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1、(FYE),20,16,12,8,4,1,2,Deutsche BankMarkets Research,RatingHoldAsiaChina,CompanyRenren Inc,Date3 December 2012RecommendationChange,TechnologySoftware&Services,Reuters,Bloomberg,Exchange Ticker,Price at 30 Nov 2012(USD)Price target-12mth(USD)52-week range(USD),3.433.247.33-3.21,RENN.N,RENN UN,NYS,REN
2、N,HANG SENG INDEX,21,768,Itching to reap returns from,investment;upgrading to HoldNearing mid stage of investment cycle;expecting financials to improve in 2013In our view,Renren is moving towards the mid stage of its investment cycle,which improves its financial visibility.Solid gaming revenue growt
3、h andconsistent platform user base gains are early indicators of investment returns.We expect growth in investment spend to slow down over the coming quartersand some investments to gradually generate financial benefits.We forecast theoperating loss to narrow to USD44m in 2013,from USD91m in 2012.We
4、believe the stock is fairly valued and upgrade it to Hold on valuation.Gaming to drive top-line growth and improve profitability in 2013,Alex YaoResearch Analyst(+86)21 2080 Alan Hellawell IIIResearch Analyst(+852)2203 Key changes,Renren is one of the few Chinese gaming platforms with development an
5、d,Rating,Sell to Hold,operational capacities in both PC and mobile.This competitive advantageallows it to proactively pursue a cross-platform gaming strategy,which hasbeen successful so far.We expect continued strong growth in gaming revenuein 2013,due to 1)a sizable user base to cross-sell to,2)a s
6、trong balance sheetto support promotion,and 3)its ability to capture user time on PC and mobile.,Price targetSales(FYE)Op profmargin(FYE)Net profit,3.13 to 3.24 174 to 174-51.2 to-52.3-77.6 to-75.3,3.5%0.2%2.1%-2.9%,Group-buy and video ads should aid growth in 2013,We believe Chinas group-buy market
7、ing has entered the consolidation stageand that Nuomi is positioned to capture more market share.We believeinvestment in the video arm,has reached a later stage,with spendingto slow down over the next few quarters and revenue growth to pick up.Upgrading to Hold,while tweaking target price to USD3.24
8、;risksWe raise our target price by 4%,as we cut our 2012 and 2013 net lossforecasts by 3%and 7%,respectively,on strong gaming momentum.We value,Price/price relative,Renren ex-Nuomi on 8x 2013E ex-cash PE,Nuomi on 5x 2013E P/S on 3.0 x 2013E P/S.Risks:user acquisition,adoption of targeted ads,competi
9、tion and OS developer policy changes(see pages 7-8 for details).,05/11,11/11 5/12Renren IncHANG SENG INDEX(Rebased),11/12,Performance(%),1m,3m,12m,Forecasts And Ratios,Absolute,4.9,-10.4,-7.3,Year End Dec 31,2010A,2011A,2012E,2013E,2014E,HANG SENG INDEX,1.8,13.1,22.5,Sales(USDm)EBITDA(USDm)Reported
10、NPAT(USDm)Reported EPS FD(USD)DB EPS FD(USD)OLD DB EPS FD(USD)%ChangeDB EPS growth(%)PER(x)EV/EBITDA(x)DPS(net)(USD)Yield(net)(%),76.513.9-61.2-0.750.200.200.0%619.40.00,117.1-22.440.10.140.160.160.0%-15.945.80.000.0,173.9-82.7-75.3-0.20-0.17-0.173.8%0.000.0,269.1-36.7-24.3-0.06-0.03-0.0322.7%80.80.
11、000.0,376.627.235.00.090.130.13-2.8%27.116.40.000.0,Source:Deutsche Bank estimates,company dataDB EPS is fully diluted and excludes non-recurring itemsMultiples and yields calculations use average historical prices for past years and spot prices for current and future years,except P/B which usesthe
12、year end close_Deutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports.Thus,investors shouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors shouldconsider this report as onl
13、y a single factor in making their investment decision.DISCLOSURES AND ANALYSTCERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P)072/04/2012.,3 December 2012Software&ServicesRenren Inc,Model updated:03 December 2012,Fiscal year end 31-Dec,2009,2010,2011,2012E,2013E,2014E,Running the numbers,Financial Su
14、mmary,AsiaChinaSoftware&ServicesRenren Inc,DB EPS(USD)Reported EPS(USD)DPS(USD)BVPS(USD)Weighted average shares(m)Average market cap(USDm),0.03-0.820.001.684na,0.20-0.750.005.382na,0.160.140.004.32842,144,-0.17-0.200.003.03851,389,-0.03-0.060.003.03811,389,0.130.090.003.13811,389,Reuters:RENN.N,Bloo
15、mberg:RENN UN,Enterprise value(USDm),na,na,1,053,411,455,446,Valuation Metrics,Hold,P/E(DB)(x)P/E(Reported)(x),nanm,nanm,45.855.0,nmnm,nmnm,27.137.3,Price(30 Nov 12)Target Price52 Week rangeMarket Cap(m),USD 3.43USD 3.24USD 3.21-7.33EURm 1,068USDm 1,389,P/BV(x)FCF Yield(%)Dividend Yield(%)EV/Sales(x
16、)EV/EBITDA(x)EV/EBIT(x),0.00nananmnmnm,0.00nananmnmnm,0.83nm0.09.0nmnm,1.16nm0.02.4nmnm,1.16nm0.01.7nmnm,1.110.80.01.216.422.0,Company Profile,Income Statement(USDm),Renren Inc.operates a social networking Internet platformin China.Its platform enables users to connect andcommunicate with each other
17、;share information and user-generated content;play online games;listen to music;andshop for deals.Price Performance20161284,Sales revenueGross profitEBITDADepreciationAmortisationEBITNet interest income(expense)Associates/affiliatesExceptionals/extraordinariesOther pre-tax income/(expense)Profit bef
18、ore taxIncome tax expenseMinoritiesOther post-tax income/(expense)Net profitDB adjustments(including dilution)DB Net profit,4741250-3000-66-68000-68702,776614608000-71-63-100-617716,11799-2290-311000624110040848,174115-8380-9122-1104-64000-758-67,269186-3770-4421000-22200-2411-13,3772692770202100041
19、600351348,0May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12,Cash Flow(USDm),Cash flow from operations,0,17,-4,-88,-17,44,Renren IncMargin Trends30150-15-30,HANG SENG INDEX(Rebased),Net CapexFree cash flowEquity raised/(bought back)Dividends paidNet inc/(dec)in borrowingsOther investing/financing cas
20、h flowsNet cash flowChange in working capital,-10-105600-739-3,-61233002462,-19-2395100-780148-2,-23-111000-51-162-30,-27-440000-44-11,-3410000010-11,-45-60,09,10 11EBITDA Margin,12E,13EEBIT Margin,14E,Balance Sheet(USDm)Cash and other liquid assetsTangible fixed assetsGoodwill/intangible assets,127
21、1113,198117,1,0412287,8783787,8345788,8438488,Growth&Profitability,Associates/investmentsOther assets,821,0240,5078,100125,100170,100220,300250200150100500,09,10,11,12E,13E,14E,100-10-20-30-40-50-60,Total assetsInterest bearing debtOther liabilitiesTotal liabilitiesShareholders equityMinoritiesTotal
22、 shareholders equityNet debt,179042421370137-127,456026264310431-198,1,278067671,21001,211-1,041,1,227084841,14201,142-878,1,24901191191,12901,130-834,1,33501581581,17701,178-843,Sales growth(LHS),ROE(RHS),Key Company Metrics,Solvency0-20-40-60,Sales growth(%)DB EPS growth(%)EBITDA Margin(%)EBIT Mar
23、gin(%)Payout ratio(%)ROE(%)Capex/sales(%),238.7na4.5-5.8nm-49.621.2,63.9619.418.210.0nm-21.57.4,53.0-15.9-19.2-26.50.04.916.2,48.6na-47.6-52.3nm-6.413.0,54.780.8-13.7-16.2nm-2.110.0,40.0na7.25.40.03.09.0,-80-100,09,10,11,12E,13E,14E,Capex/depreciation(x)Net debt/equity(%)Net interest cover(x),2.1-92
24、.2nm,0.9-46.1nm,2.2-86.0nm,2.7-76.8nm,3.9-73.8nm,4.9-71.6nm,Alex Yao,Net debt/equity(LHS),Net interest cover(RHS),Source:Company data,Deutsche Bank estimates,+86 21 2080 1666Page 2,Deutsche Bank AG/Hong Kong,3 December 2012Software video ads.Renren is experimenting in monetization in all three categ
25、ories.Nonetheless,we thinkRenrens pricing power is likely be much lower than that of the leaders in these fields,due to differences in traffic.We estimate that targeted ads,mobile ads and video ads represented 15-20%of totalads revenue in 3Q12.We expect these three ads formats to outgrow brand ads o
26、ver thenext few quarters,and reach 25-30%by the end of 2013.On the other hand,we expectbrand ads to continue to decline in 4Q12 and 1Q13 on a sequential basis.Overall,revenue growth is likely to start accelerating in 2H13.,Deutsche Bank AG/Hong Kong,Page 3,3 December 2012Software 2)mobile games acro
27、ss different mobile operating systems,particularly Android.Renrenscurrent mobile games are all based on iOS.Management has said that the company willfurther develop mobile games for the Android platform.Group-buy,Page 4,Deutsche Bank AG/Hong Kong,3 December 2012Software&ServicesRenren IncAccording t
28、o the company,Renren is likely to increase investments in Nuomimoderately.We view this as likely a part of its LBS and mobile strategy.According togroup-buy market data site Tuan800,Nuomi is rated the best-service group-buy site inChina as of September 2012.We expect the company to further enhance i
29、ts group-buyservice for both PC and mobile users.The company plans to increase the headcountand marketing promotions of Nuomi in the coming quarters.Business developmentMobile efforts:catering to global mobile usersAccording to foreign media,Renren partnered with US-based mobile network servicesprov
30、ider Syniverse on 16 October.Syniverse is dedicated to providing mobile supportfor mobile operators and cable and internet providers worldwide.Syniverse will provideRenren with global mobile capacities,allowing international Renren users to useRenrens services and applications around the world.With
31、Syniverses help,users canactivate their Renren accounts by sending authorization codes to their local mobilephones by SMS.We believe this cooperation will extend Renrens mobile capacityglobally,yet it is still in an early stage.Mobile efforts:photo app enhances Renrens mobile usageRenren announced t
32、hat it has reached a cooperation agreement with mobilephotography software provider Pinguo Technology.Pinguo will leverage LBS system viaRenrens mobile open APIs,while Renren will add Pinguos product Camera360 to itsmobile end platforms.Renrens wireless business general manager Wu Jiang revealedto t
33、he press that Camera360 brings millions of launches of Renren wireless end everyday.Seeking new SNS opportunity in financial areaIn September,Renren invested USD49m in Social Finance,Inc.,a US-based privatecompany.Social Finance helps overseas students to access low loan rates throughinnovative lend
34、ing solutions called Peer-to-Peer loans.It currently has a presence in 70schools in the US.According to Renrens CEO,Renren expects to expand its service tofinance and education,besides its current social gaming and e-commerce.We thinkRenren aims to leverage its social nature to derive various busine
35、ss opportunities.Webelieve the investment in Social Finance is one of its trials in exploring new businessareas across industry boundaries.Valuation and risksWe upgrade Renren from Sell to Hold,and tweak our target price from USD3.15 toUSD3.24.We adopt a sum-of-the-parts valuation methodology to val
36、ue a)Renren ex-Nuomi,b)Nuomi,and c)separately,given that the three assets are in differentdevelopmental stages,participate in segments with very different market sharestructures,and,broadly speaking,exhibit major differences in visibility and competitivelandscape.We assign USD262m to Renren ex-Nuomi
37、,USD126m to Nuomi andUSD54m to.We raise our target price by 4%to USD3.24,as we cut our 2012 and 2013 net lossforecasts by 3%and 7%,respectively,on strong gaming momentum.We increase our 2012 and 2013 revenue forecasts by 0%and 3%,respectively,on theback of a growing usage of Renrens webgame and mobi
38、le game products.We fine-tune our operating expense forecast such that Nuomis marketing spend is slightly,Deutsche Bank AG/Hong Kong,Page 5,3 December 2012Software&ServicesRenren Inchigher while Renrens marketing spend is slightly lower.Net-net,our 2012 and 2013 netlosses are 3%and 7%lower than our
39、previous forecasts.Figure 1:Deutsche Bank estimates vs.consensus,FY2012E,FY2013E,DB,Consensus,DB,Consensus,%,%,RevOPNP GAAPEPS GAAP,174-91-75-0.20,178-94-84(0.21),269-44-24-0.06,263-73-55(0.14),-3%-3%-10%-7%,2%-40%-56%-56%,Source:Deutsche Bank estimates,Bloomberg Financial LPRenren trades at 1.6x ne
40、t cash and 1.8x 2013E EV/revenue.We believe that the currentstock price has fairly factored in potential risk and return over the next four quarters.With 63%of the market cap comprised of net cash,we see limited downside at thecurrent level.In valuing Renren ex-Nuomi,we adopt an ex-cash PE approach
41、given the following:The ever-evolving competitive landscape in Chinas social space serves toreduce revenue growth visibility.An anticipated capital markets focus on earnings instead of revenue growthgiven current macro uncertainty.Our USD0.69 per share valuation of Renren ex-Nuomi is based on USD33m
42、 2013E non-GAAP net profit and a 8x 2013E ex-cash PE.An 8x 2013E ex-cash PE is broadly in linewith online portal valuations in China.Renrens top-line growth is faster than otherleading portals in China,which suggests upside potential to our valuation multiples.However,we expect the market to substan
43、tially discount Renrens growth rate due tothe rapidly evolving nature of Chinas social space and ever-increasing competitivepressure from leading micro-blog platform Sina Weibo.Our USD0.33 share valuation for Nuomi is based on 5.0 x 2013E price-to-sales,set at adiscount to Renrens 2013E core busines
44、s valuation,given the businesss relative lackof maturity and competitive pressures in the group-buying space in China.Our USD0.14 per share valuation for is based on 3.0 x 2013E price-to-sales.Figure 2:SoTP valuation,Valuationmethod,Core valuationmetrics,Valuation multiple,Valuation(US$m),Value pers
45、hare,%of totalvaluation,Comment,Renren,Price to earnings US$33m 2013E,8x 2013E non-cash,262,0.69,21%,Comparable with portal valuation,Non-GAAP netprofit,PE,Nuomi,Price to sales,US$25m 2013E,5x 2013E PS,126,0.33,10%,rev,Price to sales,US$18m 2013E,3x 2013E PS,54,0.14,4%,50%discount to Youku,rev,DBe 2
46、013 year,790,2.08,64%,10%discount on withholding tax,end cash,estimated cash at 2013 year-end,Total,1,232,3.24,100%,Source:Deutsche Bank estimates Company dataAs a back test,our DCF model would yield a higher value of USD3.49 using a discountrate of 14%based on 1)a beta of 2.0,2)Deutsche Banks curre
47、nt estimated long-termaverage risk-free rate of 3.1%,and 3)a market premium of 5.8%.We employ a terminal,Page 6,Deutsche Bank AG/Hong Kong,3 December 2012Software&ServicesRenren Incgrowth rate of 2.5%to reflect the long-term growth potential of the Chinese Internetspace and the online ad business in
48、 particular.Figure 3:China Internet comps,Ticker,Rating,Price,Mkt Cap,EV,CY12E,CY13E,CY12E,CY13E,CY12E,CY13E,(m),(m),ROE,ROE,PE,PE,PS,PS,China internet portals,BaiduSinaSohu,BIDU.OQSINA.OQSOHU.OQ,HoldBuyHold,USD 96.31USD 45.52USD 39.83,33,6693,0251,515,29,1162,3371,048,50%1%9%,40%4%11%,21.0 x295.1 x
49、17.0 x,17.8 x37.3 x14.3 x,10.0 x5.7 x1.4 x,7.8 x4.6 x1.2 x,Tencent,0700.HK,Buy HKD 245.40,454,178,414,055,36%,34%,28.2 x,20.8 x,8.8 x,6.8 x,SouFunQihooBitautoRenrenPhoenix New MediaTaomee,SFUN.NQIHU.OQBITA.OQRENN.NFENG.NTAOM.N,BuyNRNRHoldHoldHold,USD 21.55USD 24.99USD 6.62USD 3.43USD 3.26USD 3.31,1,
50、6842,9832761,290253121,1,8902,6361,2113971911,134%14%14%-6%7%5%,92%18%N/A-4%8%8%,11.8 x42.3 x13.5 x-20.4 x15.7 x15.9 x,9.4 x28.0 x9.5 x-125.1 x15.2 x15.4 x,4.0 x9.3 x1.7 x7.4 x1.5 x3.0 x,3.3 x6.1 x1.4 x4.9 x1.4 x2.8 x,Mean,26%,23%,44.0 x,4.3 x,5.3 x,4.0 x,China online games,Giant InteractiveNetdrago
