China on Demand (O2O Digitising the Service Industry) 031115

7/24/2019 China on Demand (O2O Digitising the Service Industry) 031115

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hina on-demandO2O digitising the service industry

Special report November 2015


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Executive summary China internet

3 November 2015 [email protected] 3

China on-demandThe internet is digitising the service industry - Chinas new growth pillar.

Online-to-offline (O2O) will be as disruptive to services as e-commerce was toretail and will accelerate China's transition to a service-led, consumption-driveneconomy. China is a world leader in developing O2O services in industries suchas restaurants, travel and housekeeping; and we forecast O2O-service grossmerchandise value (GMV) to reach Rmb2.5tn by 2019. The market is stillnascent: we expect current leaders Meituan, Dianping and Ele.me to lose shareand we are BUYers of Baidu, Tencent and Alibaba as the ultimate winners.Baidu is most serious and aims to be No.1. Tencent has the most extensive

partnerships, while Alibaba leads in O2O healthcare and finance.

Services are the key growth pillar of the Chinese economy. Tertiary industry

growth remains in double digits (11% YoY in 1H15) and it contributes morethan half of total GDP (53% in 1H). Markit services PMI continues to expand

despite the contraction in manufacturing. The service industry created 17mnew jobs in 2014, offsetting the decline in manufacturing employment.

O2O services are in great demand in China due to poor offline distributionchannels, underused capacity and a fragmented market of mostlyindependent stores. Such services have tremendous potential, given the largeeconomies of scale and the ability to deploy a low-cost sales force to scale thebusiness. China has 270 cities with over 1m population (versus 10 cities inthe USA). Chinese O2O GMV has jumped with more players and investment,growing 200% YoY for food and 50% YoY for travel in 2015.

Our proprietary consumer study asked 573 people about their preferences andusage behaviour in 10 major O2O-service categories. We also compared user

experiences on leading O2O apps. We found a high adoption rate: over 70% ofrespondents had booked food delivery, restaurants, hotels, movie tickets andtaxis online; about 65% had increased usage in the past six months; and overhalf expect to use these services more. Over 70% of O2O users have raised theiroverall consumption and half already spend more online than off. Subsidiesmatter, but half say they will keep using O2O services even if subsidies drop.Most want a one-stop O2O service platform.

We estimate the consumer service market could be worth Rmb11tn by 2019.Restaurants are the largest segment with a 41% share, followed by travel,

healthcare and education. At 23% blended online penetration, we forecastO2O-service GMV to reach Rmb2.5tn by 2019, with revenue of Rmb156bn

using an average 6.2% take rate (O2O service providers already have 5-15%

take rates). Current losses are due to heavy subsidies to acquire users, butsubsidies should decline as the market consolidates and matures. We believethe long-term Ebit margin could be sustained at c.25%.

China O2O-service GMV

Source: CLSA

467 767 1,119 1,547 2,009 2,497

0

500

1,000

1,500

2,000

2,500

3,000

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

49% 5Y Cagr

. . . with O2O servicesgenerating Rmb2.5tn GMV

and Rmb156bn revenue

Services are the new

growth pillar of theChinese economy

The internet is digitising

the service industry

O2O services have huge

potential in China

Our proprietary consumer

study shows high demand

and adoption

Consumer service market

could be worth Rmb11tnby 19CL . . .
http://www.clsa.com/


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Investment thesis China internet

4 [email protected] 3 November 2015

Why invest in O2O?Online-to-offline (O2O) is the new big thing, riding on Chinas booming

service industry. The country leads the world in O2O development, with 60%of movie tickets sold online (versus 20% in the USA) and 2% of restaurantbookings online (versus 1% in the USA). O2O services in China haveexpanded from restaurants and travel to healthcare, education andhousekeeping services. Its addressable market could reach Rmb11tn by 2019and we believe O2O service GMV could exceed Rmb2.5tn. The market is likelyto consolidate in 2016 as private-equity funding dries up; and we expect thecurrent leaders (Meituan, Dianping and Ele.me) to lose market share. Baiduand Tencent are likely to become the largest one-stop service distributionplatforms, while Alibaba leads in O2O healthcare and financial services.

What is O2O?O2O is a broad concept digitising offline commerce. Offline retailers and

service providers leverage internet technologies, data and traffic to attractconsumers and improve operational efficiency. This could be a gamechanger,particularly for the service industry. While e-commerce involves sellingphysical goods online, O2O allows local services to go online. Consumers arestill served offline, but they can make reservations, order, download coupons,pay and write reviews of the services online.

Service industry is Chinas next growth pillarServices are a critical driver of Chinas economy. Tertiary industry growth isstill in double digits (11% YoY in 1H15) and it contributes more than half oftotal GDP (53% in 1H). Markit services PMI continues to expand despite thecontraction in manufacturing. In addition, the industry created 17m new jobsin 2014, offsetting the decline in manufacturing jobs.

Industry contributions to GDP Caixin/Markit PMIs

Source: NBS, Markit, CEIC, Wind, CLSA

O2O services in great demandO2O is a desirable business model for service providers, given Chinas pooroffline distribution channels; underutilised capacity across many sectors; anda fragmented market of mostly independent service providers with weakmarketing capabilities.

The O2O business model works well in China, where O2O services have greatpotential given the high economies of scale and the ability to deploy a low-cost sales force to scale the business. Chinas population is also concentrated incities rather than suburbs: 15 Chinese cities have over 10m people and 276 haveover 1m people, whereas 30 European cities have over 1m population and just10 US cities have over 1m residents.

Demand for services is also strong. Chinas O2O GMV has jumped with moreplayers and investment, growing at 200% YoY for takeout delivery, 161% YoYfor groupbuy and 50% YoY for travel so far in 2015.

42 43 43 44 44 44 46 47 48 53

0

20

40

60

80

100

2006200720082009201020112012201320141H15

(%) Pr imary Secondary Tert iary

45

50

55

60

2010 2011 2012 2013 2014 2015

(%) Caixin/Markit services PMI

Caixin/Markit manufacturing PMI

O2O rides on thebooming serviceindustry in China

Tertiary industrycontributed 53% of

total GDP in 1H15

Service industry is acritical driver of

Chinas economy

O2O is a broadconcept digitisingoffline commerce

O2O is a desirablebusiness model for

merchants andservice providers


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Takeout delivery GMV Groupbuy GMV

Source: Eguan, CLSA Source: Tuan800, CLSA

Consumer service market to be Rmb11tn by 19CLWe estimate the consumer-service market could be worth Rmb11tn by 2019.The restaurant segment is the largest with a 41% share, followed by travel,

healthcare and education, with the top four segments accounting for 90% oftotal service spending. We believe O2O services could generate Rmb2.5tn inGMV and Rmb156bn in revenue by 2019 with an average take rate of 6.2%.O2O service operators already enjoy take rates of 5% for restaurants, 10%for food delivery and 15% for hotels. They are currently lossmaking, due tohigh subsidies to gain users. But subsidies will decline as the marketconsolidates and matures; and we believe the long-term Ebit margin could besustained at c.25%.

Service spending breakdown (2014) Online penetration by service segment

Source: Euromonitor, CLSA Source: CLSA

Consumer service market (2014) Consumer service market (19CL)

Source: Euromonitor, CLSA

2.2 3.1 3.9 6.0 4.3 8.2

45

23

56

(29)

92

(60)

(30)

0

30

60

90

120

0

2

4

6

8

10

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

(%)(Rmbbn) Takeout GMVQoQ growth (RHS)

310

14 29 77

184

46

108

161

0

2040

60

80

100

120140

160180

200

220

0

10

20

30

40

50

60

70

80

90

1H11 1H12 1H13 1H14 1H15

(%)(Rmbbn) Groupbuy GMVYoY growth (RHS)

Restaurant41.3%

Travel28.7%

Healthcare12.9%

Education7.2%

Bath/Spa 4.5%

Hair/beauty4.0%

House keeping1.0%

Entertainment0.4%

0

10

20

30

40

50

6070

80

90

100

2014 15CL 16CL 17CL 18CL 19CL

(%)Rest au rant ex-t ake-o ut T ake -o utTravel HealthcareEntertainment Others

Consumer expenditureRmb23tn

Consumer serviceaddressable byO2O business

modelRmb6.8tn

O2O GMVRmb0.5tn

Consumer serviceaddressable by

O2O business modelRmb10.7tn

O2O

servicesGMVRmb2.5tn


GMV up 200% YoYfor takeout delivery

and 161% YoYfor groupbuy

O2O services could bean Rmb11tn

addressable market inthe next five years

Restaurant is thelargest spending

category


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O2O service revenue (19CL)

Segment Market size(Rmbbn)

Onlinepenetration

(%)

Online GMV(Rmbbn)

Take rate(%)

Onlinerevenue

(Rmbbn)

Ebitdamargin (%)

OnlineEbitda

(Rmbbn)

Dineout 3,897 15.0 = 572 5.0 = 29 20.0 = 5.7

Section 4 9% Cagr c.6% today 47% Cagr Similar withtodays rate

Yelp 2Q15

Takeout 587 58.0 = 340 8.0 = 27 25.0 = 6.8

Section 5 14% Cagr c.13% today 87% Cagr Grubhub &JustEat at 15%

Grubhub 33%Just Eat 24%

Grocery1 5,300 5.7 = 3001 na = 3001 7.0 = 21.11

Section 6 5% Cagr c.6% inthe UK today

Online plusO2O

Direct sales Online plusO2O

OcadosEbitda margin

Travel 3,037 44.0 = 1,339 6.0 = 80 20.0 = 16.1

Section 7 9% Cagr c.70% flights &

c.30% hotels

34% Cagr 12% hotels,

5% transport

Agency model Ctrip at 23%,

Qunar at 17%

Entertainment 92 80.0 = 74 5.0 = 4 20.0 = 0.7

Section 8 25% Cagr c.60% today 40% Cagr Similar withdine-out today

Home/beauty 750 8.0 = 60 9.0 = 5 22.0 = 1.2

Section 9 3% Cagr c.2-5% today c.5-10%

Healthcare 1,522 3.0 = 50 10.0 = 5

Section 10 12% Cagr c.2% today 29% Cagr

Education 771 8.0 = 62 9.0 = 5

Section 11 10% Cagr

Total exgrocery

10,655 23.4 = 2,497 6.2 = 156

We exclude online grocery in our O2O GMV and revenue estimates as most O2O service providers mainly offer delivery service (not products),which attracts users and generates scale but has low revenue. Source: CLSA

Winners and losersO2O is still in the landgrab phase and competition is fierce. Most players are

small and the market is crowded with new entrants. Currently, Meituan and

Dianping are the leading O2O service providers as Chinas largest groupbuy

platforms. Ele.me is the second-largest in food delivery. 58 Home is growing

share in niche markets such as housecleaning, nanny, beauty, moving and

carwashing given its strong presence in classified ads. However, we believethe current leaders will lose market share and Baidu, Tencent and Alibaba will

be the ultimate winners in O2O service distribution. We expect Baidu and

Tencent to be the largest one-stop O2O-service platforms, while Alibaba leads

in O2O healthcare and financial services.

Chinese O2O stocks under coverage

Name Rec Price Target

price

Mkt cap

(US$m)

PE (x) EPS 3Y %

(16-18CL)

PE/G

(x)

15CL

EV/Ebitda (x) P/sales (%) 15CL

ROAE

(%)

15CL net cash

% of mkt capCurr 29 Oct 15CL 16CL 15CL 16CL 15CL 16CL

Alibaba BUY US$ 82.22 100.00 203,891 34.9 30.7 31.8 1.1 39.7 30.9 17.0 13.1 27.6 4.3

Tencent BUY HK$ 148.00 185.00 179,536 39.7 30.2 27.4 1.4 24.7 19.1 11.6 9.3 30.2 5.6

Baidu BUY US$ 168.99 225.00 59,401 32.5 25.5 29.0 1.2 23.4 17.0 5.7 4.5 19.3 13.1

JD.com BUY US$ 27.69 35.00 38,287 na na na na na 54.7 1.4 0.9 (6.9) 3.1

Ctrip U-PF US$ 87.91 96.00 12,359 na 140.6 134.4 na 105.3 127.8 6.9 5.0 2.4 0.8

58.com SELL US$ 52.31 48.00 8,874 na na na na na na 13.5 8.7 (24.5) (6.0)

Qunar SELL US$ 46.27 40.00 6,059 na na na na na na 9.9 6.1 nm 1.2

Note: Alibaba PE is non-Gaap. Source: Bloomberg, CLSA

Baidu, Tencent andAlibaba to be the

winners in O2Oservice distribution


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Proprietary consumer studyWe conducted an online-consumer study with 573 people in 10 major O2O

services (27 subcategories). Chinas O2O adoption rate is extremely high,with over 70% of respondents having booked food delivery, restaurants,

movie tickets, hotels and taxis on mobile apps. About 65% had increased

usage in the past six months and over half expect to use more. Over 70% of

O2O users have increased overall consumption and half already spend more

online than off.

Subsidies matter, but over half of our panel say they will continue to use O2O

services even if subsidies drop. Each user generally downloads two O2O apps

per category for price comparison and as a backup. The overwhelming

number of O2O service apps has confused users. About 73% of respondents

want a one-stop O2O service platform with unified user interface and search.

Alipay and Weixin are the top choices. Currently, Alipay, Meituan and Weixinare rated as the best entry points for O2O services.

% of users who will continue to use theservice without subsidies

If consolidated under a big platform,which app do you prefer?

Source: CLSA

Food: Dineout, takeout and groceryRestaurants are the largest service segment and the main battleground among

O2O service platforms. Chinese spent around Rmb7tn on food in 2014:

Rmb3bn at restaurants (dineout and takeout) and Rmb4bn on groceries.

Restaurant groupbuy is one of the most popular O2O service formats in

China. Unlike Groupon, Chinas groupbuy platforms focus on high-frequency

services such as restaurant deals, which make up 60% of Chinas groupbuy

GMV. Takeout is 10% of the restaurant market and growth has jumped, as the

backend can be easily connected online, it is great for user acquisition and itsdelivery team can support other O2O services. Chinas restaurant O2O GMV

grew 200% YoY in 2015. Online grocery is another Rmb4tn market

opportunity, although monetisation is more difficult.

Dineout O2O GMV Takeout delivery O2O GMV

Source: CLSA

82.276.2

72.964.3

60.157.656.555.8

53.052.7

50.949.048.5

46.344.7

41.6

20 40 60 80 100

GroupbuyFood delivery

Movie ticketingTransport ticketing

Doctor apptTaxi hailing

Local activitiesHotel booking

MassageCar care

Online pharmacyGrocery delivery

BeautyCar/driver hailing

AttractionHome cleaning

(%)

0 10 20 30 40 50 60 70

JD

58

Baidu Map

Mobile Baidu

Baidu Nuomi

Dianping

QQ

Meituan

Taobao

Weixin

Alipay

(%)

83 165 248 347 451 572

0

100

200

300

400

500

600

700

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

47% 5Y Cagr

15 45 113 203 284 340

0

50

100

150

200

250

300

350

400

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

87% 5Y Cagr

Chinas O2O adoption

rate is extremely high

Over half of our panelwill continue to use

O2O services even ifsubsidies drop

Alipay and Weixin thepreferred one-stop

O2O service platforms

Restaurant is thelargest service

segment

Expect 47% O2Odineout GMV Cagr toRmb572bn by 19CL


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TravelTravel was the first and one of the biggest online services, covering hotel

bookings and flight ticketing to, most recently, car-hailing. There are twomain types of travel apps: online travel agents (OTA) and local travel. Ctripand Qunar dominate the OTA market with over 80% share. They holdaggregate volume shares of 24% in hotel booking and 59% in air ticketing.Mobile internet has accelerated online penetration to low-tier cities and theextensive range of leisure-travel products, special promotions and speedyservice have also attracted more users.

Didi-Kuaidi and Uber dominate local travel. Didi-Kuaidi is a monopoly taxi-booking app with over 1.35m taxi drivers in 360 cities nationwide, servicingabout 4m orders per day. However, it faces intense competition from Uber inprivate car-hailing. Uber has partnered with Baidu and has integrated withBaidu Map and Baidu Wallet. Private car-hailing has much larger revenue

potential than taxis.

Online travel GMV Composition of travel industry


Housekeeping and beautyO2O home services are popular in China. Users can book housekeeping,nanny, hairdressing and massage services online. Service providers areprofessionals from offline stores and we find service quality is comparable orbetter than in the stores. Home and beauty services are individually smallO2O markets, led by small players such as Meituan, 58 Home (nanny service,moving), eJiaJie (housecleaning), eDaixi (laundry) and Heilijia (massage), butmost are available on big O2O service platforms for traffic.

HealthcareThe healthcare sector is likely to adopt the O2O model gradually, givencomplex regulations, but the potential is large. The government faces growing

pressure to promote private healthcare to cope with rising demand from anageing population, increasing awareness and pollution. Currently, there aretwo main services: online pharmacy and doctor appointments. Alibaba leadsin online pharmacy and providing cloud-based IT and payment solutions toconnect public hospitals. Alibaba, Tencent and Baidu compete on consumer-end healthcare services such as doctor appointments, which could open upopportunities in consultation, prescription drug sales and health monitoring.

EducationChinas online education market had expanded at a 19% five-year Cagr toRmb100bn by 2014, according to iResearch. Growth is strong but notspectacular. A pure online model is difficult to implement, as individuals lack

self-discipline. An online-plus-offline business model will work better andaccelerate growth. Higher education is currently the biggest online educationsegment, but demand is growing fastest for vocational training and languagestudies, given the economic changes in China.

308

455

621

828

1,068

1,339

0

300

600

900

1,200

1,500

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

34% 5Y Cagr Air17%

Rail24%

Bus21%Local & other

transport5%

Accommodation33%

Travel is the

second-largestO2O subsegment

Didi-Kuaidi and Uberdominate local travel

Consumers can booknumerous home

services online

Healthcare sector

likely to adopt O2Omodel slowly

Online education

expanded at 19%five-year Cagr to

Rmb100bn by 2014

Expect c.34% onlinetravel GMV Cagr toRmb1.3tn by 19CL


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Section 1: Digitising traditional businesses China internet


Digitising traditional businessesThe internet is digitising the service industry - Chinas new growth pillar. O2O

is the new big thing. China is a world leader in developing O2O services inmarkets such as restaurants, travel and housekeeping. We estimate the

consumer service market could be worth Rmb11tn by 2019. O2O services

could generate Rmb2.5tn GMV and Rmb156bn revenue by 2019. The market

is still in its infancy. The current leaders (Meituan, Dianping, Ele.me) will lose

market share. Baidu and Tencent will likely be the largest one-stop O2O

service platforms while Alibaba leads O2O healthcare and finance services.

What is O2O?O2O is a broad concept digitising offline commerce. Offline retailers and

service providers leverage on internet technologies, data and traffic to attract

consumers and improve operational efficiency. This could be a gamechanger,

particularly for the service industry. While e-commerce involves sellingphysical goods online, O2O allows local services to go online. Consumers are

still served offline, but they can make reservations, order, download coupons,

pay and write reviews of the services online.

Service industry is Chinasnext growth pillarThe service industry is the fastest-growing economic sector and a critical

driver of the Chinese economy. Chinastertiary industry continued to grow at

double digits (11% YoY nominal) in 2014 and 1H15, while overall nominal

GDP rose by 7-8%. The official services PMI remained in expansion at 53.4 in

September, despite a contraction in manufacturing PMI at 47.8.

Figure 1 Figure 2

Chinastertiary sector growth Industry contributions to GDP

Figure 3 Figure 4

Official services PMI stays above 50 Caixin/Markit PMIs

Source: NBS, Markit, CEIC, Wind, CLSA

The service sector is a key growth engine for Chinas economy over the next

decade. Its contribution to Chinese GDP reached 53% in 1H15 and isnarrowing the gap with developed economies (70-80%). With increasing

weighting of the high growth tertiary industry to GDP, China believes it could

stabilise GDP growth.

18

26

18

13

18 19

13 14

11 11

0

5

10

15

20

25

30

2006 2007 2008 2009 2010 2011 2012 2013 2014 1H15

(%) Tertiary GDPOverall GDP

42 43 43 44 44 44 46 47 48 53

0

20

40

60

80

100

2006200720082009201020112012201320141H15

(%) Pr imary Secondary Tertiary

48

50

52

54

56

58

60

2010 2011 2012 2013 2014 2015

(%) Official services PMIOfficial manufacturing PMI

45

50

55

60

2010 2011 2012 2013 2014 2015

(%) Caixin/Markit services PMI

Caixin/Markit manufacturing PMI

O2O is a broad concept

digitising offlinecommerce

Tertiary industry grew11% YoY in 2014

and 1H15

NBS services PMI was

53.4 in Sep 15 while

manufacturing PMI fellto 47.8

Service industry is a

critical driver of theChinese economy

Internet is digitising

the business modelof service industry


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Figure 5 Figure 6

Service sector contribution to GDP Service contribution to GDP (2014)


Services are also creating the most jobs. The tertiary industry added 17m net

new jobs in 2014, compared to 14m net job losses in the primary industry

and 1m net job losses in the secondary industry.

Figure 7 Figure 8

Employment by industry Net job creation by industry

Source: CEIC, CLSA

Saving remains high in China at a steady 40% of disposable income or 50%

of GDP, well above the developed economies 10-20%. This could change.

Chinas post-1990 generation has grown up in affluent families under the one-

child policy. They are raised in a stronger and globalised China. They are

better educated than their parents, more tech-savvy and willing to spend.

Figure 9 Figure 10

Gross savings as % of GDP Savings as % of disposable income

Source: World Bank, CLSA Source: Euromonitor, CLSA

O2O boosts growth

From a service providers perspective, O2O is a desirable business model due

to Chinas poor offline distribution channels; underutilised capacity across

many sectors; and a fragmented market of mostly independent service

providers with weak marketing capabilities. For example, over 90% ofrestaurants and 70% of hotels in China operate independently, compared with

just 64% of restaurants and 43% of hotels in the USA. Competition is also

30

40

50

60

70

80

90

2009 2010 2011 2012 2013 2014

(%)

China Japan USA UK

47

73 78 79

0

10

20

30

40

50

60

70

80

90

China Japan USA UK

(%)

38 37 35 34 31 30

28 29 30 30 30 30

34 35 36 36 38 41

0

20

40

60

80

100

2009 2010 2011 2012 2013 2014

(%) Primary Secondary Tertiary

(20)

(15)

(10)

(5)

0

5

10

15

20

25

2009 2010 2011 2012 2013 2014

(m) Primary Secondary Tert ia ry

0

5

10

15

20

25

30

35

40

45

2009 2010 2011 2012 2013 2014

(%)

China Japan USA UK

0

10

20

30

40

50

60

2009 2010 2011 2012 2013

(%)

China Japan USA UK

O2O is a fast growing andlucrative market in China

given poor offlinedistribution channels

Services contribution to

GDP reached 53% in

1H15, narrowing the gapwith developed

economies

Tertiary industry added17m net new jobs in 2014

China savings remain high

at 40% of disposableincome or 50% of GDP


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intense as the hotel occupancy rate was only 53% in China in 2014. This is

why online travel agents such as Ctrip and Qunar continue to record strong

sales-volume growth (60%, versus 20% for Expedia in the USA).

Figure 11 Figure 12

Independent restaurants as % of total Independent hotels as % of total


The O2O business model works well in China. The service is relatively small in

developed markets such as the USA, mostly because it requires a large sales

force to sign up offline merchants and sufficient scale to justify the cost.

However, Chinese labour costs are much lower than in developed markets.

Leading players such as Meituan, Dianping and Ele.me all have 10,000-

15,000 sales staff to acquire merchants and maintain relationships.

Chinas high population density also helps to create scale. Chinas land area is

similar to the USAs and roughly 2.2 times the size of the EU. But China has a

larger population, which is concentrated in the eastern region: 45% of the

population lives on 29% of the land area in eight coastal provinces and thethree municipalities of Beijing, Shanghai and Tianjin. The population is also

concentrated in cities rather than suburbs: 15 Chinese cities have over 10m

people and 276 have over 1m people, whereas 30 European cities have over

1m population and just 10 US cities have over 1m residents.

Figure 13 Figure 14 Figure 15

Population of top Chinese cities Population of top European cities Population of top American cities

Source: CEIC, Eurostat, US Census, CLSA

Online services in great demand

Strong demand for local O2O services is also evidenced by rapid takeup by

consumers. Online food delivery is the poster child for Chinas rapid expansion

in O2O in 2015. Total orders and GMV almost doubled QoQ in 2Q15,

according to Eguan. In 1H15, overall online food-delivery GMV reached

Rmb12.5bn, almost equalling 2014s full year figure of Rmb15bn. This was

primarily driven by heavy promotions and significant discounts given toencourage adoption. First-time customers can enjoy up to a 50% discount.

The average subsidy is Rmb8-12 per order or about a 33% discount.

98

78

64

0

10

20

30

40

50

60

70

80

90

100

China UK USA

(%)70

65

43

0

10

20

30

40

50

60

70

80

China UK USA

(%)

0

5

10

15

20

25

30

Chongqing

Shanghai

Beijing

Tianjin

Chengdu

Guangzhou

Baoding

Zhoukou

Shenzhen

Fuyang

Shijiazhuang

Suzhou

Wuhan

Linyi

Nanyang

Harbin

Zhengzhou

Handan

Weifang

Wenzhou

(m)

0

5

10

15

20

25

30

London

Paris

Berlin

Madrid

Barcelona

Milano

Napoli

Athina

Manchester

Roma

Bucuresti

Lisboa

Hamburg

Budapest

Warszawa

Wien

Stockholm

Mnchen

Lyon

Dublin

(m)

0

5

10

15

20

25

30

NewYork

LosAngeles

Chicago

Houston

Philadelphia

Phoenix

SanAntonio

SanDiego

Dallas

SanJose

Austin

Jacksonville

SanFrancisco

Indianapolis

Columbus

FortWorth

Charlotte

Detroit

ElPaso

Seattle

(m)

Over 90% of restaurantsand 70% of hotels in

China are independent

Strong demand for localO2O services evidenced

by rapid takeup

Chinas low labour costsenable O2O players to

hire a large sales force

Chinas populationdensity generally higher

than Europe and the USA


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Figure 16 Figure 17

Online food-delivery order volume Online food-delivery GMV

Source: Eguan, CLSA

Fast growth is not limited to new O2O services. Segments with a long

operating history such as groupbuy and travel also continue to expand, withGMV and revenue growth accelerating in 2015. Overall groupbuy GMV was up

161% YoY in 1H15 according to Tuan800, while online travel GMV could be up

50% YoY. This is driven by mobile internet, which allows consumers to make

reservations online in more scenarios, product innovation by market leaders

and geographic expansion into lower-tier cities.

Figure 18 Figure 19

Groupbuy GMV Ctrip and Qunars revenue growth

Source: Tuan800, CLSA Source: Companies, CLSA

Chinas O2O users jumped to 280m in 2014, about 20% of the total

population or about 45% of internet users. The increase was driven by

expansion of O2O services into lower-tier cities. For example Meituan and

Ele.me now cover 200-plus cities for food delivery service, while taxi-hailing

app Didi-Kuaidi has drivers in 360 cities nationwide. Currently just under halfof all O2O services are in tier-3 or lower cities.


Number of O2O users O2O users by city tier O2O user growth by city tier

Source: Sootoo, Talking data, CLSA

40 67 79 190 176 350

68

18

141

(7)

99

(50)

0

50

100

150

200

0

50

100

150

200

250

300

350

400

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

(%)(m) Takeout ordersQoQ growth (RHS)

2.2 3.1 3.9 6.0 4.3 8.2

45

23

56

(29)

92

(60)

(30)

0

30

60

90

120

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4

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1Q14 2Q14 3Q14 4Q14 1Q15 2Q15


3

10

14 29 77

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46

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161

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1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

(% YoY) Ctrip Qunar

82

135

185

280

367

20

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80

0

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2011 2012 2013 2014 15F

(%)(m) UsersYoY growth (RHS)

Tier 118%

Tier 238%

Tier 3 &others44%

2527

18

0

5

10

15

20

25

30

Tier 1 Tier 2 Tier 3 & others

(%)

Older O2O servicesgroupbuy and travel alsosaw acceleration in 2015

Total orders and GMValmost doubled QoQ

in 2Q15


13/208



Consumer services market to be Rmb11tn by 19CLWe estimate the consumer-service market could be worth Rmb11tn by 2019.

It is a subsegment of Chinas consumer expenditure (Rmb23bn in 2014, one-third of Chinas nominal GDP). Consumer expenditure includes broader

spending on physical goods and services, food and beverage, apparel,

housing, household goods, transport, education, healthcare, communications

and others.

Figure 23 Figure 24

China consumer spending Consumer spending breakdown (2014)


Excluding physical products sales (eg, apparel) and certain categories that

are not addressable by O2O business models, such as housing, utilities and

financial services expenditure, we estimate the consumer-service market wasRmb7tn in 2014 and could reach Rmb11tn by 2019.

Figure 25 Figure 26

Consumer-service market (2014) Consumer-service market (19CL)


12 14 17 19 21 23

14

20

13

11 11

0

5

10

15

20

25

0

5

10

15

20

25

2009 2010 2011 2012 2013 2014

(%)(Rmbtn) Consumer expenditure

YoY growth (RHS)

F&B 29%

Housing17%

Apparel 9%Transport 7%

Healthcare 7%

Householdgoods & services

6%

Communications4%

Hotels and

catering 4%

Leisure andrecreation 3%

Education 2%

Others 12%


Consumer serviceaddressable byO2O business

modelRmb6.8tn

O2O GMVRmb0.5tn

Consumer serviceaddressable by

O2O business modelRmb10.7tn

O2Oservices

GMV

Rmb2.5tn


O2O services could be anRmb11tn addressable

market in five years

Addressable market wasaround Rmb7tn in 2014


14/208



The restaurant segment was the biggest at 41% of total expenditure in 2014,followed by travel (29%), healthcare (13%) and education (7%), with the topfour segments accounting for 90% of consumer-service spending.

Figure 27 Figure 28

Consumer-service spending Service spending breakdown (2014)

Source: CLSA

DineoutChinese spent around Rmb7tn on food and beverages in 2014: about Rmb3bnat restaurants (dineout and takeout/delivery) and Rmb4bn on groceries (foodat home). We forecast the dineout market to see a 9% five-year Cagr toRmb3.9tn by 2019.


Dineout GMV Dineout online penetration O2O dineout GMV

Source: NBS, Euromonitor, CLSA

Restaurant services are booming in China. Apart from business

entertainment, more people are going to restaurants, teahouses and cafes fordaily meals and gathering with friends. The frequency of eating out is alsorising as middle-class spending power grows. Dining out is an importantleisure activity over weekends and holidays. Good restaurants are importanttools for shopping malls to attract customers. Even luxury brands such asGucci have opened cafes to draw traffic, while LVMH acquired the Crystal Jaderestaurant chain in 2014.

Chinese groupbuy sites were early providers of O2O services and theyoperate differently from Groupon in the USA. Groupon focuses on low-frequency, high take-rate items; and merchants use the platform for brandpromotions. In contrast, Chinese groupbuy platforms sell high-frequency, low

take-rate items and merchants use them to drive sales volume. Over 60% ofChinas groupbuy GMV today is on restaurant deals. Unlike Groupon, theChinese counterparts offer daily or even real-time deals. Consumers cangenerally download and use discount coupons in restaurants right away.

6.2 6.8 7.4 8.1 8.9 9.7 10.7

0

2

4

6

8

10

12

2013 2014 15CL 16CL 17CL 18CL 19CL

(Rmbtn)

9.5% 5Y Cagr

Restaurant41.3%

Travel 28.7%

Healthcare12.9%

Education

7.2%

Bath/Spa

4.5%

Hair/beauty

4.0%

House keeping

1.0% Entertainment0.4%

2,4

87

2,7

11

2,9

68

3,2

50

3,5

59

3,8

97

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

9% 5Y Cagr

3.3

6.1

8.3

10.7

12.7

14.7

0

2

4

6

8

10

12

14

16

2014 15CL 16CL 17CL 18CL 19CL

(%)

83 165 248 347 451 572

0

100

200

300

400

500

600

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

47% 5Y Cagr

Restaurant services are

booming in China

Chinese groupbuyplatforms were early

providers of O2O services

Chinese spent around

Rmb7tn on food andbeverages in 2014

The restaurant segmentwas the biggest


15/208



Groupbuy GMV growth jumped in 2H13 with rising smartphone penetration

and growing location-based services. GMV growth accelerated further in 1H15

and was up nearly 200% YoY, as groupbuy sites expanded beyond catering totakeout delivery, home services, hotels and others. Groupbuy 1H15 GMV was

bigger than in the whole of 2014. We expect the momentum to continue,

given increased promotions from leading players.

Figure 32 Figure 33

Quarterly groupbuy GMV Semi-annual groupbuy GMV

Figure 34 Figure 35

Annual groupbuy GMV Groupbuy GMV breakdown

Source: Tuan800, CLSA

The groupbuy market has already consolidated, with Meituan, Dianping and

Nuomi the leaders. Meituan is the largest player with a 50% market share,

according to Tuan800. It has strong execution capability in acquiring offline

merchants and has been fast in penetrating low-tier cities. Dianping has a

30% market share and is perceived as the Yelp of China. It has strong brand

in top-tier cities but has been relatively slow to penetrate lower-tier cities.

Figure 36Groupbuy market share

Source: Tuan800, CLSA

7 7 10 12 13 16 22 24 30 46

98

120 115102

131

186

0

40

80

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200

240

05

10152025303540455055

1Q13

2Q13

3Q13

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1Q14

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4Q14

1Q15

2Q15


3 10 14 29 77

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46

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161

0

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21 36 75 190

68

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155

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2012 2013 2014 15CL


50.6 56.9 55.7 61.8 63.4

0

20

40

60

80

100

1H13 2H13 1H14 2H14 1H15

(%)

Catering Entertainment HotelLifestyle Others

0

10

20

30

40

50

60

70

Jan13

Feb13

Mar13

Apr13

May13

Jun13

Jul13

Aug13

Sep13

Oct13

Nov13

Dec13

Jan14

Feb14

Mar14

Apr14

May14

Jun14

Jul14

Aug14

Sep14

Oct14

Nov14

Dec14

Jan15

Feb15

Mar15

Apr15

May15

Jun15

(%) Meituan Dianping Nuomi Others

Groupbuy GMV growthaccelerated further in

1H15 and was up nearly200% YoY

Groupbuy GMV growthjumped in 2H13 with

rising smartphone

penetration

Groupbuy market hasalready consolidated with

leading players Meituan,Dianping and Nuomi

Strong momentum shouldcarry into 2H15, givenincreased promotionsfrom leading players

Meituan is the largestgroupbuy player


16/208



In October 2015, Meituan and Dianping announced a merger, which wouldcreate Chinas largest O2O and groupbuy services platform. However, the newcompany will maintain a co-CEO structure and the Meituan and Dianpingbrands will operate separately, including the overlapping high-frequencygroupbuy coupons and restaurant instant-discount businesses. Thetransaction accelerated industry consolidation, which is good for all players,but the competitive landscape is unlikely to change significantly as Dianpingand Meituan will continue to operate separately.

Nuomi was owned by Renren, but was sold to Baidu in February 2014. Baiduhas ramped promotions on Nuomi since early 2015. Replicating AlibabasDouble-11 (Bachelors Day) success, Nuomi launched promotional days toencourage users to sign up and boost sales. Nuomi recorded Rmb73m in GMVon its first promotional event on 7 March. Its GMV jumped to Rmb450m on 22August (Chinese Valentines Day).

Baidu estimates Nuomis groupbuy market share increased from c.10% inJanuary 2015 to c.20% in July 2015. Baidus measure differs from Tuan800smarket share data, as Tuan800 can only properly track GMV on PCs andMeituans tracked GMV includes travel deals, which are not like-for-like withNuomi. Baidus subsidiary Qunar offers most of the travel-related productsinstead of Nuomi. Baidu is confident of overtaking Dianpings scale by end-2015 and ultimately becoming No.1 in the groupbuy market.

Takeout deliveryTakeout delivery faces the fiercest competition among major O2O services.Chinas overall takeout-delivery market was around Rmb300m in 2014, 10%of the total restaurant market. However, it is ideal for acquiring users, as:

The backend is easily connected online.

Order sizes are small and repeat purchase frequency is high.

Each purchase requires online payment.

Gross take rate is high at 10-15%.

Delivery team can support other O2O services such as online grocery andmedicine sales.


Takeout-delivery GMV Takeout-delivery online penetration Online takeout-delivery GMV


Online takeout-delivery GMV is growing at a phenomenal rate. Meituan andEle.me are the largest players with 30-40% market shares, followed byBaidu. Baidu only launched food-delivery services in October 2014 and itcurrently covers only 100 cities, compared to over 200 cities for Meituan and

Ele.me. However, it has the largest share among white-collar workers in halfof its covered cities. Baidu Waimai just raised US$250m from private fundingfor expansion. Ele.me also raised US$650m of new capital in August.

299 344 395 452 515 587

0

100

200

300

400

500

600

700

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

14% 5Y Cagr

5.0

13.1

28.5

44.8

55.058.0

0

10

20

30

40

50

60

70

2014 15CL 16CL 17CL 18CL 19CL

(%)

15 39 78 117 152 193

0

50

100

150

200

250

300

350

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

87% 5Y Cagr

Baidu has rampedpromotions on Nuomi

since early 2015

Baidu is confident ofovertaking Dianping

by end-2015

Takeout delivery faces thefiercest competitionamong O2O services

Online takeout-deliveryGMV is growing at a

phenomenal rate

Meituan and Dianpingannounced merger

in October 2015
https://www.clsa.com/member/company/index.asp?clsa_id=320011449https://www.clsa.com/member/company/index.asp?clsa_id=320011449http://www.clsa.com/


17/208



Figure 40 Figure 41

Takeout-delivery orders Takeout-delivery GMV

Source: Eguan, CLSA

Takeout delivery orders and GMV almost doubled QoQ in 2Q15. Food takeout

GMV reached Rmb12.5bn in 1H15 according to Eguan, almost the same as

2014 full years Rmb15bn. Heavy promotions and discounts have driven

sales. First time buyers can enjoy as much as 50% discount. Average subsidy

is Rmb8-12 per order or 33% discount.

Figure 42 Figure 43

Takeout-delivery order share Takeout-delivery GMV share

Figure 44 Figure 45

Takeout order share - Students Takeout order share - White-collar

Source: Eguan, CLSA

We recruited four university students in China to try a range of O2O services.

In our takeout-delivery test, we compared the ordering and delivery process,

subsidy offered and customer-service experiences among the four popular

food-delivery mobile apps in four cities. Key findings are:

Restaurant choice. The four delivery platforms have similar coverage,covering a fair variety of chain and independent restaurants as well as

fastfood shops, cafes and snack bars. Our student in Shanghai commented

that Koubei had slightly better coverage, while the other three are similar.

40 67 79 190 176 350

68

18

141

(7)

99

(50)

0

50

100

150

200

0

50

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1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

(%)(m) Takeout ordersQoQ growth (RHS)

2.2 3.1 3.9 6.0 4.3 8.2

45

23

56

(29)

92

(50)

(25)

0

25

50

75

100

125

0

1

2

3

4

5

6

7

8

9

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15


Meituan41%

Eleme39%

Baidu8%

Taodiandian3%

Daojia1%

Others8%

Meituan

35%

Eleme33%

Baidu13%

Taodiandian4%

Daojia2%

Others13%

Meituan48%Eleme

39%

Baidu4%

Taodiandian3%

Others6%

Meituan38%

Eleme34%

Baidu16%

Taodiandian3%

Others9%

Takeout orders andGMV almost doubled

QoQ in 2Q15

Meituan and Ele.me leadmarket share in takeout-

delivery O2O service

Baidu has larger shareamong white-collar

workers than students

Four delivery platformshave similar coverage


18/208



Review. All the platforms encourage users to rate and provide feedback

on restaurants. Our diners commented that quality and quantity of reviews

are better at Koubei and Ele.me, relative to Baidu and Meituan. Subsidies. The four platforms offer various subsidies, including first-time-

user discounts, coupons for orders exceeding a certain threshold, discounts

for use of certain payment channels, red packets to share with friends and

restaurant-specific discounts. Baidu and Ele.me are more aggressive in

providing subsidies, while Koubei is the least aggressive. Koubei is the only

platform that does not provide payment discounts or red packets.

Payment. Aside from Koubei, the apps provide various payment options

including Alipay, Baidu or WeChat Wallet, credit or debit card and cash on

delivery. Alipay is mandatory on Koubei.

Delivery. Half of our orders were delivered by staff of local restaurants.

Baidu and Meituan appeared to have a relative large inhouse deliveryteam, while Ele.me and Koubei teamed up with third-party delivery

companies. Delivery was generally fast at around 40-50 minutes.

Grocery

Chinas food and grocery retail market is worth about Rmb4tn. Unlike

electronics and apparel where online penetration is relatively high at 20-25%,

grocery - especially fresh food - is difficult to sell online due to smaller value

per order, perishable products, fragile packaging and complex logistics

requirements, such as cold-chain. Currently only about 2% of fresh food is

sold online in China. The grocery online penetration rate is also low in

developed economies at 5-6%.


Grocery retail market size Grocery online penetration Online grocery GMV


The grocery industry currently adopts two business models for online sales:

asset-heavy online supermarkets, which require large upfront capital to build

dedicated infrastructure; and flexible O2O agencies that function like a

concierge service. Yihaodian is the largest online grocery store in China but

has struggled to make a profit. The founders sold all their shares to Wal-Mart

this year. Other key players include SF Best and Cofco Womai, which primarily

operate asset-heavy models covering key cities, while dozens of startups such

as Benlai.com and Swbj.com are competing in O2O, mostly in tier-1 and top

tier-2 cities.

Alibaba and JD.com are building a hybrid central-fulfilment-centre-plus-O2Omodel. Alibaba is expanding the geographical coverage of its Tmall

supermarket, which operates an asset-heavy, central fulfilment centre model

with Cainiao Logistics, while the company is also experimenting with O2O

4,176

4,385

4,604

4,834

5,076

5,330

0

1,000

2,000

3,000

4,000

5,000

6,000

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)5% 5Y Cagr

1.6

2.2

2.9

3.8

4.7

5.7

0

1

2

3

4

5

6

2014 15CL 16CL 17CL 18CL 19CL

(%)

67 97 135 183 238 302

0

50

100

150

200

250

300

350

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

35% 5Y Cagr

Chinas food and groceryretail market is worth

about Rmb4tn

Alibaba and JD.com aretrying both approaches

Two business models:online supermarkets and

O2O agencies

Baidu and Ele.me aremore aggressive inproviding subsidies

Half of our orders were

delivered by staff of localrestaurants


19/208



through investee companies. JD has built a cold-chain logistics chain, but it

mainly covers Beijing, Shanghai and nearby areas, offering premium fresh

fruit, imported food and beverages. It is experimenting with the O2O modeland crowdsourced delivery through JD Daojia, which is largely based on

Ubers sharing-economy concept. Its crowdsourced delivery team comprises

freelance local residents paid on a per-delivery basis.

Figure 49 Figure 50

Hypermarket market share (2014) Top five players market share

CREs figure included Tesco in 2014. Source: Euromonitor, Companies, CLSA

JD partners with supermarkets, hypermarkets and convenience stores to offer

O2O grocery services where consumers order online and JD delivers the

products to their homes. In August 2015, JD acquired a 10% stake in Yonghui

Superstores, an A-share-listed chain with 351 retail outlets across 17

provinces. The partnership is intended to secure food product supply and

leverage on Yonghuis cold-chain system. Yonghui is not Chinas largest

supermarket, but 46% of its sales are fresh food, the largest among all.

Travel

Travel is another major consumer spending segment, which we estimate was

worth about Rmb2tn in 2014. We forecast a c.9% five-year Cagr to Rmb3tn

by 2019, boosted by favourable policies and strong demand for outbound

travel. Online travel was the first and most-developed O2O service. Online

migration has accelerated with mobile internet, by penetrating to lower-tier

cities and facilitating last-minute booking, which is common among Chinese

travellers. Growing leisure and outbound-travel products, special promotions

and speedy service have also attracted more users online.


Travel market size Travel online penetration Online travel GMV


Domestic travel benefits from central-government policies. The governmenthas encouraged domestic travel to stimulate consumption; and in August, the

State Council issued a policy to further promote the tourism industry,

14.0 13.9

10.6

6.45.3

3.52.7 2.4 1.9 1.7

02

4

6

8

10

12

14

16

18

SunArt

CRE

Wal-Mart

Carrefour

Yonghui

Bailian

A-Best

CPLotus

Wuhan

Zhongbai

Renrenle

(%)

1.8 2.3

3.13.9

4.55.3

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014

Sun Art CRE

Wal-Mart Carrefour

Yonghui

(%)

1,938

2,112

2,313

2,533

2,774

3,037

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

9% 5Y Cagr

15.9

21.6

26.9

32.7

38.5

44.1

0

5

10

15

20

25

30

35

40

45

50

2014 15CL 16CL 17CL 18CL 19CL

(%)

308

455

621

828

1,068

1,339

0

300

600

900

1,200

1,500

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

34% 5Y Cagr

JD acquired 10% stake inYonghui Superstores

in August

Domestic travel benefitsfrom government policies

JD partners withsupermarkets,

hypermarkets andconvenience stores

Travel is another majorsegment, worth about

Rmb2tn in 2014


20/208



including encouraging 2.5-day weekends in the summer, as some employees

cannot use up their annual leave and some worry that taking holidays could

affect their careers. The statement also criticised the underdevelopment oftourist sites and their infrastructure and encouraged more investment.

Outbound travel is still in its infancy. Chinese tourists are travelling to many

destinations for the first time, while renminbi strength against Asian

currencies and the euro makes travelling and shopping overseas highly

appealing. Japan is the top destination and a shopping paradise for Chinese

visitors. Travel to Korea is recovering after Mers. Thailand is another popular

destination, but the Bangkok bombing has hurt near-term demand. Longhaul

travel to Europe and the USA saw high demand during the summer holidays.

Ctrip, eLong and Qunar dominate the online travel market. Ctrip and Qunar

account for an aggregated 24% of hotel-booking volume and 59% of air-ticketing volume. Airlines commission-rate cuts have squeezed out small

players and increased Ctrip and Qunars share gain. Both continue to grow

volume and commission revenue at over 50% YoY in hotel-booking and air-

ticketing services in 2015.


Hotel room-nights sold Hotel room-nights sold growth YoY Hotel booking revenue growth YoY


Flight ticketing volume Flight ticketing volume growth YoY Flight revenue growth YoY

Source: Companies, CLSA

Ctrip continues to accelerate revenue growth (46% YoY in 1H15) and market

share gain by:

Opening up its platform to third-party travel agents. About 60% of air

tickets come from third parties. Ctrip does not charge a commission on

these sales, but bundles third-parties cheaper air tickets with insurance or

other products, which provide an equivalent commission rate of about 4%.

0

5

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25

30

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3Q13

4Q13

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(m)

Ctrip Qunar eLong

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Ctrip Qunar eLong

(50)

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(& YoY)

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(m)Ctrip Qunar

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Ctrip Qunar(% YoY)

0

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100

2Q13

3Q13

4Q13

1Q14

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1Q15

2Q15

Ctrip Qunar(% YoY)

Outbound travel is still inits infancy

Ctrip continues toaccelerate revenue

growth and market share


21/208



Strengthening outbound products by partnering with Priceline and Expedia,setting up a local team stationed overseas to create self-organised tour

products, forming the SkySea Cruise JV with Royal Caribbean andacquiring packaged-tour wholesaler Hytours. Outbound travel contributed30% of flight revenue and 65% of package tour revenue in 2Q15.

Ctrip acquired a 37.6% stake in eLong (48% voting rights) to become thelargest shareholder of the company. Since the acquisition, eLong and Ctriphave reduced couponing at high-end hotels, which account for 70% ofCtrips revenue. Ctrip will reallocate some the couponing to grow share inthe mass leisure-travel market.

Upgraded its technology platform, which also allows Ctrip to penetrate themass leisure-travel market cost-effectively.

Qunar has also accelerated revenue growth by:

Aggressive offline marketing. Qunar sends teams to hotels and touristattractions to meet travellers, assist customers to download its mobileapp, open accounts and register their payment cards with Qunar. Usersreceive discount red packets in return.

Introduction of a merchant model. The company will bear inventory riskson vacation packages and hotels in popular destinations and during peakseasons. We believe that while this could help Qunar gain high-end users,it increases inventory risk in a weak macro environment.

Car hailingCar-hailing apps are a popular O2O service in China. Instead of fighting for

taxis, users can preorder a ride easily on their smartphones. Didi-Kaudi is theleading player, backed by Tencent and Alibaba. According to media reports,the platform received US$3bn in new funding this summer.

Uber has partnered with Baidu in China. Uber China just raised US$1.2bn innew funding to expand its service coverage from the current 20 cities to 100cities by yearend. Ubers CEO loves China, as users are highly adoptive ofnew apps and services and the market is growing fast. Uber China has fullyintegrated with Baidu Map and set Baidu Wallet as its default paymentplatform.


China taxi market size O2O taxi GMV O2O private car-hailing GMV

Source: CLSA

Tencent, Alibaba and Baidu are heavily subsidising car-hailing apps as this is

fastest way to acquire mobile-payment users. While taxi apps have lowrevenue-growth potential, private car-hailing apps can be a lucrative market:we forecast Rmb80bn in GMV and a 20% take rate by 2019.

304 316

328 339

350 361 371

0

50

100

150

200

250

300

350

400

2014 15CL 16CL 17CL 18CL 19CL 20CL

(Rmbbn)

12

22

32

42

52

63

0

10

20

30

40

50

60

70

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

10

25

41

59

79

0

10

20

30

40

50

60

70

80

90

15CL 16CL 17CL 18CL 19CL

(Rmbbn)

Ctrips revenue growth isdriven by open platform,

better outbound products

and reduced couponing

Qunar has accelerated

revenue growth by offlinemarketing and launching

a merchant model

Car-hailing apps are avery popular O2O service

Uber has partnered withBaidu in China


22/208



EntertainmentChinas movie business saw a strong 31% sales Cagr over the past threeyears, with total box-office revenue reaching Rmb30bn in 2014. We believethe industry could sustain a 30% five-year Cagr to Rmb110bn by 2019,driven by rising user penetration - especially in low-tier cities - better contentand promotions by online ticket sellers. Online movie-ticket sales have grownfast: around 46% of tickets were sold online as of end-2014, but the ratiorose to 63% by 1Q15 and we forecast it to reach 80-90% in five years,implying c.Rmb95bn in revenue by 2019.


Entertainment market size Entertainment online penetration Online entertainment GMV


China annual box-office revenue Movie tickets sold per capita Box-office revenue by channel

Source: CEIC, CLSA

Home and beauty servicesHome and beauty is a fast-growing and fiercely competitive O2O segment inChina. Users can book housecleaning, nanny, hairdressing and massageservices through their smartphone. Service providers are professionals fromoffline stores and we find service quality is comparable or better than in thestores. For example, massage therapists bring the massage table and other

equipment needed to create a spa environment to the customers home.

Home services are individually small markets, led by one-stop platformsincluding 58 Home and Meituan. We estimate housekeeping to be a Rmb60bnmarket and beauty services a Rmb200bn segment in 2015. Small players alsoexist, including eJiaJie (housecleaning), eDaixi (laundry) and Heilijia(massage). They have their own apps, but most of these services are alsoavailable on the big O2O platforms with broader user reach, such as Baidu,Alipay and Weixin.

HealthcareHealthcare is underdeveloped and one of the fastest growing servicesegments in China. Consumer healthcare spending was Rmb1.6bn in 2014according to Euromonitor, of which healthcare service spending (outpatientand hospital excluding healthcare equipment) was Rmb900bn. We estimatethis could rise at a 12% five-year Cagr to Rmb1.5tn by 2019.

30 41 54 67 80 92

0

10

20

30

40

5060

70

80

90

100

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

25% 5Y Cagr

46

60

7075

80 80

0

10

20

30

40

50

60

70

80

90

2014 15CL 16CL 17CL 18CL 19CL

(%)

14 25 38 50 64 74

0

10

20

30

40

50

60

70

80

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

40% 5Y Cagr

0

10

20

30

40

50

60

70

0

5

10

15

20

25

30

35

2007 2008 2009 2010 2011 2012 2013 2014

(Rmbbn) Box-office revenueYoY growth (RHS)

(%)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2007 2008 2009 2010 2011 2012 2013 2014

(tickets)China USA/Canada

0

5

10

15

20

25

30

35

2013 2014 1Q15

(Rmbbn)Online revenue Offline revenue

Home and beauty fast-growing, fiercely

competitive O2O segment

Home services areindividually small O2O

markets

Healthcare is one of thefastest growing service

segments in China

Online movie ticket saleshave grown fast

Around 63% of movietickets were sold online

in 1Q15


23/208



Chinas healthcare system development lags economic reform. Publichospitals still dominate the market. Although China has around 11,000

private hospitals - nearly half the countrys total of 24,000 - the private sectoronly employs around 14% of medical staff and serves about 10% of patients,targeting a niche market. Private hospitals face two big challenges: talent andinsurance coverage. China lacks medical staff and doctors traditionally onlypractice in public hospitals to advance to higher levels. It is also not easy toget public insurance to cover private hospital services as local governmentsprotect public hospitals.


Healthcare industry size Healthcare online penetration Online healthcare GMV


Other problems include a serious mismatch between patients and hospitalsand overprescription. Larger hospitals are packed with patients with minorillnesses, given patient concerns over the quality of smaller hospitals andclinics. Smaller hospitals have low utilisation rates.

China has long kept a tight grip on drug prices to ensure medical costsremain affordable. However, some drugmakers have sacrificed quality to keepprices low. Hospitals are overreliant on drug sales for income, which results inoverprescription, especially for expensive drugs. Public hospitals generate40% of their revenue from prescription-drug sales and are allowed to chargea 15% markup on prescription drugs sold.

However, given poor access to medical support - especially in rural areas -rising medical costs and low insurance coverage, the government initiated anRmb850bn healthcare-reform plan in 2009. It aims to provide affordablemedical services to all citizens by 2020. The reforms include a completeoverhaul of the healthcare system, including building more hospitals,

expanding insurance coverage, updating IT systems and laws governingprivate healthcare investment, pharmaceuticals and medical devices.

China further liberalised the healthcare industry in 2012 by lifting restrictionson foreign investment in private hospitals. In 2014, China raised the foreignownership cap to 70% and allowed 100% foreign direct investment in privatehospitals the Shanghai Free Trade Zone. It also allows public hospitals to sellfranchises to private-sector operators to give patients access to a widerservices. It encourages doctors to work in multiple hospitals or locations.

The 2014 reform plan included bringing private hospitals into the countryspublic medical insurance system and encouraging a private insurance market,allowing fully foreign-owned health insurers to operate in China. It alsoencouraged insurance companies to partner with and invest in hospitals. Thisyear, China deepened the reform by scrapping price caps on most medicinesand the 15% markup on drug sales in hospital pharmacies, which will initially

873

979

1,097

1,226

1,367

1,522

0

200

400

600

800

1,000

1,200

1,400

1,600

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

12% 5Y Cagr

1.6

2.3

2.72.9

3.1 3.3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2014 15CL 16CL 17CL 18CL 19CL

(%)

14 22 29 35 42 50

0

10

20

30

40

50

60

2014 15CL 16CL 17CL 18CL 19CL

(Rmbbn)

29% 5Y Cagr

China has long kept atight grip on drug prices

Government initiated anRmb850bn healthcare-

reform plan in 2009

Last years reformbrought private hospitals

into the public medical

insurance system

Chinas healthcare systemdevelopment lagseconomic reform


24/208



end in 100 large-city hospitals and then be extended to all of China in 2017.We believe liberalisation of the healthcare industry will continue, given rapidlygrowing demand, as:

An ageing population, increasing pressure from work and pollution arecausing a rise in cancer, heart disease, diabetes and other chronicillnesses. The 2009 reforms established and updated public hospitals,relaxed the foreign-ownership cap and scrapped price controls andmarkups on drugs in public hospitals. This will make medical services moreaccessible and transparent for patients. Private insurance coverage alsoeases the governments burden.

With rising incomes, improved health awareness and growing attention tophysique, Chinese consumers are pursuing health products such asvitamins and dietary supplements to boost immunity and delay ageing.

With growing healthcare knowledge and busy lifestyles, consumers haveshifted to OTC drugs for minor illnesses such as coughs, colds anddermatological problems.

Private healthcare spending per capita is currently US$180, 7% of totalconsumer spending and well below the USA (US$5,000, 21%). The growth ofprivate healthcare services helps ease the governments burden.

Figure 72 Figure 73

Private healthcare spend/capita (2014) Five-year Cagr (2010-14)

Figure 74 Figure 75

Pub+pvt healthcare spend per capita Five-year Cagr (2010-14)


Private healthcare spend % of total Govt HC spend % of total govt Pvt insurance % of total HC spend


307 181

4,733

844

0

500

1,000

1,500

2,000

2,5003,000

3,500

4,000

4,500

5,000

World China USA W.Europe

(US$)

4

15

3

1

0

2

4

6

810

12

14

16


(%)

1,030409

8,930

3,720

0

1,000

2,000

3,0004,000

5,000

6,000

7,000

8,000

9,000

10,000


(US$)

3

17

3

1

0

2

4

6

8

10

12

14

16

18


(%)

30

44

53

23

0

10

20

30

40

50

60


(%)

5

25

0

5

10

15

20

25

30

China USA

(%)

4

35

23

0

5

10

15

20

25

30

35

40

China USA W.Europe

(%)

Private healthcarespending per capita is

US$180, 7% of totalconsumer spending

Growing privatehealthcare service helps

ease government burden


25/208



According to iResearch, the online healthcare segment remains small atRmb10.9bn in 2014 (including advertising, medical services and goods sales),less than 1% of consumer healthcare spending. Currently, there are two mainonline healthcare services: pharmacy and doctor appointments.

Figure 79 Figure 80

Online healthcare revenue Online healthcare revenue mix (2014)

Source: iResearch, CLSA

Figure 81 Figure 82

Online healthcare sales Online healthcare sales mix (2014)


Online pharmacy has gained strong momentum, contributing 95% of onlinehealthcare revenue in 2014 and growing at a triple-digit rate. This growth isdriven by an extensive product range, free delivery and 24-hour shopping.Alibaba leads in online pharmacy services. It acquired Citic 21CN, the soledrug-tracking system in China, injected its Tmall Pharmacy into the companyand renamed it Alibaba Health. It is the only B2C platform with an online OTCdrug-sales licence. Prescription drugs cannot be sold online yet, but thegovernment does plan to issue online prescription-drug sales licences. In themeantime, healthcare products such as vitamin supplements and OTC drugsare in high demand.

Doctor appointments are another major battleground among Baidu, Alibaba

and Tencent. Doctor appointments start other services, such as consultations,prescription drug sales, checkups, rehabilitation and monitoring.

Tencent has invested in Guahao.com (a leading online doctor-appointmentplatform) and Haodaifu (a leading online platform to search for physiciansand online consultations).

Baidu has launched Baidu Doctor (forming direct partnerships with over 700hospitals and 25,000 doctors) and DuLife (an open platform connecting third-party wearable devices).

Alibaba has invested in Huakang Mobile Healthcare, a mobile healthcare appdeveloper. It was established in 2002 and focuses on patient-doctorinteraction through two mobile apps: Yike, which allows doctors to manage

patients records and look up the latest medical information, and also servesas a networking platform for doctors to discuss difficult cases; and Jiuyibao,which allows patients to make appointments, consult doctors online,download test results and manage personal records.

0 0 1 2 5 11 17

200

56

167

134126

59

0

50

100

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200

250

0

2

4

6

8

10

12

14

16

18

20

2009 2010 2011 2012 2013 2014 15F

(%)(Rmbtn) Online healthcare revenueYoY Growth (RHS)

Productsales 94%

Advertising5%

User value-added1%

11

4 811 14

87

215

112

3223

0

50

100

150

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250

300

0

2

4

6

8

10

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16

2009 2010 2011 2012 2013 2014

(%)(Rmbtn)Online healthcare product salesYoY Growth (RHS)

Allergy care0.2%

Sports nutrition0.5%

Paediatric OTChealthcare 4.9%

Weightmanagement

5.5%

OTC 9.9%

Herbal products22.1%

Vitamins anddietary

supplements56.9%

Online healthcare marketis small at Rmb10.9bn,

less than 1% of total

Main online healthcareservices are pharmacy

and doctor appointments

Online pharmacy,contributed 95% of online

healthcare revenuein 2014

Growing at atriple-digit rate

Strong growth driven byextensive product range,

free delivery, 24-hourshopping

Doctor appointments

another majorbattleground


26/208



EducationEducation is another Rmb500bn market according to Euromonitor, and couldcontinue to grow at 10% per year. Online education is great concept, butimplementation is tricky as people lack self-discipline. It is challenging for anadult to sit in front of a computer for a six-hour course every day, let alonekids. Online education only works for language learning, certification andexam-based programmes.

Tarena is a China-based, Nasdaq-listed institution which provides vocationalprogrammes. It insists on an online-plus-offline model. While teachersdeliver lectures online, students have to take the lessons in classrooms. Thisis ensures all students finish the whole programme and obtain a jobplacement afterwards. O2O is better business model for the majority ofeducational institutions. While taking lessons offline, students can sign up forcourses, download timetables and book and pay for lessons online.

Chinas private-education market is lucrative with increasing competition,driven by the rising middle class and growing applications to study overseas.There are four main subsegments:

Preschool education - Private kindergartens are on the rise and account for70% of the total market. Fierce competition drives parents to start early togive their kids an advantage. The relaxation of the one-child policy since2014 could bring an additional million babies per year.

Afterschool tutoring - Most students attend public schools for Grade 1-12education. The stress of the National Higher Education Entrance Exam(gaokao) creates high demand for afterschool education. This is a vast buthighly fragmented market that is entering the age of diversification withpersonalised service and strong brands.

Vocational education - China faces huge challenges producing enough skilledworkers to move up the value chain. Only 21% of Chinese people havecollege or above degrees. Fresh college graduates - especially those fromsecond-tier universities - lack relevant skillsets for new industries. Thegovernment plans to modernise vocational training by introducing degree-and certificate-based options. It has also decentralised the approval ofonline schools to provide distance education. This will fuel vocational-education growth, especially in business management and IT training.

Language training and study overseas - English is of great importance fordomestic tests (gaokao, the Senior High School Entrance Exam [zhongkao]and graduate exams), studying overseas and obtaining well-paid jobs.External courses featuring native-English-speaking teachers are indemand. International schools are thriving in China as studying overseasbecomes fashionable.

According to iResearch, the online-education market expanded at a 19%Cagr over the past five to Rmb90-100bn in 2014. K12 and higher educationare the biggest segments, while demand for vocational and languageprogrammes is growing. The structural changes in China mean more peoplewill have to retrain for new jobs. English skills are increasingly important tofind a well-paid job and study overseas. But most courses are online. O2Oadoption is low. Additional capital from internet leaders is likely to fuel newgrowth in this segment:

Baidu has invested multiple sites, including chuanke.com ( ),

wansue.cn () and smartstudy.com (). Smartstudy was set upin February 2014 by former senior management of New OrientalEducation.

Online education is agreat concept but

tricky to implement

Chinas private education

market is lucrative withincreasing competition

Private education markethas four major segments:

preschool, afterschool,vocational and language

Online education saw a19% five-year Cagr toRmb90-100bn in 2014
http://www.baidu.com/link?url=BWSphQFR00TR0vFOPRcNDnQGcf9d-EG5onLQEyrCpNqi7BgntK4H-bC4SZ9ELHoq3cWUcGJ0qL26Wi_TmJWzVqhttp://www.baidu.com/link?url=BWSphQFR00TR0vFOPRcNDnQGcf9d-EG5onLQEyrCpNqi7BgntK4H-bC4SZ9ELHoq3cWUcGJ0qL26Wi_TmJWzVqhttp://www.baidu.com/link?url=BWSphQFR00TR0vFOPRcNDnQGcf9d-EG5onLQEyrCpNqi7BgntK4H-bC4SZ9ELHoq3cWUcGJ0qL26Wi_TmJWzVqhttp://www.baidu.com/link?url=BWSphQFR00TR0vFOPRcNDnQGcf9d-EG5onLQEyrCpNqi7BgntK4H-bC4SZ9ELHoq3cWUcGJ0qL26Wi_TmJWzVqhttp://www.clsa.com/


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Alibaba has invested in TutorGroup with Temasek and Qiming VenturePartners. TutorGroup is one of the worlds largest online English-language

learning institutions. Founded in 2014, it provides real-time interactivelanguage learning and has 2,000 teachers in 30 countries.

In addition, YY, Renren and NetEase have also invested in 100.com(100 ), wanmen.org ( ) and 91waijian.com (91 )respectively.

Figure 83 Figure 84

Online education GMV Online education GMV mix


GMV could reach Rmb2.5tn by 19CLOverall O2O penetration in Chinas services industry is low (in single digits),as the market is still in its infancy and highly fragmented. iResearchestimated that local service O2O transactions grew 38% YoY to Rmb237bn in2014, representing c.3% of service-related consumer spending. Nearly half ofthese transactions were driven by mobile. Restaurant groupbuy O2O

contributed about 41% of total transactions or Rmb98bn, but the segmentsonline penetration was only c.3% in 2014.

Figure 85 Figure 86

O2O GMV transaction estimates China O2O transactions - iResearch

Source: iResearch, Sootoo, Eguan, CLSA Source: iResearch, CLSA

Figure 87 Figure 88

Restaurant dineout O2O - iResearch Takeout delivery O2O - iResearch


41

49

58

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2009 2010 2011 2012 2013 14F 15F

(Rmbbn)

19% 5Y Cagr

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2009 2010 2011 2012 2013 14F 15F

(%)

Higher education LanguageVocational Primary/secondaryOthers

0

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2010 2011 2012 2013 2014 15F 16F 17F

(Rmbbn)iResearch Sootoo Eguan

4575

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410

498

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(%)(Rmbbn) TransactionsYoY growth (RHS)

9 2142 63 98 142 181 217

0.5

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01

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2010 2011 2012 2013 2014 15F 16F 17F

(%)(Rmbbn) Dineout O2O (LHS)Online penetration

59 74

96

125 162 216 277 3380.3 0.6

1.5

3.4

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10.7

12.4

0

3

6

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15

050

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2010 2011 2012 2013 2014 15F 16F 17F

(%)(Rmbbn)

Takeout O2O (LHS)Online penetration

K12 and higher educationare the biggest online-

education markets

O2O penetration inservice industry is in

single digits

Restaurants contributedabout 41% of total

transactions or Rmb98bn

iResearch estimates localservice O2O transactions

grew 38% YoY toRmb237bn in 2014


28/208



iResearchs O2O transaction-size estimates do not include all online travel

transactions, such as on Ctrip and Qunar, which are arguably not local

services. However, travel is a large spending category on Meituan (hotels) andon Baidu (through Qunar), Chinas two largest O2O platforms.

Including online travel transactions, we estimate that overall O2O transaction

volume could be around Rmb455bn in 2014, representing 6.6% of service-

related consumer spending. We forecast the market to expand at a 38% five-

year Cagr to Rmb2tn by 2019, given heavy subsidies and funding from PE

and leading internet companies.

By segment, we forecast online penetration could reach 15% for restaurant

dineout, 58% for takeout delivery, 44% for travel and single digits for other

segments. Restaurants and travel are the biggest O2O m

Documents

China on Demand (O2O Digitising the Service Industry) 031115