MailYandex-230119(2)_watermark

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integration with VK give it advantages. Consolidation similar to Yandex.Taxi/Uber cannot be ruled out either, in our view.

Figure 27: Delivery Club’s revenue has been growing fast but profitability is unlikely in the near-term due to competition from Yandex

1,200				Revenue, RUBmn							growth, %									60%
1,000																				50%
800																				40%
600																				30%
400																				20%
200																				10%
0																				0%
	1Q17	2Q17	3Q17		4Q17	1Q18					2Q18			3Q18			4Q18E

Source: Company data

Figure 28: Delivery Club is the most popular online restaurant delivery service on mobile but Yandex.Foods is making progress (Android DAU

in Russia, ‘000s)…

	Delivery Club			ZakaZaka			Yakitoria
	Tanuki			Papa Johns			2 Berega
60.0	Eda.Yandex
50.0
40.0
30.0
20.0
10.0
0.0
Jan-17	Apr-17	Jul-17	Oct-17	Jan-18	Apr-18	Jul-18	Oct-18

Figure 29: …and the same is true for web traffic (desktop + mobile web, monthly visits, mn)

	Delivery Club		ZakaZaka			Yakitoria
	Tanuki		Papa Johns			2 Berega
	Dodo Pizza		Eda.Yandex
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Sep-16	Jan-17	May-17	Sep-17	Jan-18	May-18	Sep-18

Source: SimilarWeb

Source: SimilarWeb

Figure 30: Increased competition is likely to lead to faster market growth and higher long-term revenue opportunity

Total food delivery market

	Others	Food delivery	Others	Delivery Club
			40%
	RUB 75bn	aggregation
				60%
		RUB 25bn

Note: Estimates for 2018.

Source: Press reports, Renaissance Capital estimates

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Figure 31: In the more mature US market leader GrubHub has a c. 50% share, a decline from 60% in 2017

US online food delivery market shares

70%
GrubHub		UberEats	DoorDash	Postmates		Caviar	Amazon
60%
							50%
50%
40%
30%
							21%
20%							15%
10%							9%
							4%
0%							1%
Aug	Sep	Oct	Nov	Dec	Jan	Feb	March

Source: Second Measure

Figure 32: UK and US markets show that an online food delivery business can potentially generate a 30-40%

EBITDA margin at a mature stage

Just Eat UK GrubHub

60%

50%

40%

30%

20%

10%

0%

2011

2012

2013

2014

2015

2016

2017

Source: Company data

AliExpress is the dominant platform in cross-border e-commerce

Russian e-commerce market growing fast and share of cross-border segment continues to increase

In 2018, the Russian e-commerce market grew 20% YoY to RUB1.25trn. With online retail penetration still only at around 5%, the medium-term growth outlook is good (Euromonitor forecasts an 18.5% CAGR 2018-23E). Within that, the cross-border segment has outperformed, with its share up from 15% in 2011 to 38% in 2018, equivalent to RUB470bn. China accounted for 91% / 53% of the cross-border e-commerce in terms of parcels / value last year, and we believe the bulk of that came via AliExpress, implying c. $3bn gross merchandise volume (GMV) in 2018.

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		23 January 2019
		Media
Figure 33: Russian e-commerce is forecast to grow at 19% per annum	Figure 34: Cross-border segment has outperformed, with its share reaching 38%
	in 2018

Ecommerce market, RUBbn

Growth, %

3,500						40%	500
3,000						35%	450
2,500						30%	400
							350
						25%
2,000							300
1,500						20%	250
						15%	200
1,000						10%	150
500							100
						5%	50
0						0%	0
2010	2012	2014	2016	2018E	2020E	2022E

Russian cross-border ecommerce market, RUBbn								Growth, %
								160%
								140%
								120%
								100%
								80%
								60%
								40%
								20%
								0%
2010	2011	2012	2013	2014	2015	2016	2017	2018E

Note: AKIT is a source for actual
Source: AKIT, Euromonitor	Source: AKIT

Figure 35: China is the key market for Russian cross-border e-commerce			Figure 36: …and value
in terms of both volumes…
Cross-border parcel distribution, 2017				Cross-border spending distribution, 2017
EU	USA	Other
3%	2%	4%
			USA	Other
			12%
				13%
					China
		China		EU	53%
		91%		22%

Source: AKIT

Source: AKIT

AliExpress’ market position is strong, with further support likely from integration into VK

Given the size of the China-Russia cross-border e-commerce market, AliExpress is unsurprisingly the largest e-commerce platform in Russia, with a significant lead in popularity vs competitors. With most peers including Yandex.Market, Beru and Ozon quite different in terms of their offering, AliExpress’ dominant position in the cross-border segment seems secure to us. The deal with Mail (which contributes Pandao and c. $100150mn cash in exchange for a 15% stake in AliExpress Russia) is expected to close in

1Q19 and we think the platform’s integration into VK could strengthen its position.

Assuming a GMV multiple of 1.0x (which could be conservative), we estimate AliExpress Russia’s valuation at c. $3bn for 100% or $450mn for Mail’s stake, with material upside on a three-to-five year view.

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Figure 37: AliExpress’ app is significantly ahead of peers’ by usage in Russia

(Android DAU, ‘000s)…

Pandao		Yandex Market		AliExpress
Ozon.ru		Lamoda.ru		Beru

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23 January 2019

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Figure 38: …and it is also popular on the web (monthly unique website visitors in Russia, mn)

Pandao		Yandex Market		AliExpress
Ozon.ru		Lamoda.ru		Beru

4,000							70.0
3,500							60.0
3,000							50.0
2,500							40.0
2,000
1,500							30.0
1,000							20.0
500							10.0
0							0.0
Jun-17	Sep-17	Dec-17	Mar-18	Jun-18	Sep-18	Dec-18	Mar-17	Jun-17	Sep-17	Dec-17	Mar-18	Jun-18 Sep-18 Dec-18
					Source: SimilarWeb							Source: SimilarWeb

We remain sceptical on the outlook for Youla and Citimobil but we were negative about Pandao and got that wrong

Youla remains very popular in Russia, helped by still quite aggressive marketing. However, we remain sceptical on its potential to considerably disrupt Avito’s (core shareholder Naspers) market leadership, with the latter’s financials still strong. We believe Mail has visibly increased Youla’s monetisation over the past six months, which may support the company’s near-term financials; however, unlike at Avito, Youla’s monetisation is largely via display ads (one ad in every eight listings), which could damage user experience and suggests the platform is not strong enough to be monetised via value-add-services and professional sellers.

We are also sceptical on Citimobil, in which Mail invested last year. Although it has gained popularity over the past nine months, it remains a small fraction of Yandex.Taxi in terms of usage (Figure 58).

That said, we were also quite sceptical on Pandao but Mail’s deal with AliExpress demonstrated that it can create value from its initiatives either organically or via M&A, and that it is helped by the power of its ecosystem with VK at the centre. We would be surprised if consolidation in some shape or form between Delivery Club, Youla, Avito, Naspers and Mail is not given consideration from time to time, at least by Mail’s management.

Figure 39: Youla’s popularity has been growing fast (Android DAU in	Figure 40: …as has time online
Russia, 000s)…

	Avito	Youla			Average daily usage time, mm:ss
						Avito		Youla
	3.0		36:00
	2.5		28:48
	2.0
			21:36
	1.5
	1.0		14:24
	0.5		07:12
	0.0		00:00
	Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18
			Apr-16	Aug-16	Dec-16	Apr-17	Aug-17	Dec-17 Apr-18 Aug-18 Dec-18
		Source: SimilarWeb						Source: SimilarWeb
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Figure 41: However, this has not affected Avito’s financials, with 32% revenue	Figure 42: …and a c. 65% EBITDA margin
growth in 2017 and 29% in 9M18…

		Revenue, RUBmn				Growth, %
18,000	159%							180% 10,000
16,000								160%	8,000
14,000								140%
12,000								120%	6,000
10,000		79%		75%				100%	4,000
8,000								80%
			55%
6,000					32%			60%	2,000
4,000							29%	40%
									0
2,000								20%
0								0%	-2,000
2012	2013	2014	2015	2016	2017	9M17	9M18

Source: Company data

	Adj. EBITDA, RUBmn				Adj. EBITDA margin, %

							65%	100%
		51%		54%	58%	60%
			49%
	28%							50%
								0%
								-50%
								-100%
-118%
								-150%
2012	2013	2014	2015	2016	2017	9M17	9M18

Source: Company data

Figure 43: Youla is heavily monetised via display ads which do not seem to us to be well-targeted…

Lottery tickets advertisement in the Cars category

Yandex.Browser

advertisement

Source: Youla app, Renaissance Capital

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Figure 44: …while Avito’s ads appear relevant and are also monetised via VAS and professional sellers

An example of a promoted private listing which is larger and has a highlighted price tag

An advertisement of the official dealer of Audi in the Audi section of the Cars category

Source: Avito app, Renaissance Capital

O2O spin-off should help crystallise value

In 2019, Mail plans to form a new O2O and local services platform based around Delivery Club and Youla, which is likely to be spun off from the core. We think this platform could then attract external capital from both Mail’s existing shareholders, especially Alibaba,

Naspers and Tencent, and new domestic and international investors. For Mail, this could demonstrate material value creation in just three years, while also providing greater transparency around the financial profile of its core social network and gaming business, which is delivering c. 30% top-line growth and c. 40% EBITDA profitability, with meaningful upside to the latter in case of the games margin recovering.

Figure 45: The potential spin-off of O2O should remind investors that Mail’s core business is growing fast and is highly profitable, with upside assuming games’ margin recovery

Core revenue, RUBmn

Core EBITDA, RUBmn

Margin, %

18,000										60.0%
16,000										50.0%
14,000
12,000										40.0%
10,000										30.0%
8,000
6,000										20.0%
4,000										10.0%
2,000
0										0.0%
1Q16	2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18

Note: Core revenue and EBITDA are calculated as the sum of ‘Email, Portal and IM’, ‘Social Networks ex VK’, ‘VK’ and ‘Online games’ segments’ financials.

Source: Company data

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Figure 47: Mail.ru Group – DCF valuation, $mn (unless otherwise stated)

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Financials and valuation

Our Mail Group TP is derived using a DCF methodology, with an 11% WACC and a 3% terminal growth rate. Downside risks to our forecasts include: slower-than-expected ad market dynamics; lower-than-anticipated monetisation of VK; lower-than-expected medium-term profitability of the games segment; a lack of new popular games in the medium term; the inability to sustain strong market positions in online food delivery and e-commerce; and management and shareholder structure instability.

Figure 46: Mail Group income statement, 2015-2021E, RUBmn (unless otherwise stated)

	2015	2016	2017	2018E	2019E	2020E	2021E
Online advertisement	14,632	18,442	23,766	31,191	39,588	48,112	56,852
Growth	17%	26%	29%	37%	27%	22%	18%
MMO games	9,401	11,390	17,422	23,054	27,142	30,283	33,187
Growth	12%	21%	53%	32%	18%	12%	10%
Community IVAS	12,505	11,854	13,946	14,079	14,702	15,424	16,215
Growth	5%	-5%	18%	4%	4%	5%	5%
Other (incl. Delivery Club)	689	1,065	2,335	6,734	9,320	12,383	15,984
Total revenue	37,227	42,751	57,469	75,058	90,752	106,202	122,238
Growth	14%	15%	34%	32%	21%	17%	15%
EBITDA	18,086	17,913	20,551	20,786	26,776	34,939	42,840
EBITDA margin	49%	42%	36%	28%	30%	33%	35%
EBIT	14,363	14,973	16,964	14,209	20,423	27,505	34,283
Operating margin	39%	35%	30%	19%	23%	26%	28%
Finance income	613	205	302	507	1,260	1,955	2,770
Finance costs	(2,351)	(767)	0	0	0	0	0
Share of profit/(loss) of equity method investees	69	46	31	(598)	(1,140)	(531)	0
Profit before tax	12,597	15,089	17,448	14,254	20,544	28,929	37,054
Income tax expense	(2,753)	(3,473)	(3,204)	(3,045)	(4,445)	(6,039)	(7,596)
Tax rate	19%	22%	18%	21%	21%	21%	21%
Net profit	9,844	11,616	14,244	11,210	16,099	22,890	29,458
Growth	-14%	18%	23%	-21%	44%	42%	29%
EPS diluted, RUB/GDR	47	56	68	54	77	109	141

Source: Company data, Renaissance Capital estimates

	2020E	2021E	2022E	2023E	2024E	2025E	2026E	2027E	2028E	2029E
Revenue	1,550.4	1,732.5	1,900.8	2,041.1	2,162.4	2,268.5	2,367.3	2,456.9	2,550.9	2,673.9
Growth	14.6%	11.7%	9.7%	7.4%	5.9%	4.9%	4.4%	3.8%	3.8%	4.8%
EBIT	401.5	485.9	543.3	589.2	625.8	656.4	682.9	707.5	733.1	768.3
Growth	31.9%	21.0%	11.8%	8.4%	6.2%	4.9%	4.0%	3.6%	3.6%	4.8%
Margin	25.9%	28.0%	28.6%	28.9%	28.9%	28.9%	28.8%	28.8%	28.7%	28.7%
Tax rate	20.5%	20.5%	20.5%	20.5%	20.5%	20.5%	20.5%	20.5%	20.5%	20.5%
Tax on EBIT	(82.3)	(99.6)	(111.4)	(120.8)	(128.3)	(134.6)	(140.0)	(145.0)	(150.3)	(157.5)
EBIT after tax	319.2	386.3	432.0	468.4	497.5	521.9	542.9	562.5	582.8	610.8
D&A	139.2	157.2	173.9	187.5	198.7	207.9	216.1	223.4	231.1	240.8
Changes in working capital	-	-	-	-	-	-	-	-	-	-
Capex	(108.5)	(121.3)	(133.1)	(142.9)	(151.4)	(158.8)	(165.7)	(172.0)	(178.6)	(187.2)
% revenue	7.0%	7.0%	7.0%	7.0%	7.0%	7.0%	7.0%	7.0%	7.0%	7.0%
Unleveraged free cash flow	349.8	422.3	472.8	513.1	544.8	570.9	593.3	613.9	635.3	664.4
Growth	31.0%	20.7%	12.0%	8.5%	6.2%	4.8%	3.9%	3.5%	3.5%	4.6%
Timing	1	2	3	4	5	6	7	8	9	10
Discount factor	90.1%	81.2%	73.1%	65.9%	59.3%	53.5%	48.2%	43.4%	39.1%	35.2%
NPV of cash flows	315.2	342.7	345.7	338.0	323.3	305.3	285.7	266.4	248.4	234.0
Free cash flow in 2030	684.4
NPV of terminal value	3,013
Total NPV of cash flows	3,005
Net cash (end-2019E)	399.4
Associates (AliExpress JV)	405.0
MktCap	6,822
Number of GDRs, mn	220.1
Target price/GDR, $	31

Source: Renaissance Capita estimates

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Yandex

Yandex has gone through the market transition to mobile with no significant share loss

Over the past few years, the Russian search market has undergone a rapid transition from desktop to mobile, with mobile accounting for the majority of searches last year. The share of mobile search continues to grow and is approaching 60%. Given Yandex’s historically weak position on mobile, we were concerned that the market’s transition to mobile could negatively impact its overall search share, leading to deteriorating monetisation and softer revenue trends.

However, a favourable FAS ruling and good work getting pre-installation deals with OEMs has led to a substantial improvement in Yandex’s search share on Android. We believe

Google still has a much better presence on home screens and smartphones generally, which is a consequence of: 1) the global nature of its relationships with manufacturers; and 2) its wider offering, with Chrome, Gmail, Maps and YouTube being very popular services in Russia. However, the mandatory requirement to give users a choice of search engine for the widget and even Chrome browser, regardless of which apps are preinstalled, has been a major game changer for Yandex on Android.

As a result, Yandex’s search of share on Android has increased materially over the past

18 months. According to Yandex’s own data, it is now in line with Google’s, while on

Liveinternet data Yandex is still well below Google with c. 35%. The truth is probably somewhere in between, but either way the takeaway is that Yandex has gone through the market transition to mobile without any material market share loss and is well positioned to maintain its overall leadership longer-term.

Figure 48: Share of mobile search exceeded that of desktop in 2018 and continues to grow

				Desktop share			Mobile share
80%
70%
60%
50%
40%
30%
20%
10%
0%
Jan-15	May-15	Sep-15	Jan-16	May-16	Sep-16	Jan-17	May-17	Sep-17	Jan-18	May-18	Sep-18

Source: Yandex.Radar

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Figure 49: In our view, Google still has materially more apps pre-installed on new phones, but Yandex’s search is often the default, while in other cases the user is given a choice (screenshots of a newly purchased Samsung Galaxy A9)

	Yandex is the default search engine	Yandex s search and voice assistant Alice are available
		by swinging the screen down

There is a wide selection of Google apps preinstalled on home screen

	Source: Renaissance Capital
Figure 50: Yandex’s share on Android has improved dramatically (search share	Figure 51: …although it remains significantly below Google’s on Liveinternet data
on Android)…	(search share on Android)

			Yandex		Google					Google		Yandex
70.0%							80.0%
65.0%							70.0%
60.0%							60.0%
55.0%							50.0%
50.0%							40.0%
45.0%							30.0%
40.0%							20.0%		Change in
35.0%							10.0%		methodology
30.0%							0.0%
Jan-15	Jul-15	Jan-16	Jul-16	Jan-17	Jul-17	Jan-18 Jul-18	Jan-15	Jul-15	Jan-16	Jul-16	Jan-17	Jul-17	Jan-18 Jul-18 Jan-
						Source: Yandex.Radar							Source: Liveinternet

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Figure 52: Although Yandex’s performance of iOS remains soft (search share on iOS)…

Figure 53: …its overall share in mobile search has increased considerably in the past 18 months (search share on mobile)

			Yandex		Google					Yandex		Google
65.0%							65.0%
60.0%							60.0%
55.0%							55.0%
50.0%							50.0%
45.0%							45.0%
40.0%							40.0%
35.0%							35.0%
30.0%							30.0%
Jan-15	Jul-15	Jan-16	Jul-16	Jan-17	Jul-17	Jan-18 Jul-18	Jan-15	Jun-15	Nov-15	Apr-16	Sep-16	Feb-17	Jul-17	Dec-17 May-18
						Source: Yandex.Radar								Source: Yandex.Radar

Figure 54: As a result, Yandex’s overall search share has been intact (overall search share)…

Figure 55: …and on Liveinternet data it declined only slightly over the past 18 months (overall search share)

			Yandex		Google
65.0%
60.0%
55.0%
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
Jan-15	Jun-15	Nov-15	Apr-16	Sep-16	Feb-17	Jul-17	Dec-17	May-18

			Yandex		Google
70.0%
65.0%
60.0%
55.0%
50.0%			Change in
45.0%			methodology
40.0%
35.0%
30.0%
25.0%
20.0%
Mar-11	Mar-12	Mar-13	Mar-14	Mar-15	Mar-16	Mar-17	Mar-18

Source: Yandex.Radar Source: Liveinternet

Figure 56: Yandex’s share on desktop has remained intact…

Figure 57: …despite the ongoing growth in popularity of Google Chrome, on

which Google is the dominant search engine with a c. 60% share

Yandex

Google

Google Chrome

Yandex.Browser

Opera

80.0%

Firefox

Internet Explorer

							65.0%
70.0%
60.0%							55.0%
50.0%							45.0%
40.0%							35.0%
30.0%
							25.0%
20.0%
10.0%							15.0%
0.0%							5.0%
Jan-15	Jul-15	Jan-16	Jul-16	Jan-17	Jul-17	Jan-18 Jul-18	Feb-13	Oct-13	Jun-14	Feb-15	Oct-15	Jun-16 Feb-17 Oct-17
						Source: Yandex.Radar						Source: Liveinternet

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