Morgan Stanley: Asia Insights - Five Catalysts to Accelerate Digital China's Progress Mobile Internet Section Summary

On April 23, 2012, according to foreign media reports, Morgan Stanley, a well-known American investment bank, recently released a report titled "Asia Insights: Five Catalysts Accelerating Digital China's Progress", stating that the commercialization of Weibo, the stock prices of leading online game companies will be re-rated, dividend payments, industrial integration and the development of mobile Internet will become the five catalysts that accelerate the rise in the stock prices of Chinese Internet companies in the next one to two years.

Morgan Stanley's report stated that in the next two years, mobile Internet will drive faster growth in China's Internet industry. Based on this understanding, China's leading Internet companies have been actively increasing their investment in the mobile Internet sector. Mobile search may become the next engine to drive Baidu's performance growth. Other digital leaders in China are also working hard to explore the mobile Internet sector.

The following is a summary of the "Mobile Internet" section of the Morgan Stanley report:

We believe that in the next two years, the evolution of mobile Internet will become the fastest-growing driving force for China's Internet industry. We have observed many encouraging trends in this area:

--According to data released by the China Internet Network Information Center (CNNIC), the number of mobile Internet users in China has more than tripled in the past three years to 356 million in 2011. During the same period, the total number of Internet users increased by 72%, while the total number of mobile phone users increased by 54%. By the end of 2011, mobile Internet users in China accounted for 69% of all Internet users and 36% of all mobile phone users.

The penetration rate of mobile Internet in China is increasing day by day

——There are two main driving forces behind the rapid growth of China's mobile Internet industry:

1) In the past two years, the overall number of smartphones in the Chinese market has quadrupled, and smartphones are precisely the most suitable mobile devices for running mobile Internet applications. According to statistics released by market research firm iResearch, China's smartphone shipments in 2011 more than doubled year-on-year to 72 million units, making smartphone users account for 11% of all mobile phone users. According to our estimates, from 2011 to 2013, the compound annual growth rate (CAGR) of China's smartphone shipments may exceed 70%, while the CAGR of China's total mobile phone shipments in the same period is expected to be 9%.

2) The average selling price (ASP) of smartphones in the Chinese market continues to decline, making smartphones a disposable commodity for Chinese consumers. According to our estimates, the ASP of smartphones in the Chinese market has fallen by about 50% between 2009 and 2011, and may fall by another 30% in the next two years.

China's leading Internet companies have been actively increasing their investment in the mobile Internet sector. We have noticed that:

-- Sina Weibo has attracted more than 300 million registered users, making it one of the largest and most active online social communities in China. In the fourth quarter of 2011, the number of users accessing Sina Weibo from mobile phones and tablets exceeded the number of users accessing from PCs for the first time.

-- According to our estimates, Tencent's WeChat has become the fastest growing social community in the Chinese market, with 100 million users in just one year. In China, WeChat has become the second most popular iOS app after Mobile QQ. It is estimated that users only need to pay RMB 1 to send 1,000 text messages through WeChat, while sending the same number of SMS messages would cost RMB 100.

——We believe that mobile search may become the next engine driving Baidu's performance growth. Because:

1) China's mobile search traffic is increasing at an annual rate of 50% to 60%, which is three to four times the growth rate of PC search traffic in the same period.

2) The current Chinese mobile search market is still relatively fragmented, with Baidu's market share at around 35%, while Yisou and Tencent's market share are just over 20%. 3) Although no substantial revenue has been generated from mobile search business, mobile search volume accounts for about 15% of Baidu's total search volume.

——Other Chinese digital leaders are also working hard to expand into the mobile Internet sector:

1) Currently, more than 50% of Renren’s traffic comes from smartphones, compared to 38% in the fourth quarter of 2011 and just 3% three years ago.

2) We estimate that 5% to 10% of Dangdang's transactions come from mobile devices.

3) Due to its rich content resources and close cooperation with China Mobile, Phoenix New Media's revenue from mobile Internet value-added services increased by 49% year-on-year in 2011, accounting for 47% of its annual revenue. According to our analysis, Phoenix New Media's daily mobile user logins have exceeded 14 million, making it one of China's top mobile portals.

——In the Japanese market, more than 90% of the revenue of mainstream mobile Internet companies including DeNA and GREE comes from mobile online games, and the rest comes from mobile online advertising and mobile online communities. It is foreseeable that Chinese companies may adopt a similar business model to achieve the commercialization of mobile Internet.