 Global Research 22 July 2019 China Internet Sector Equities Can mini programs become a significant growth China driver for Internet giants? Internet Services Jerry Liu Analyst Mini programs are catching on and can become significant revenue drivers jerry.liu@ubs.com +852-2971 7493 Tencent first launched mini programs in January 2017, which are simple apps in WeChat that users can open without first instal ing. This unique Chinese innovation got Wei Xiong Analyst off to a slow start, but platforms/developers are now enthusiastically adopting it. S1460518100005 Tencent and Alibaba/Ant each have over 200mn daily active users (DAUs) for their mini wei.xiong@ubssecurities.com programs, and Baidu, Bytedance, etc. are launching their own. In 2019, we estimate +86-213-866 8883 WeChat mini programs wil generate Rmb12bn of revenues from ads and payments Angela Xu, CFA (3.1% of total revenue), and that could grow 5x by 2022 (7.5% of total). We see Analyst potential upside for Ant in Alipay and Baidu in search and feed. angela.xu@ubs.com +852-3712 4671 Mini programs can help developers acquire users cheaply and boost usage Curtis Li For mid- to low-frequency use cases, mini programs are a good way for developers to Associate Analyst reach users (e.g. Tongcheng-eLong in travel), especially as customer acquisition costs curtis.li@ubs.com (CAC) for apps soar. Our industry checks indicate CAC for mini programs can be as low +852-2971 5526 as 1/10 of apps. For high frequency use cases, WeChat mini programs can improve Navin Killa engagement, leveraging social connections (e.g. Pinduoduo in e-commerce). In Analyst WeChat, users on average use 10 mini programs (+2.9% YoY) and spend over 15 mins navin.kil a@ubs.com per day. Games are the most popular use case, fol owed by life services and shopping. +852-2971 7594 Tencent: mini programs are underappreciated ads and payments drivers We estimate Tencent can generate Rmb4bn of revenues from mini program payments in 2019 or 6% of its Fintech and Business Services (FBS) revenues based on new top down industry and bottom up apps/company analyses. By 2022, we expect revenues to increase ~3x to Rmb11bn, and see Rmb18.5bn in revenues in our upside case. We estimate another Rmb8bn of revenues from mini program ads or 11% of total ad revenues in 2019. By 2022, we see potential revenues of Rmb45bn or 33% of total ad revenues. We believe mini programs have surpassed official accounts to become the second largest ad product in Tencent, behind Moments. Alibaba and Baidu: significant growth opportunities from mini programs Ant can leverage mini apps to improve its Alipay use cases, and Alibaba use it to give brands, merchants, product categories more exposure, and in enterprise scenarios with DingTalk. Baidu's smart mini program generated high interest from developers at its recent AI conference and could drive ad growth in 2020, as it becomes a highly attributable ad unit with improved conversion rate in search and feed use cases. Figure 1: Mini programs for Tencent, Alibaba and Baidu Company Price Mkt cap Rating Price target PE Investment thesis in min programs (LC) (USD m) (LC) 2020E 2021E Frontrunner in mini programs. We expect mini programs to become a key driver for Tencent 363.2 433,600 Buy 450 24.1x 19.4x Tencent ads and payment revenues, and contribute to games revenues. Alipay mini apps use base has caught up with WeChat mini programs. Alipay is more Alibaba 174.8 454,357 Buy 210 20.5x 15.9x focused on transactions and services, and has synergies with Alibaba's ecosystem. We see Baidu's mini programs as a new ad format, which can boost its ad revenues Baidu 113.6 39,651 Neutral 131 16.6x 11.0x due to better ad conversion and attribution. Source: Reuters, UBS estimates. Note: price data as of Jul 17, 2019. www.ubs.com/investmentresearch This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 25. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in ma

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