EX-99.(C)(3) 3 d699526dex99c3.

htm DISCUSSION MATERIALS PREPARED BY MORGAN STANLEY ASIA LIMITED

Exhibit (c)-(3)
CONFIDENTIAL
Project Goliath
Discussion
December Materials
31, 2013
Morgan Stanley
CONFIDENTIAL
Disclaimer
Project Goliath
IThis document
i G hasIbeen( prepared
h “C by Morgan
”) d dStanley
f DAsia Limited
b 3 2013(“Morgan Stanley”) pursuant to the terms of a letter of engagement and a letter of indemnification with the independent special committee of the Board of Directors (the “Client”) of Giant
This document
Interactive Group,hasInc.
been(theprepared by Morgan
“Company”) Stanley Asia Limited ( Morgan Stanley ) pursuant to the terms of a letter of engagement and a letter of indemnification with the independent special committee of the Board of Directors (the Client ) of Giant
This
the document
Client and hasdirectors,
its been prepared
officers, the dated
Clientasonly
foremployees, of December
in the context
representatives
3, 2013.
andof the Transaction
agents (as defined
in strictStanley’s
confidence. below)
This documentand, together
and anywith any oral
materials mustornot
other
be supplemental
photocopied or information
reproducedprovided in connection
in any electronic, with or
physical thisother
document
form and(collectively,
must not be“materials”),
communicated,mustdisclosed
be held by or
distributed
The purpose toofany other
this person
document intowhole
is provideor in
thepart at any
Client with time
an except with Morgan
explanation of the basis upon prior
which written
Morgan consent.
Stanleyall is of
issuing a financial ordinary
opinion letter (the “Opinion”) in relation torepresented
the proposal
of his
per affiliated
share or ADS entities),
(the and an affiliate
“Transaction”). of Baring
This document Private
shouldEquity
be Asiain(collectively,
read conjunction the
with “Consortium”)
and is subject to the
to acquire
terms of theOpinion.
the outstanding
This document shares, including
supersedes any ordinary
previous shares
documents or byby the Company’s
American
presentations delivered by
Chairman,
Depositary Shares,
Morgan
being
of theMr.
Stanley to
Yuzhu Shi
Company
the Client
(and certain
forinUS$11.75
connection
with
In the Transaction.
preparing this document, Morgan Stanley has: (i) used information obtained from the Company and public sources; (ii) assumed and relied upon, without independent verification, the accuracy and completeness of the information supplied or otherwise
made available
judgments of thetofuture
it for the purposes of this document; (iii) assumed thatdate
the financial projections and
notother financial
anydata relating tovaluation
the Company have been reasonably and properly prepared on bases reflecting
in anythe best currently available estimates and
provided with
Neither Morgan any such financial
Stanley, valuation
its
performance
or appraisal,
affiliates
of the which
ofupon
nor anyprospects
Company as at relied
we have
their respective
the
directors,
of thisindependent
without
officers,
document;
employeesif or
(iv)
valuation.
agents
conducted
(the
independent or appraisal of the assets or liabilities of any company involved proposed transaction; and (v) not been
projections,
eitherdocument management
generates. Furthermore,targets,
and estimates,
without prejudice toorliability
returns for
contained
fraud, in member
no this document, any;
of the Stanley
Morgan orStanley
(ii) the“Morgan
accuracy
Group
Stanley
accepts
Group”) gives
or completeness
or will accept anyany
ofany representation
information
liability,
or warranty,
contained
responsibility
express or any
in obligation
or this document, implied, information
(whetheroral
as to: (i) the provided
in contract, tort or
achievement or reasonableness oforfuture
in connection
otherwise) in relationtherewith any data that
to these matters.
This
For the is not a financial opinion or recommendation by any member of the Morgan Group.
owes
Any toavoidance
views Client of
thecontained aredoubt,
those
in
no member
this set
document
of
forth in,are
andthesubject
based
Morgan Stanley
to the
on financial,otherGroup
economic,
owes of,
provisions anythe
market
fiduciary dutiesletter
engagement
and
to theand
other conditions
Client, the Company
indemnity
prevailing entered
at the
or any
into
date hereof
other person
between Morgan
and Morgan
whether
Stanley
Stanley
inand
shall
respect
bethe
of thisindocument,
Client
under connection
no obligation
the Opinion,
with
to update the the Transaction or otherwise. The only duties Morgan Stanley
Transaction.
this document or any materials in the light of changes to such
conditions
This documentor otherwise.
and the information contained
a financing,
Client. We underwrite
recommend or purchase
that the Clientor seek anherein
agentdo
act asindependent or not
third
constitute
advisor or in
party
an offer
any
legal, othertocapacity
regulatory,
sell or the solicitation
with
accounting respect
and toof
tax anyantransaction,
advice
offer to buyorany
regarding the
security,
commit
contents
commodity
capital,
of
or instrument
ordocument.
this to participate
This
ortrading
indocument
any related strategies,
is
derivative,and
not a research
nordodonot
report
theyconstitute
and
constitutelegal,
an offer
was not prepared
or commitment
regulatory, accounting
by the research
to lend,
or taxsyndicate
departmentadvice
of thetoor
thearrange
Morgan
Stanley Group. anything herein to the contrary, the Client, the Company and their directors, officers, employees, representatives and other agents may disclose to any and all persons, without limitation
Notwithstanding of tax
anystructure.
kind fromForthethis
commencement ofstructure”
discussions,
the U.S. federal
limited toStanley and state income tax treatment and tax structure of the Transaction and all materials of any kind (including opinions or other tax analyses) that are
facts relevant to the U.S. federal and state income tax treatment of the Transaction and does not include information relating to the identity of the parties or their affiliates, agents or advisors. provided relating to the tax treatment and purpose, “tax is
Morgan
2
CONFIDENTIAL
Introduction
Project Goliath
Transaction Overview
The
O Consortium
100% f llsubmitted
dil d a preliminary
i b i htakeI diprivate
i offer
Off (thel “Indicative
h C Offer”) on November
i l 25
$2 2013
95B to the Board of Directors of Goliath The Indicative Offer is for $11 75 per ADS (the “Indicative Price”) and is posted on the SEC website
The OnConsortium submitted a preliminary take-private offer (the Indicative Offerat) approximately
on November 25, 2013 to the Board of Directors of Goliath. The Indicative Offer is for $11.75 per ADS (the Indicative Price ), and is posted on the SEC website
––The a 100%
Premium offully
24.0%,diluted equity
29.1%, basis,
31.3% andthe Indicative
31.6% to the Offer values the Company
volume-weighted average price during $2.95Bn
the last 5, 30, 60 trading days and last 3-months
– AsConsortium
The Consortium
collectively
part of the transaction,
intends to
owns
finance
approximately
Chairmanthe Shi intends 47%
transaction with
of thehis
to reduce
a
Company
combination
on a fully-diluted
currentofshareholding
debt and equity
basis
in Goliath from
capital. 42.5%
Equity to a fully
financing diluted
would pre-transaction
be provided the20%
fromAugust stake
Consortium
–Chairmanvote Shi proposed
for the and Baring have signed
transaction and anot
consortium
take agreement and havewith
agreed
it to work with each other exclusively for nine months until 25, 2014. and
Theany additional
consortium membersobligates
agreement that are accepted into theto:
the Consortium Consortium
––Valuation
not transfer
vote against any
anyof their
competingrespective
proposalshares in theany
or matter that
action inconsistent
Company unless as aotherwise
would facilitate competing permitted
proposalunder the Consortium Agreement
Methodology
–In assessing trading
Historical the Indicative
ranges Price, we have considered the following:
––– Comparable
Range of broker target
companies
Precedent transaction
prices
analysis
analysis
–– Discounted
Leveraged cash flow
buyout (“DCF”)
(“LBO”) analysis
analysis
Morgan
3 Stanley
CONFIDENTIAL
Project Goliath
Chinese Online Gaming
Up to November Peer
22, 2013 Share Price
(1 Trading DayPerformance
Prior to the Indicative Offer Announcement)
Goliath’s
Sh P i share
P fprice dropped in September 2011 primarily due to the payment of a special dividend of US$708MM
Goliath s share
ShareThree
Price price dropped in September 2011 primarily due to the payment of a special dividend of US$708MM
Performance
Last
200 Years
NetEase: 62.3%
150
Goliath: 42.5%
100
Changyou: (17.8%)
50
Shanda: (33.9%)
Perfect World: (40.8%) 0
Nov-10
May-11 Feb-11
Aug-11
Dec-11
Mar-12 Jun-12
Oct-12
Jan-13
Apr-13
Nov-13 Aug-13
Goliath
NetEase
Changyou
Shanda
Perfect CapIQ
Source World
Morgan
4 Stanley
CONFIDENTIAL
Goliath Trading Volume Analysis
Up to November
Project Goliath 22, 2013 (1 Trading Day Prior to the Indicative Offer Announcement)
• Goliath
G li h ADSs
h havedtraded
d b between US$5i 09Pand
h I di i US$10
i J 13 in
30the last 12 months prior to the Indicative Offer announcement
2008
•– Goliath
Goliath ADSs nothave traded between US$5.09Price
and US$10.13
since June in
30,the last 12 months prior to the Indicative Offer announcement
ADS
US$ Pricehas
Tradingtraded
Rangeabove the Indicative 2008
20 11 19.20
13.46
6.48 6.39 6.32
6.28
6.23 6.18 6.04
6.52
5.41
8.19 7.71
8.02 7.45 7.25 6.93
7.55
8.50
6.51
9.05 8.46 8.26
8.10
7.96 7.82 7.71
9.30
7.34
9.16 8.17
7.88 8.50 7.55 6.93 6.30
5.41
10.13 9.39 9.21
9.06
8.92 8.63 8.43
10.13
8.24
9.08
8.45
8.11
7.71
7.34
6.48
6.16
10.13
10.65
8.77
7.92
7.39
6.48
5.15
5.09
23.15
1Q13 Volume
Total 2Q13 3Q13(MM YTD2013
ADS) L1M LTM Since IPO
54 TSO
% 87.1 (1)
62 258 3826
22Volume
36 280 1,320
108
25% of CapIQ
Source Total 50%16of117 551Volume 75% of Total Volume 100% of Total Volume
Total
Note
1. BasedStanley
on 239.6MM ordinary shares outstanding as of October 31, 2013
Morgan 5
Morgan Stanley
CONFIDENTIAL
Project Goliath
•• Goliath’s P/E dropped in September 2011 primarily
HiCashi has
lMat times
l i l represented
A l i a significant portion ofdue
thetomarket
the payment
value of a special dividend of US$708MM
•Historical
Cash hasMultiple
at times represented a significant portion of the market value
Up to November
Historical 22,Analysis
2013 P/E
NTM Adjusted (1 Trading
(1) Day Prior to the Indicative Offer Announcement)
xLast
16
3 Years
12
84
Indicative
Nov-10 Apr-11 Price:Aug-11
11.4x (2) SinceMay-12
IPO Avg.:11.0x Pre-Offer: 9.8x (2) L1M Avg.: 9.7x LTM Avg.: 8.1x
Historical Ex-Cash NTMJan-12
Adjusted Oct-12 Feb-13
P/E (1) Jul-13 Nov-13
xLast
12
3 Years
Premium of Indicative
L1M Adjusted NTM P/E Price
17%
LTM Adjusted NTM P/E
40%
L1M Adjusted NTM
46%
Ex-Cash P/E NTM
LTM Adjusted
22%
Ex-Cash
12 P/E
96
30
Indicative Price:Aug-11
Nov-10 Apr-11 8.7x (2)Jan-12
Pre-Offer: 7.1xOct-12
May-12 (2) L1M Avg.:Jul-13
Feb-13 7.1x Since
Nov-13IPO Avg.: 6.7x LTM Avg.: 6.0x
Sources
Notes Company Filings, CapIQ
1. Based
2. Consensus
on estimates
2014E from brokers
management as aggregated by CapIQ
projections
6
Morgan Stanley
CONFIDENTIAL
Project Goliath
Historical Multiple
Up to November
Hi i l NTM Adj22Analysis
2013 (1 Trading
d AV Day(1)(3)
/ EBITDA Prior to the Indicative Offer Announcement)
Up to November
Historical 22, 2013 AV
NTM Adjusted (1 Trading
/ EBITDADay(1)(3)
Prior to the Indicative Offer Announcement)
Since
x10 IPO
86
4Indicative
Price: 8.3x (2)
Pre-Offer:
6.9x (2)
L1M Avg.:
6.4x
Since IPO
Avg.: Avg.:
LTM 6.2x
5.5x
20
Indicative Price:
Pre-Offer: 8.3x (2)Avg.: Since 6.4x IPO Avg.: 6.2x LTM Avg.: 5.5x
Premium
L1M of6.9x
Adjusted
(2) L1M
Indicative
NTM AV Price
/
37%
EBITDA
LTM
57% Adjusted NTM AV /
EBITDA
Nov-10 Apr-11 Aug-11 Jan-12 May-12 Oct-12 Feb-13 Jul-13 Nov-13
Sources
Notes Company Filings, CapIQ
1. Consensus
2. AV
Based estimates
on 2014E from
management brokers as aggregated by CapIQ
projections
3.
7Morganbetween September 12, 2011 and October 31, 2011 adjusted for US $708MM special dividend
Stanley
CONFIDENTIAL
•Project Goliath
• Goliath’s P/E
Cash has at dropped
times in September
represented 2011 primarily
a significant portion ofdue
thetomarket
the payment
value of a special dividend of US$708MM
GoliathNHistorical
U b 22 Trading Multiples
2013 (1 T di vs D Select
P i Peersh I di i Off A )
Goliath Historical22,
Up to November Trading Multiples
2013 P/E
(1 Trading vs.
DaySelect
PriorPeers
to the Indicative Offer Announcement)
Historical
Last NTM Adjusted (1)
x18 Three Years
12
60
Perfect
Goliath:World:
(2)6.2x11.6x NetEase: 11.5x
9.8x
Changyou:
Nov-10 Mar-11 Shanda:Oct-11
Jun-11 4.7x Feb-12 May-12 Sep-12 Dec-12 Apr-13 Aug-13 Nov-13
Goliath
NetEase
Changyou
Perfect World
Shanda
Sources CapIQ
Notes
1. Based
Consensus estimates from brokers as aggregated by CapIQ
2. on 2014E
8Morgan Stanley management projections
CONFIDENTIAL
Project Goliath
Goliath
Up Historical22,
to November Trading Multiples
2013 (1 Tradingvs.
DaySelect
PriorPeers
to the Indicative Offer Announcement)
Historical
L Th NTMY Adjusted AV / EBITDA (1)(2)
Historical
ThreeNTM
YearsAdjusted AV / EBITDA (1)(2)
xLast
12
96
30
Goliath:
6.9x (3) NetEase:
6.8x
Perfect World:
5.7x
Shanda:
3.6x
3.3x (4) Changyou:
Nov-10
Goliath Apr-11 Aug-11 Jan-12 May-12 Oct-12 Feb-13 Jul-13 Nov-13
NetEase
Changyou
Perfect World
Shanda
Sources CapIQ, Company Filings
Notes
1. Goliath’s
2. ConsensusAVestimates
between from brokers12,
September as aggregated by CapIQ
2011 and October 31, 2011 adjusted for special dividend of $ US708MM
3. Based on Shanda
2014E management projections
94. Assumes
Morgan Stanley
Game’s net cash position is zero after July 28, 2013, due to the payment of $ US812MM to the parent, Shanda Interactive, for the acquisitions of the platform-related business
CONFIDENTIAL
•Project
-• L1M
Goliath
Goliath
to has
LTMtraded
VWAPat awithin
significantly
range oflower level than
~US$7.5-9.1 perthe Indicative Price in the twelve months prior to offer announcement
ADS
GEven
li hwith
Hi thei share
l ADSprice
P i runP upf prior to announcement the Indicative Offer still represents a 16 0% premium to the pre announcement price
•Goliath
Even with the share
Historical ADS price run-up
Price prior to announcement, the Indicative Offer still represents a 16.0% premium to the pre-announcement price
Performance
Up
LTM toPrice
November 22, 2013
Performance (1 Trading Day Prior to the Indicative Offer Announcement)
US$ 15.00
Nov-13-2012 Announced 3Q13 results (revenue ofresults
US$86MM vs. consensus of US$85MM)
Feb-26-2013 Announced
May-7-2013 Announced 1Q134Q12 results
and full(revenue
year 2012
of US$92MM (4Q12 revenue
vs.ADS of US$92MM
consensus vs. consensus of US$91MM)
of US$92MM)
Jun-5-2013Ntreev
Jul-5-2013 Announced
Soft and priced
enters follow-on offering
into as
cooperation deal forofjoint
11MMdevelopment of mobile games
Aug-22-2013
Sep-16-2013 Signed
AnnouncedMike Tyson an ambassador for World
resignation of Lu Zhang from the board of Xianxia
Indicative
10.00 Offer: US$11.75
US$10.13
5.00
Apr-9-2013
Apr-18-2013Announced
Announcedresignation
new CEO Wei of Mr.LiuYuzhu
and Shi as CEO
President Xuefeng Ji Network
Jun-17-2013
Aug-6-2013 Announced
Announced investment
2Q13 in(revenue
mobile
resultspublic game developer
of US$96MM Dijiang
vs. consensus of US$96MM)
Sep-6-2013 World
Nov-6-2013 of Xianxia
Announced 3Q13 began
results testing
(revenue of US$96MM vs. consensus of US$97MM)
Summary Share Price
Share
Premium
Offer of Price
Price
Pre-announcement
L1M VWAP
VWAP 8.93 10.13 16.0%
9.10 31.6%
29.1%
L3M
L6M VWAP 8.37 40.4%
LTM
SourceVWAP
CapIQ7.58 54.9%
0.00
Nov-12 Jan-13 Feb-13 Apr-13 May-13 Jun-13 Aug-13 Sep-13 Nov-13
Sources
10 Company Announcements, CapIQ
Morgan Stanley
CONFIDENTIAL
•Project Goliath
• Indicative Price
Broker target is ~25%
prices higher
remain than consensus
unchanged target priceOffer announcement and are in the range of US$9.00- US$9.60 (2)
post the Indicative
Analyst
S l dTargets
S & Commentary
R hE i (1)(2)
Analyst
SelectedTargets
Summary & Commentary
US$MM,
Oppenheimer except forResearch
Morgan target
Stanley
Estimates
price and EPS
CICC
(1)(2)
Barclays Macquarie Median
Date 11/26/2013
Rating N/A Buy 11/25/2013
Buy Buy 11/8/2013 11/7/2013 11/7/2013
TP N/A2014E
2013E 9.60 9.00
2015E9.20 9.40Buy
2013E 9.30
2014E 2015E 2013E 2014E 2015E 2013E 384 385 385 387 385 385
Revenue
N/A 469 425 435
N/A 570 449
490 483
490 440 440
Adjusted
N/A 306 N/A EBIT367 243304264306244 284 235 272 246 320 245 279 244 279
Adjusted
Adjusted EBITDA
Net Income 2732014E
302 N/A2015E252224291237
314 N/A238 N/A N/A 263 339 391 N/A N/A N/A 263 302 352
Adjusted
2014E EPS
2015E 2013E
0.95 1.040.94 0.98
1.12 0.97
1.15 0.95
1.02 0.96N/A
1.04 0.96 258 277 240 276 N/A 235 289 325 238 256 273 238 258 277
N/A
Source Broker Research,1.11
1.11 N/A 1.28 1.07 CapIQ, Bloomberg
Positives
“Goliath owns aZT healthy
-flagship
Morgangame,
Stanley, Onlinegame
November
pipeline,
2, remain
7, 2013
including
healthy... six games
Goliath expectsinWorld
operation, as welltoasbe3+itsMMORPGs,
of Xianxia 2+ web
next key growth games
engine, and 2+ mobile
following games,
the success which
of ZT should
Online continue
2, and to to
it plans fuel its growth...
release the firstWe believe the
expansion packgamer community
for the and in-game
game in November economics for Goliath’s
2013.
“Goliath’s
that management
diversifies the company’srestated the company’s
development efficient cost control strategy and attributed its well-maintained margins to 1) in-house dominated game portfolio, 2) effective marketing spend on new game launch and 3) minority interest-based studio model
risks.”
- Barclays,
“Goliath November
continues to 7, 2013 on
execute its strategy to try diversifying away from the maturing PC MMO market into mobile games and webgames. The company has a steady cash flow from its MMO game portfolio, which we believe strength in ZT2 and 7,
contribution
2013 from XianXia have helped to offset a decline in ZT Original in the quarter. It plans to focus on the developer side as well in the mobile game market, with a mix of hardcore and casual games.” - Bank of America Merrill Lynch, November
“We believe
licensing the performance
games including CangTianof its existing
2 from hit games,
Korea and ZT series and
a shooting ZT2, is
game..” largely
- Bank of stable
America as aMerrill
mix while the November
Lynch, company is25,
lining
2013up for a more busy launch schedule in 2014, including a dozen mobile games, ZT3 (new version of ZT series), a couple of
Concerns
“Although we- believe that Goliath may potentially sacrifice part of its top-line growth to drive stable earnings as well as cash dividends, we believe this would be attractive to risk-averse investors preferring to have China online game exposure with stable
cash
“Sincereturn.”
Goliath Barclays, November
licensed7,MMO2013
Commentary
“This onwill
represents a 16%
launch
Indicative aOffer
premium overcompares
game Cang Tian 2 in 2014, gross margin will likely go down by 2-3%, in our view.” - Macquarie, November 7, 2013
the last trading price
“Goliath’s
premium implied
range of takeout
15-70% valuation
(an average of favorably
31% and to (vs.
a median its 15% for Focus
ofUS-listed ChineseMedia,
24%). - Oppenheimer, online 24% for Shanda
gaming
November peers, Interactive,
which
26, 2013
33% for
are trading Tom
at an Online).
average TheP/E
2014E proposed price
multiple implies
of 8.5x and11.7x 2014e P/E
EV/EBITDA (10.3x of
multiple ex-cash)
4.5x. We- Morgan
also noteStanley, November
that recent 25,MBOs
Chinese 2013 have a takeout
Source Broker
Research Research
Recommendation Summary
Hold83%
Buy 17%
Notes
1. Estimates
Only include
2.
11 are reports
converted thatfrom
wereRMB published
to USDpostatthe 3Q 2013 earnings
an exchange releasebased
rate of 6.1200 on November 6, 2013guidance
on management and those that have adjusted estimates for share-based compensation
Morgan Stanley
CONFIDENTIAL
Revenue Project Goliath Goliath Summary Financial Projections
Gross
US Profit
$MM US $MM
2Margin
000 1 (%)
500 1 000 500 0
Margin
2,000285 (%) 1,000 500 0
1,500
202
1,250 346750
1,000 385500384250
4600440 614 490 712 798 894 1,001 1,081 1,167 1,261
172 244
2010 2011300 3362013E
2012 335 382 382 498
2014E 2015E4232016E
578 647 725 812
2017E 2018E8772019E
947 1,023
2020E 100 92 842022E
2021E 76 68 60
Growth
Difference
41.0% 21.5%
(2.0%) 4.5% 11.1% 19.6% 33.5% 16.0% 12.0% 12.0% 12.0% 8.0% 8.0% 8.0%
25.3%
2010 2011
Growth23.0% 2012 2013E
Difference 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
42.0%
0.3% 0.1%Management11.9% 13.9% 30.4% 16.0% 12.0% 12.0% 12.0% 8.0% 8.0% 8.0%
17.9%
Historical
Select Broker ConsensusProjections
(1) Growth
Historical
Select Broker Management
Consensus Projections
(1) Margin
Sources
Adjusted Management
EBITDA (2)Projections, Broker Research Sources Management Projections, Broker Research
US$MM Margin
Adjusted Net (%)
Income (2)
US$MM
800 600 Margin
400 200 (%)
0 121 189 241 26385258 302
433 144
118 484 213
542 238
606 230
654 258
706 255
762 100
302 27770 40286
55374
333
373 352
750
420 500
472 250 0555 601 80 60 40 20
5122019E
2010
2010 20112011 2012
2012 2013E
2013E 2014E
2014E 2015E
2015E 2016E
2016E 2017E
2017E 2018E
2018E 2019E 2020E
2020E 2021E
2021E 2022E
2022E7.9% 7.9% (1.9%) (5.4%) 6.1%
Growth Difference
Growth Difference 56.7%
22.6% 27.7% 6.9%
47.7% 8.0% 10.9%
10.9% 30.6%
18.4% 15.9%
10.1% 12.0%
12.4% 11.9%
12.4% 11.8%
12.3% 7.9%
8.4% 8.4% 8.4% (3.1%) (1.0%) 9.2%
Historical
Historical Management
Management Projections Select
ProjectionsBroker Broker
Select ResearchConsensus
Broker Consensus (1)
(1) Margin
Margin Projections, Broker Research
Sources
Revenue Management Projections, Sources Management
•• Management
Licensed gamesprojects revenue
expected to to undergo
contribute relatively
8.6% and higher
17.2% of growth
revenue in
in2014
2014 and
and 2015
2015,due to the expected
respectively, licensed
an increase games
over in the pipeline
the 2010-2012 as well
average as anticipated contribution from webgames and mobile games
of 2.9%
•Gross Profit
The increasing
EBITDA contribution from licensed games leads to increases in revenue share with companies from whom Goliath licenses games; hence, lower gross margins beyond 2014
•– Operating
Growth expenses projected to remain relatively constant
in R&D expenses in line with growth in labor costs as a % of total sales going forward
Net Income
•Notes
Management expects certain taxthat
benefits to cease from
1. Based
2. Adjusted on broker
for share-based reports
compensationwereand
published post2014
impairment the onwards
3Q 2013Stanley
12 Morgan earnings release on November 6, 2013 and those that have adjusted estimates for share-based compensation
CONFIDENTIAL
Project Goliath
Goliath
Based onValuation Summary
Management Projections
I60 Day
li d 30
G Day
li h Indicative
ADS V l (1)(2)(3) VWAP (4) VWAP (4) P i
60-Day
Implied 30-Day
Goliath Indicative
per ADS Value (1)(2)(3) VWAP (4) VWAP (4) Price:
$8.98 $9.10
Historical $11.75
Trading
One Month
Three Months Prior toRange
Prior Indicative Offer Announcement $8.24 $10.13
Six Months
Twelve Months to to
PriorPrior Indicative
Indicative
to Indicative
Offer
Offer Announcement
Announcement
Offer Announcement
$7.42
$7.00 $10.13
$10.13
$5.09 $10.13
Broker Target Price
Undiscounted Broker Estimates (Prior to Indicative Offer Announcement) $8.10 $10.40
Comparable
2013E Adjusted Companies
Adjusted P/EP/E (5–11x)
(6–12x) $5.17
$5.59 $11.37
$11.18
2014E
2015E Adjusted
Adjusted AV P/E /(5-10x) $6.12 $12.23 $5.89 $10.51
2013E
2014E Adjusted
Adjusted AV AV // EBITDA
EBITDA (3.5–8.0x)
(3.0–7.0x) $6.01
$5.71 $11.22
$10.27
2015E
Precedent Transactions EBITDA (2.5-6.0x)
LTM
NTM Adjusted
Adjusted P/E
P/E (11–17x)
(10–16x) (5) $10.25
$10.33 $15.84
$16.53
LTM Adjusted
NTM Adjusted AV
AV // EBITDA
EBITDA (7–9x)
(6–8x) (5) $9.48
$9.13 $11.53
$11.41
Premium to
Premium to L1M
L1M VWAP
VWAP for for U.S.–listed
Gaming Precedents
Chinese (20–30%)
Companies$10.92 $11.83
(30–35%) $11.83 $12.29
DCF (Includes
Management Value of Alibaba
Projections, Stake)WACC,
12.7–14.7% (6) 1–3% PGR $15.71 $19.65
Management Projections
1–3% PGR – Leveraged
ILLUSTRATIVE and Management
PURPOSESWACC ONLYAssumption,
$9.60 $10.3924.0–26.0% WACC,
Hypothetical
25–35% Buyout
$0 $5 $10Target
Notes $15 $20IRR,$25$1.0Bn PF Leverage, 7.0–9.0x 2014 Adjusted AV / EBITDA Exit $10.07 $12.46
1.
2. Accounts for
arestock
All figuresand based options and restricted stock units (RSUs) using specified
treasury method at the Indicative Price
3.
4. EBITDA
Prior to EPS
indicative areonadjusted
Offer
management
date offor
projections
share-based
November
unless otherwise
compensation
25, 2013
5. Assumes
6. LTM financials
total as of December
Alibaba equity 31, 2013
value of based
US$120Bn, on management
based on projection
median provided
of broker estimates
13
Morgan Stanley
CONFIDENTIAL
Project Goliath
Comparables
As of DecemberAnalysis
Trading
(US$MM Statistics27,
ofh 2013
Selected
i Comparable
d i ) Companies
Trading
(US$MM, Statistics
except of Selected
share Comparable
price and ratios) Companies
Last
PriceClose
Trading Market Aggregate AV / Sales (2) Adjusted AV / EBITDA (2) (3) Adjusted P/E (2) (3)
Company
Goliath 12/27/2013
(pre-announcement) Currency- Value
Management(1) Value
Case 2013E
(3)(4) 2014E
10.13 2015E
USD 2013E
2,544 2014E
1,975 2015E 2013E 2014E 5.3x
2015E
Goliath (at
Primary offerOnline
price)Gaming
- Management Case (4) 11.75 USD 2,952 2,382 6.2x 5.2x5.1x
3.9x4.3x
9.2x3.2x
8.3x7.7x
6.4x6.9x 10.9x
12.6x 11.4x 9.8x 8.3x
9.6x
NetEase China
Changyou 78.46
31.59USDUSD 10,266
1,693
Peers
7,120
1,155 4.6x
1.6x 4.0x
1.4x 3.6x
1.2x 9.2x
3.5x 8.0x
3.4x 7.0x
2.8x13.5x
6.8x 12.0x5.4x
6.2x 10.7x
Shanda Games
NetDragon (5)
(6)17.83 4.49
13.90USD USD
HKD886 1,216
950462 1,266
722 N.A.0.8x 1.7x 1.6x 1.6x
4.2x 3.6x4.7x 4.6x
N.A. 10.1x 4.1x 3.9x
6.5x N.A. 5.7x 5.3x
12.2x 5.0x
Perfect
Forgame World 3.2x 0.9x 1.8x 0.7x 6.4x3.6x
4.8x3.0x
9.2x10.1x 8.0x 6.5x10.7x
Boyaa (7)51.30
China Mobile
HKD 844
7.74Games
HKD 868 608
and
648 5.6x 2.3x 3.0x
4.2x
Entertainment
10.3x 11.1x
15.9x
(8)(9) 22.65 USD7.9x 67821.6x
10.8x
16.8x
633 9.9x
8.5x
12.1x
2.8x 1.6x N.A. N.A. N.A. N.M. 18.1x 9.0x
Mean:
Median:3.9x
3.2x2.7x
2.6x2.1x
1.7x8.0x 6.7x
6.9x 6.4x5.1x
4.8x11.2x 11.2x
11.4x8.5x
9.7xCompany 8.7x
Sources
Notes Goliath Management Projections, Filings, Broker Research, CapIQ
1. Revenue
2. Fully-diluted
and total shares
EBITDA outstanding
estimates based based
on on treasury
Thomson stock
broker method for
consensus; in-the-money
EPS are adjustedoptions as disclosed
from consensus in latest
GAAP EPSfiling
based on broker estimates of share-based compensation
3. Based
4. As of November
on Goliath’s22,balance
2013, the lastastrading
sheet of day prior
December 31,to2013E
the indicative
based onoffer announcement
management projection
5. NetDragon’s
6. Assumes Shanda cashGame’s net cash
is adjusted position is cash
for US$1.09Bn zero due to the payment
consideration from of
theUS$812MM
sale of to the parent,
its majority stake inShanda
9191 Interactive,
Wireless for and
to Baidu the acquisitions
US$515MMofspecial
the platform-related business
dividend announced on October 29, 2013; 2013E multiples are N/A given consensus estimates include
consolidated
8. China
Estimates results
are based from 91 Wireless for 9M 2013; 2014E and 2015E consensus estimates do not include Wireless
9.
14 Mobile Gamesonand Brean Capital estimates
Entertainment’s as of December,
net income is adjusted13,
for2013
share-based compensation, impairment of goodwill and impairment of intangible assets
Morgan Stanley
CONFIDENTIAL
Project Goliath
Precedent
Precedent Online Gaming Transactions
Transactions
US$MM
N GAAP AV/EBITDA(1)(4) N GAAP P/E(1)(4) P i P i / (Di )
US$MM
Non-GAAP AV/EBITDA(1)(4) Non-GAAP P/E(1)(4) Price Premium / (Discount)
Date Equity Target
Announced Agg %/ 1Acquiror
Month 1Value(1)
Day 52 Week
Value(1) Acquired LTM(2) NTM(3) LTM(2) NTM(3) VWAP
07/29/13 Activision
07/25/13 Shanda Interactive’s
/ Investor Platform
Consortium - Related
15,664 Affiliates
11,899 / Shanda
24.9% Games
6.0x7.9x 812 812(5)
8.9x30.9x
10.5x 100.0%
17.3x26.8%
(8.4%) N.A. Prior
(11.6%) N.A. High
N.A. 9.3x (6) N.A. N.A. N.A.
(15.6%)
10/17/11 Shanda
12/02/07 Vivendi Interactive
Games / / Chairman
Activision 2,396
8,121 1,542
8,121(5) 31.6%
100.0%(7) 8.2x
N.A. N.A. N.A. 32.5x
N.A. N.A. N.A.23.5%
N.A. (23.7%)
Mean 7.1x
Median 7.1x8.4x 20.7x
8.4x 20.7x19.7x
17.3x9.2%
9.2%5.9%
5.9% (19.6%)
(19.6%)
Sources
Notes Company Filings, News Release, CapIQ
1.
2. Equity value
Based on the and aggregate value
LTMof the targetprior
as oftoannouncement date. Data as disclosed in the deal announcement or calculated based on the latest financials disclosed prior to announcement
3.
4. Activision andlatest
EBITDA aggregate
and EPS
available
Shanda Interactive’s
are adjusted
disclosure
NTM estimates
for market
share-based
the announcement
based
compensation on Thomson consensus estimates
5.
6. Assumes
Calculated based onvalue
equityequal
valuetoover value
2013E given noGAAP
projected publicnet
disclosure
income ondisclosed
as net cash in Shanda Game’s conference call and assumes no share-based compensation
7.
15 % Acquired indicates the outstanding shares that were not owned by the Chairman and his affiliates prior to the take-private transaction
Morgan Stanley
CONFIDENTIAL
Project Goliath
Precedent Acquisitions
Selected Precedent of US-Listed
Acquisitions Chinese Chinese
of US-listed Companies
Companies (1)
Initial Offeri Initial
(I ) I dOffer A
Premium
D To ShCompany
/ ADSPrice
E iperVOffer (2) 1M
l VWAP 3M D l S
VWAP
Initial Offer Initial
(Incorporation) Offer Ann.
Premium
DateTo Company Price perVal.
Offer (2) 1M 3M Deal Status
Harbin
(Nevada) Electric Industry
Machinery 11-Oct-10 Shares
$24.00 / ADS Equity
/ share $750MM VWAP
35.8% VWAP
35.1% Completed on November 3, 2011 at original offer price
Fushi Copperweld
Chemspec ChemicalMachinery
11-Nov-10 3-Nov-10
$8.00 / $11.50
ADS / share $440MM
$290MM 24.0% 20.9%
24.9% 31.2% Completed
Completed on August on15,
December
2011 27, 2012 at $9.50 / share (Nevada)
China Security & Surveillance Security 28-Jan-11 $6.50 / share $580MM
(Delaware) 30.0% 25.9% Completed onatSeptember
$8.10 / ADS 14,(Cayman)
2011 at original offer price
China Fire & Security Fire equipment 7-Mar-11 $9.00 / share $260MM 53.3% 39.2% Completed on November 4, 2011 at original offer price
(Florida)
Funtalk
(Cayman) Mobile 25-Mar-11
technology $7.10 / share $440MM 31.6% 28.8% Completed on August 22, 2011 at $7.20 / share
Shanda
(Cayman) Interactive Internet 17-Oct-11 $41.35 / ADS $2,300MM 26.6% 24.5% Completed on February 14, 2012 at original offer price
CRIC Internet 28-Oct-11
AsiaInfo-Linkage Software$6.62 / ADS $12.00
20-Jan-12 (2) $1,000MM 39.1% 20.4%
/ share48.8%
$890MM 61.7% Completed on April
39.6% Signed 24, 2012
definitive at $4.48on
agreement / ADS
May (3)
13,(Cayman)
2013 at original offer price (Delaware)
Zhongpin
Focus Media Food 27-Mar-12
Media $13.50
13-Aug-12 / share
$27.00 $500MM
/ $350MM
ADS $3,700MM 39.0%
37.7% Completed
31.1% on June
Completed on 27,
May2013
23,at2013
original offer
at $27.50 /price
ADS(Delaware)
(Cayman)
3SBio
7Yongye Pharma 12-Sep-12
Days Hospitality $15.00
26-Sep-12 / ADS 30.2% 25.3% Completed on May 30, 2013 at $ 16.70 / ADS (Cayman)
(Nevada) Food 15-Oct-12 $6.60$12.70
/ share /$334MM
ADS $640MM 45.0%34.5%
63.5%33.7%
SignedCompleted on July 5, 2013
definitive agreement on Sepat 23,
$13.80
2013/ ADS
at $6.69(Cayman)
/ share
Simcere Software 11-Mar-13 $9.56 / ADS $535MM 20.8% 21.4% Signed definitive agreement on Aug 28, 2013 at $9.66 / share
(Cayman)
Pactera Technology 20-May-13 $7.50 / ADS $654MM 41.9% 22.6% Signed definitive agreement on Oct 17, 2013 at $7.30 / ADS
(Cayman)
iSoftStone
(Cayman) Technology 6-Jun-13 $5.85 / ADS $333MM 28.3% 27.7% On-going discussion
Spreadtrum
(Cayman) Technology approved
Shareholders 21-Jun-13the $28.50 / ADS on
transaction $1,625MM
Sep 14.1% 41.8% 40.2% Signed definitive agreement July 12, 2013 at $31.00 / ADS
4, 2013
Charm
(Cayman) Comm. Media 30-Sep-13 $4.70 / ADS $747MM 13.3% On-going discussion
RDA Microelectr. Technology 11-Nov-13 $18.50 / ADS $910MM 40.8% 53.4% Signed definitive agreement on Nov 11, 2013 at $18.5 / ADS with Tsinghua Unigroup
(Cayman)
Median
Median Premium
Premium (Cayman-incorp)
(Overall) 35.2% 31.6%
30.0% 25.3%
Sources Public Filings and Announcements, CapIQ
Notes
1. Approximate
2. Announced and ongoing
equity or of
values successfully
initial offercompleted
based on going private
available publictransactions of US-listed Chinese companies since 2010, with transaction equity value > $ US250MM
3. Initial offer
December 22, consists of
2011; price US $1.60
at signing iniscash
lower and 0.6announcement
than E-House shares perdisclosure
price CRIC
due to share at E-House
E-House share price of $8.36 as of October 27, 2011; revised offer consists of $1.75 in cash and 0.6 E-House shares per CRIC share at E-House share price of $4.55 as of
price drop
16
Morgan Stanley
CONFIDENTIAL
•Project Goliath
• Successful
Projectionsgames
assumeare highly
long termscalable,
growth totranslating to high
be supported margins
by long and sustainable
life-cycle of existingcash flows introduction of new MMO titles through both self-development and licensing, and diversification into webgames and mobile games
franchises,
• Howeverd projections
Di C h Fl A are highly
l i sensitive to successful launch of game titles
•Discounted
However, projections are highly sensitive to successful launch of game titles
Cash Flow Analysis
Based on Management
Illustrative Projections
DCF Value Based on Management Projections
US$MM
For Fiscal Years Ending December 31,
2013A 2014E
Revenue 2015E 2016E 2017E797.9
2018E 2019E 2020E 2021E1,167.4
2022E Terminal
% Growth384.5
Adjusted 11.3%
EBIT
459.9
19.6%
247.5
614.1
274.5
712.4
33.5% 16.0%
360.7
893.6
12.0%
418.458.7%
1,000.9
12.0%
468.658.7%
1,080.9
12.0%
524.9 58.7%
587.9 8.0% 8.0%1,260.8
634.9 8.0% 2.0%
% Margin
(-) Tax 64.4%
(1) (45.8) &59.7%
(50.8) 58.7% 58.7%
(66.8) (77.5) (86.8) (97.3) (108.9) 58.7%685.7
(117.7) 58.7%
(127.1)
740.5
58.7%
(137.2)
(+) Depreciation
(-) Capex
Increase Amortization
in Working 10.3
Capital(17.8) 11.5
(20.3)(18.3) 12.8
22.1 (18.8) 14.3
32.5 14.1 15.8 17.2
10.6(19.8) 18.4
11.5 (20.4)19.57.3
12.5 7.0 20.5
7.721.5
(-) (11.4)
(-) Non-controlling (12.8)
Purchase of Intangible (16.0)
Assets (13.1) (6.5)(17.5) (19.3)
(6.5) (19.7)
(6.5) (6.5) (6.5) (20.4)
(6.5) (6.5)(29.2)
(6.5) (6.5)
(-)
Unlevered Free Cash Interest
Flow (13.4) (1.7)
153.946.0% 0.5
236.245.6%
317.1 45.7%
327.4 363.7 (22.1)
408.8 (24.9)
459.1 (26.9)
490.5 (31.6) 4,986
530.3 573.9
% Margin
Aggregate 40.0%
Value 51.4%
3,578 51.6% 45.9% 45.4% 45.4% 45.5%
% Terminal
Net Cash (2) Value
577 43.7%
Equity Value
Equity Stake in Alibaba (3) 207
4,362
Value per ADS
Sensitivity 17.36 and PGR Sensitivity to WACC and PGR
to WACC
Value
WACC per ADS
WACC Implied EBITDA Multiple
17 12.7%
1.0% 18.45 13.2%
17.4413.7%
18.12 17.73 16.82 14.2% 14.7%1.0%
16.24 15.92
15.71 12.7%6.513.2% 6.013.7%
6.2 6.2 5.7 5.814.2% 14.7%
5.5
1.5%
PGR 2.0% 17.08
18.82 18.05 16.47
17.36 1.5% PGR
16.73 16.14 6.8 6.5
2.0% 7.26.0 6.8 6.5 6.3 6.0
2.5%
3.0% 19.21
19.65 18.40
18.79 17.67
18.01 17.00
17.30 16.39
16.65 2.5%
3.0% 7.5
8.0 7.2
7.6 6.9
7.2 6.6
6.9 6.3
6.6
Assumptions
DCF Run Date Dec-13
WACC
PGR 13.7%
2.0%
Implied
Implied FCF Multiple
EBITDA 8.5x 6.5x
Multiple
Notes
1. Assumes
2.
17 2013E netmanagement projected long-term
cash from management projectionstax rate of 18.5%
Morgan Stanley
CONFIDENTIAL
Discounted Cash Flow Analysis
Based
Projecton Management
Goliath Projections and Management WACC Assumption
• WACC
Managementd bWACC shown for f illustrative
i i purposes ionly
•• Management
WACC used WACC
by shown for
management illustrative
impairmentpurposes
forManagement accountingonly
Illustrative
US$MM DCF Value Based on Projections purposes
For Fiscal
2013A Years
2014E Ending
2015E December
2016E 2017E 31,
2018E 2019E 2020E 2021E1,167.4
2022E Terminal
Revenue
% Growth384.5
11.3% 459.9
19.6%614.1 712.4
33.5% 797.912.0%
16.0% 893.612.0%
1,000.912.0%
1,080.98.0% 8.0%1,260.8
8.0% 2.0%
Adjusted
% Margin EBIT
64.4% 247.5
59.7%274.5 360.7
58.7% 418.458.7%
58.7% 468.658.7%
524.9 58.7%
587.9 634.9
58.7%685.7
58.7% 740.5
58.7%
(-) Tax (1)
(+)Increase (45.8)
Depreciation (50.8) (66.8)
& Amortization (77.5) (86.8)
10.3 22.1 (97.3)
11.5 32.5
12.8 14.1 (108.9)
14.3 10.6 (117.7)
15.8 11.5
17.2 12.5
18.4(127.1)
19.57.3 (137.2)
20.5
(-)
(-) Purchase in
Capex (11.4) Working Capital
(12.8) (16.0) (20.3)
(17.8) (18.3) (18.8) (19.3) (19.8)(6.5)
(20.4)7.0
(20.4) 7.721.5
(-) of
(-) Non-controlling Intangible
InterestAssets (13.1)
(13.4)236.2 (6.5)
(1.7) 317.1 (6.5)
0.5 (17.5) (6.5)
(19.7) (6.5)
(22.1) (6.5)
(24.9) (6.5)
(26.9) (6.5) (6.5)
(29.2) (31.6) 2,545
Unlevered Free
% Margin 40.0% Cash Flow 153.9 327.4 363.7 408.8
51.4% 51.6% 46.0% 45.6% 45.7% 45.9% 45.4% 45.4% 45.5% 459.1 490.5 530.3 573.9
Aggregate
% Terminal Value
Value 1,719
19.9%
Net Cash
Equity (2) 577
Stake in Alibaba (3) 207
Equityper
Value Value
ADS 2,503
9.96 and PGR Sensitivity to WACC and PGR
Sensitivity
Value per to WACC
ADS Implied EBITDA Multiple
WACC WACC
24.0%10.22
24.5% 25.0% 25.5% 26.0% 3 24.0% 24.5% 25.0% 25.5% 26.0%
1.0%
1.5% 2.0% 10.05
10.2610.30 9.90
9.93 9.74
10.0910.13 9.78 9.60
9.63 1.0% 3.3
3.4 3.2
1.5% PGR 3.3 3.2 3.1
3.3 3.5 3.0
3.2 3.4
3.1 3.3 3.3 3.2
PGR
2.5% 10.39
10.34 10.21 10.009.96
10.17 10.04 9.849.81
9.699.66
2.5% 3.7 2.0%
3.6 3.6
3.5 3.4 3.4
3.4 3.4
3.3
3.0%
WACC Analysis: 9.88
Management 9.72 3.0%
Assumptions 3.5
Cost
Cost of Equity
ofWeighting Capital
Debt 6.6%89.8% 28.0%
Equity
Debt Weighting
WACC 25.7% 10.2%
Assumptions
DCF Run
WACC Date Dec-13
25.0%
PGR 2.0%
Implied FCF Multiple 4.3x 3.3x
Implied
Notes EBITDA Multiple
1. Assumes
2. Assumes management
2013E nettotal
cashAlibaba projected long-term
from management tax rate of 18.5%
3.
18 equity valueprojections
of US$120Bn, based on median of broker estimates
Morgan Stanley
CONFIDENTIAL
Project Goliath
Goliath
$120Bn invested
Alibaba US$50.4MM in Alibaba
valuation represents at $13.50
median / share
estimate in September
of research 2011
analysts covering Yahoo!
E Refer to the appendix
i Affili A l ifor more details
–Equity
ReferAffiliate
to the appendix for more details
Analysis
Adjustment
Equity for Equity
Investment Stake in Alibaba
in Alibaba
US$
Assumed Alibaba Valuation ($Bn)in Alibaba ($MM) (1)
Implied Alibaba
Implied Value of Stake
Goliath’s
ValueStake
(Price perofGoliath
Implied
20.0 34 Goliath
$0.14 DCF Value
$16.67 Inclusive AlibabaADS)
Stake (Price per ADS) (2)
29.2 50
40.0 103 $0.20
69 $0.27 $16.74
$16.81
60.0
80.0 138 $0.41
$0.55 $16.95
$17.09
100.0 172
120.0 241 $0.69
207 $0.96 $17.22
$0.82 $17.50
$17.36
140.0
Sources Filings, Goliath Management Projections
Notes
1.
2. Assumes
Assumes
Morgan
implied Alibaba
calculated
Stanley WACCtotal basic shares outstanding of 2,165MM, based on Yahoo! filings as of April 30, 2013, of which Goliath currently owns 3.7MM based on initial investment of US$50.4MM at $13.50 / share
of 13.7%
19
CONFIDENTIAL
Project Goliath
Hypothetical LeveragedProjections
Based on Management Buyout Analysis
Sources and Uses
US$MM
Sources
US$MM and Uses
Sources
Cash Available 450
Acquisition
Sponsor 1,167 Debt 1,000
Chairman
Total SourcesRollover
3,208591
Uses
Purchase Equity 2,952
Min. Cash
Existing Debt (Transactional)
102 100
Transaction
Total Uses 3,208 and Financing Costs 55
Transaction
ImpliedAdjusted and Credit
Transaction Multiples
Multiples
2013E
2014E AdjustedAdjusted P/E AV / EBITDA
AV / EBITDA (1)(2)(3)
(1)(2)(3) 9.2x
8.3x
2013E
2014E Adjusted P/E (1) (1) 12.6x
11.4x
CreditDebt
Total Multiples
/ 2013E Adjusted EBITDA (2) 3.9x
2014E
PF DebtAdjusted
/ Total EBITDA
Capital 36%/ Interest Expense (2) 7.8x
PF Debt
Entry / Equity
Price 57% Analysis
Sensitivity
FY1
IRR AV / Adjusted EBITDA Exit Multiple
6.0x
25.0% 10.606.5x 7.0x
10.97 10.837.5x 8.0x
11.22 11.47 8.5x
11.729.0x 9.5x
11.97 10.0x
12.21 12.46 12.18
12.71 12.41
12.96
27.5%
30.0% 9.99 10.2810.18 11.06
10.4810.36 11.28
10.6910.55 11.51
10.8910.74 11.73
11.1010.92 11.96
11.3011.11
11.5111.30
11.7111.48
11.92
32.5%
35.0% 9.73 9.90 10.07 10.24 10.41 10.58 10.75 10.92 11.09
Key
Indicative Assumptions
Price: $11.75 per ADS
–Transaction
5-year
– Consortium
date:period
holding 31-Dec-13
rolls over exiting
pre-LBO at end
24.7%of FY2018
stake
Assuming acquisition debt funding of $1.0Bn
––– Pre-tax
Amortization
Additional ofschedule:
costcash debt
sweep
0%,
of 4.75%
with
0%,
for 20%, 40%, and 40% amortization over FY2014-2018, respectively
acquisition
available cash debt
––Transaction
Minimum
No cash balance
withholding tax of $100MM
assumed
and financing fee: $55MM
(4)
Assuming
Notes management is granted 5% of equity
1.
2. Equity
Figuresvalue assuming
adjusted exercise ofcompensation
all options andandRSUs outstanding using treasury method
3.
4. Includes
Company net debtfor
maintains
share-based
based on balance
21.8% of sheet
revenue asas
minimum
amortization
of December
cash balance
of intangibles
31, 2013E based
going on management
forward projections
(post-transaction); minimum cash percentage calculated as minimum cash percentage of 2014E revenue
Morgan Stanley
20
CONFIDENTIAL
Project Goliath
Transaction Matrix
Based on Management Projections
Transaction Matrix
US$MM l h i d
Transaction
US$MM, to Matrix
unless otherwise stated
Premium
Adjusted P /(2)
E/ EBITDA
(5)
Adjusted
AV / AV
Revenue (5)
Offer Price
Current ($)(1)
Price
1M VWAP
6M VWAP 3M VWAP
Equity Value
Agg Value (3)
(4) 2013E 2014E 2013E 2014E
2013E
Company 2014E
11.27 9.10Metrics
Indicative 8.93 8.37
Price:
(2)2,831 2,261 $0.93 $1.03 $258 $286 $384 $460
$11.75
$12.25 4%
9% 29%
35% 32%
37% 40%
46% 2,952 2,382 12.6x 11.4x 9.2x 8.3x 6.2x
6.5x 5.2x
$12.75
$13.25 13%
18% 40%
46% 43%
48% 52%3,077
3,2032,508
2,63313.1x
13.7x 11.9x
12.3x9.7x 8.8x
10.2x 9.2x 5.5x
9.6x 6.8x 5.7x
$13.75 26%
$14.25 22% 57%
51% 60%54% 58%
64% 3,329
70% 3,455 2,759
3,580
14.2x
2,885 15.3x
3,011
12.8x
14.8x 13.8x 10.7x
13.3x 11.7x
11.2x 10.5x
10.1x7.2x
7.5x6.0x
6.3x
$14.75 31%
Sources 62% 65%Projections,
Management 76% 3,706 3,136
CapIQ 15.8x 14.3x 12.2x 11.0x 7.8x
8.2x 6.5x
6.8x
Notes
1. Current share price as of December 27, 2013
2. VWAPs
3. Includes are
Equity value prior to
assumes Indicative Offer
allonoptions, announcement
RSUs, and RSs outstanding using treasury
4.
5. Figures net debt based balance sheet
adjusted for share-based compensation as of December 31, 2013E based onmethod; latest projections
management shares, options and RSUs balance from management as of October 31, 2013
Morgan
21 Stanley
CONFIDENTIAL
Project Goliath
Appendix
Appendix A
Morgan Stanley
22
Morgan
22 Stanley
CONFIDENTIAL
Project Goliath
Risk-free
Goliath’s rate based weighted
calculated on China’scost
10-year Treasury
of capital (base case) is 13.7% per CAPM method
APPENDIX
WACC A l i
APPENDIX
WACC Analysis:
Analysis CAPM Method
WACC
WACC Calculation
Assumption
Notes
Base
Low
High
Market Risk Premium (MRP)
Morgan
6.0% 6.0% Stanley estimated
6.0%(Rf market risk premium
Risk-Free
Spot rate Rate
10-year )
PBOC Treasury as of 12/27/2013
4.6% 4.6%
Predicted 4.6%
Beta
U.S. Local
1.28 1.28 1.28 Predicted Beta per Barra for Goliath
Sensitivity
+/- 1.0% Adjustment
from base
(1.0%)
Cost of 1.0%
Equity (KE )
Calculated using
Adjustments When theRequired:
Capital Asset Pricing Model 12.3% 11.3% 13.3%
Excess Cash
Adjusted Cost Adjustment
of Equity (1) 1.8%
(KE 1.8% 1.8%15.1%
) 14.1%
Is theofCost
Cost of Equity
Borrowing Reasonable? Yes13.1%
Yes Yes
Per Morgan
Taxtax
Rate Stanley GCM 4.5% 4.5% 4.5%
(t)based on management
LT
Post-tax rate
CostCapitalization estimates
of Debt (KD ) 3.7% 3.7% 3.7% 18.5% 18.5% 18.5%
Debt / Total
Based on current
Weighted
Capital Averagecapital
(WACC)
structure 3.5% 3.5% 3.5%
Cost of
KE * E/(D+E)
Sources Alacra,+Bloomberg,
KD * D/(D+E) 13.7%
Goliath 12.8% 14.7%
Management Projections
Note
1. Excess
excess
assumed nettocash
cash adjustment
equals cashcalculated
be US$100MM interest as difference
multiplied
per management
of implied
by total
guidance
cost
cashexcess
and less of capital andand
operating
net cash cash
costdebt,
of equity.
as of 2013YE total Implied
equity
assumed
cost
cost
to be
of capital
equals
US$477MM
calculated
cost of as difference
equity multiplied of yield
by equity on excess
value, net cashoperating
and aggregate and total equity cost
business divided
value by aggregate
equals aggregate value
operating
plus business
operatingvalue,
cash. where yieldcash
Operating on
Morgan
23 Stanley
CONFIDENTIAL
Project Goliath
APPENDIX
Yahoo!
Yahoo! Research
US$B Research Analyst Commentary on
Analyst Commentary on Alibaba
Alibaba Group
Yahoo!
US$Bn Research Analyst Commentary on Alibaba Group
Broker
Date
Value12/9/2013
RBC Methodology 150 / Comments
Macquarie
BAML 11/19/2013
10/16/2013 135150126
Oppenheimer
Piper Jaffray 10/16/2013
10/16/2013 120
Goldman
Evercore Sachs 10/15/2013
10/15/2013 112 120
SIG 10/16/2013
JP Morgan 110
10/16/2013 100
Cowen 10/16/2013
UBS 10/15/2013 105
N/A
Median
Source 120 reports
We are Broker
EBITDA now ascribing $150B in market value to Alibaba (vs. $110B prior), using a 10X P/S multiple on our approximate $15B in 2015 revenue, a multiple we believe is appropriate given comps and our projections for 35%+ revenue growth in ‘15 and 50%+
Estimatesmargins
generally
correspondingly value Alibaba anywhere from $100bn to $200bn; within our SOTP model, a $100bn valuation for Alibaba implies a ~$30.50/share value for YHOO. If Alibaba“s valuation rises to $150bn or $200bn, Yahoo“s per-share value
We expect
based on Alibaba IPOinup
moves
$28.40/share
to ~$37.50
optimism
asset
or $44.75
and(using
see an$135bn
upside for
Alibaba valuation case at $43/share using a $150bn valuation, and downside support at $29 using $100bn value for Alibaba. Our $37 PO (down from $38 to reflect lower EBITDA for the core business) is
Alibaba
We are revenue was
adjusting our +61% y/y,value
assumptions 4%forbelow,
the while EBIT
valuation
Alibaba)
increased 130%account
y/y, 16%forabove our estimate. As a result, wegrowth
are increasing 2013-15 margin assumptions
for Alibabaand now billion,
value Alibaba at $126 billion basedconsensus
on 2014 estimates, vs. $92 billion previously
We are
Our $120increasing
billion our estimated
post-IPO value
value,the
which of Alibaba
is based toof
on
Alibaba
$120bn
comparable
to better
(from $105bn)
gross based onthemultiple
recent 61% reported
expansion revenue
atunchanged.
comps in Q2.
likeHowever,
Tencent and Our new valuation
Baidu is $120 which we believe is largely at this point.
Rising gross margins
Based on Alibaba’s are giving company more dollars
historical growth rates and margin expansion, to invest asprofit
and
to growth
they grow…and
most
multiples,
recent numbers
remains
still reported
produce margin expansion.
at Yahoo!’s Given we
3Q earnings,
wetrend,
this now believe Alibabaour
we are raising
are conservatively
is likely
utilizing
to price
Alibaba its IPO closer to $100 billion, up from the $60 billion we assigned previously.
valuation…
an implied valuation range of $90B - 110B ($100B at the midpoint) for Alibaba Group in our sum-
of-the-parts
We have anlalysis
raised our Alibabaagreement
valuation to $105BN from $65BN previously
Yahoo also
tax efficient restructured
exit for thatits
second tranche with Alibaba to sell less of its 24% stake in Alibaba’s IPO…This transaction opens up the possibility of additional value to our Yahoo SOTP through increased exposure to Alibaba’s post-IPO valuation and a possible
Morgan
24 Stanley