101 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com number of bidders they would typically have exposure to, thus increasing the amount of money raised for their cause. 102 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com 103 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com International Sector Outlooks International Sector Outlooks 104 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com 105 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com China Internet Market Overview Number of Internet Users Continues Strong Uptrend China’s Internet population grew at a rapid pace in 2007, increasing 53% Y/Y to 210M, according to China Internet Network Information Center (CNNIC). In 1H08, the number of Internet users climbed a further 20% to reach 253M as per CNNIC, giving China the world’s largest Internet user base. This strong growth in recent years has been driven by factors such as robust GDP growth, lower priced computers, more affordable telecom connection fees, government support to Internet usage and low-cost entertainment aspects. Further, growth in the rural population exceeded that in the overall population, growing at almost 128% in 2007, as lower- income groups also continue to adopt the Internet. Despite this rapid growth, China's Internet penetration rate of ~20% of the population is still well below that of developed markets like the US, Japan and Korea (over 70%). We expect Internet users to grow by around 20% Y/Y in 2009 to reach ~320M, or the penetration rate to reach ~24% of the population by the end of 2009. Figure 57: China Internet Users and Penetration Rate 23 27 34 46 59 68 80 87 94 103 111 123 137 162 210 253 268 295 322 347 375 0 100 200 300 400 500 600 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08E Jun-09E Dec-09E Jun-10E Dec-10E 0% 5% 10% 15% 20% 25% 30% Number of China Internet Users (Left, millions) Penetration Rate as % of Total Population (Right) Source: CNNIC (China Internet Network Information Center), J.P. Morgan estimates. Broadband and Mobile Continue Rapid Growth The number of users with broadband Internet access grew 80% Y/Y to 163M (78% of total users) by the end of 2007, and to 214M (85% of total users) by June 2008, as per CNNIC. 106 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Figure 58: Broadband Internet Users in China 7 10 17 31 43 53 64 77 91 122 163 214 0 50 100 150 200 250 Dec- 02 Jun- 03 Dec- 03 Jun- 04 Dec- 04 Jun- 05 Dec- 05 Jun- 06 Dec- 06 Jun- 07 Dec- 07 Jun- 08 Broadband Internet Users (millions) Source: CNNIC. Figure 59: Broadband Internet Users as % of Total Internet Users 11% 14% 22% 36% 46% 51% 58% 63% 66% 75% 78% 85% 0% 20% 40% 60% 80% 100% Dec- 02 Jun- 03 Dec- 03 Jun- 04 Dec- 04 Jun- 05 Dec- 05 Jun- 06 Dec- 06 Jun- 07 Dec- 07 Jun- 08 Broadband users as % of total Internet users Source: CNNIC. Further, the number of broadband subscribers reached 66.5M by the end of 2007, up 28% Y/Y. Table 52: Trends in Broadband Subscriber Penetration 2003 2004 2005 2006 2007 Broadband subscribers (MM) 10.4 23.9 37.5 51.9 66.5 Population Penetration (%) 0.8% 1.8% 2.9% 4.0% 5.1% Households Penetration (%) 2.7% 6.2% 9.1% 12.5% 15.9% Source: CNNIC, Ministry of Information Industry (MII), J.P. Morgan estimates. Since China has yet to roll out 3G mobile technology, mobile Internet access is slow. Despite this impediment, the number of mobile Internet users increased by 65% Y/Y to 73.1M by Jun-08, as per CNNIC. The number of mobile Internet users was 29% of all Internet users and 12% of all mobile users. This compares to South Korea, where ~51% of mobile users use their phones to browse the Internet. We expect mobile Internet usage to increase significantly once 3G technology becomes available to consumers. Figure 60: Methods of Accessing by Device 87.3% 30.9% 28.9% 0% 20% 40% 60% 80% 100% Desktop Laptop Mobile Phone Percentage Source: CNNIC (Jun-08). 107 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Home Has Become a Preferred Place to Access the Internet Given the increase in Internet accessible computers, broadband penetration, and per capita wealth, the home has become the preferred place for most users to access the Internet, with over two-thirds of all Internet users accessing the Internet from home. Access from an Internet café lost share to the home, but still grew almost 61% in 2007. Figure 61: Main Access Locations 74% 39% 23% 0% 10% 20% 30% 40% 50% 60% 70% 80% Home Internet Café Others Source: CNNIC (Jun-08). However, given the relatively lower cost to access the Internet from an Internet café, about Rmb51.6 per month ($7.46), as per CNNIC, more young people are drawn to Internet cafes. While Internet access at home is more expensive for those who pay for it, about Rmb74.9 per month ($10.83), we expect Internet access from home to continue to grow at a fast rate as a wealthier population continues to buy more computers and can more readily afford home access. Figure 62: Young Secondary and High School Students More Likely to Use Internet Cafes 26.6% 45.3% 18.7% 1.4% 2.9% 9.8% 14.4% 1.0% 6.7% 21.1% 36.0% 16.1% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% < Secondary Secondary High Junior college Undegraduate Postgraduate and above Internet café Total Internet Source: CNNIC (2007). 108 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Figure 63: Home Internet Access Charges Rmb < 30, 10.8% 31-50, 23.2% 51-100, 49.5% > 100, 16.5% Source: CNNIC (2007). Average: 74.9 Rmb / Month Figure 64: Internet Cafe Access Charges Rmb < 15, 33.3% 16-30, 24.8% 31-50, 16.1% 51-100, 13.1% > 100, 12.7% Source: CNNIC (2007). Average: 51.6 Rmb / Month Users Spending More Time Online China’s Internet users are continuing to spend more time online. CNNIC’s Jun-08 survey showed users spent an average of 19 hours per week online. This was up from 16.2 hours per week six months earlier. We note that Internet usage has almost doubled compared to the 8.7 hours per week spent online in June 2001. Figure 65: Average Time Spent Online Hours/week 8.7 8.3 9.8 13.0 13.4 12.3 13.2 14.0 15.9 16.5 16.9 18.6 16.2 19.0 8.5 0 5 10 15 20 Jun- 01 Dec- 01 Jun- 02 Dec- 02 Jun- 03 Dec- 03 Jun- 04 Dec- 04 Jun- 05 Dec- 05 Jun- 06 Dec- 06 Jun- 07 Dec- 07 Jun- 08 Average Access Time Per Week (Left, hours) Source: CNNIC (Jun-08). Notably, as per some surveys, Internet use has surpassed radio and print media as a method of obtaining information and is second only to TV in terms of weekly consumption. 109 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Figure 66: Time Spent on Different Media Hours/week 28 16 14 6 2 - 5 10 15 20 25 30 TV Internet Radio Newspaper Magazine Source: CMMS, CNNIC. Figure 67: Top Information Source for High-Impact Users – the Internet 89.2% 74.7% 67.3% 19.6% 21.2% 14.2% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Internet Newspaper Television Mobile phone Magazine Book Source: CNNIC (2007). Note: Defined as those aged 25-40, with junior college education or higher and an annual income of Rmb2,000 or more. Media and Instant Messaging Are Among the Most Popular Internet Uses According to the Dec-07 CNNIC survey, online music is the most popular use of the Internet, with 86.6% of Internet users accessing online music. Online video is also popular, with 76.9% usage, while online news use was 73.6%. 110 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 53: Internet Usage by Category Use % who use (Millions) Search engine 72.4% 152.04 E-mail 56.5% 118.65 Instant message 81.4% 170.94 E-government 25.4% 53.34 Online news 73.6% 154.56 Update blog/personal spaces 23.5% 49.35 Internet games 59.3% 124.53 Online music 86.6% 181.86 Online video 76.9% 161.49 Online shopping 22.1% 46.41 Online payment 15.8% 33.18 Online banking 19.2% 40.32 Online job search 10.4% 21.84 Online education 16.6% 34.86 Online brokerage 18.2% 38.22 Source: CNNIC (2007). Instant messaging (IM) use was cited by 81.4% of all respondents, second only to online music. However, IM was the first stop for 39.7% of all Internet users, almost 20% more than the second most frequent first stop, online news at 20.0%. Online music came in at a distant sixth place, or 3.4%. It is also interesting to note that IM was more widely used in China than e-mail, as per the survey, which has likely benefited companies like Tencent, which owns the popular QQ brand. Figure 68: First Stop When Using the Internet Instant Messaging, 39.7% Online news, 20.0% Online games, 9.3% Search, 7.4% E-mail, 3.5% Online Music, 3.4% Online video, 2.4% Other, 14.3% Source: CNNIC (2007). . Dec- 07 Jun- 08 Broadband Internet Users (millions) Source: CNNIC. Figure 59: Broadband Internet Users as % of Total Internet Users 11% 14% 22% 36% 46% 51%. 30% Number of China Internet Users (Left, millions) Penetration Rate as % of Total Population (Right) Source: CNNIC (China Internet Network Information