 365 1,001 1,149 1,516 2,059 See the last page for disclaimer Page 7 of 8

8 Company Rating Definition The Benchmark: Time Horizon: 6 to 18 months Rating NASDAQ Composite Index Definition Buy 买入 Relative Performance>15%; or the fundamental outlook of the company or sector is favorable. Accumulate 收集 Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce 减持 Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell 卖出 Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable. [Table_IndustryRatingDefinition] Sector Rating Definition The Benchmark: Time Horizon: 6 to 18 months Rating NASDAQ Composite Index Definition Outperform 跑赢大市 Relative Performance>5%; or the fundamental outlook of the sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform 跑输大市 Relative Performance<-5%; Or the fundamental outlook of the sector is unfavorable. DISCLOSURE OF INTERESTS (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for KAISA GROUP (01638 HK),GUOTAI JUNAN I (01788 HK),BINHAI INVESTMENT (02886 HK),VALUE A SHARE (03095 HK),CAM SCSMALLCAP (03157 HK),Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. (5) Guotai Junan and its group companies are not making a market in the securities in respect of the issuer mentioned in this Research Report. (6) Guotai Junan and its group companies have not employed an individual serving as an officer of the issuer mentioned in this Research Report. There is no officer of the issuer mentioned in this Research Report associated with Guotai Junan and its group companies. DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services, etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel.: (852) Fax: (852) Website: See the last page for disclaimer Page 8 of 8