China Internet Report 0404

In-Depth

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Industry Overview April 14, 2004

Mary Meeker (Internet – US & Global) (212) 761 8042 [email protected]

Lina Choi (Telecommunications – China) (852) 2848 6782 [email protected]

Yoshiko Motoyama (Internet – Japan) (81) 3 5424-5912 [email protected]

The China Internet Report

Contributors:

Andy Xie (Economics – China) [email protected] Stephen Roach (Economics – Global) [email protected] Mark Shuper (Telecommunications – China) [email protected] Viktor Ma (Technology – China) [email protected] Eric Wen (Technology – Asia) [email protected] Brian Pitz (Internet – US) [email protected] Brian Fitzgerald (Internet – US) [email protected] Minyan Liu (Media – China) [email protected] Shawn Kim (Technology – Korea) [email protected] Mitchell Kim (Telecommunications – Korea) [email protected] Javier Marin (Internet – Europe) [email protected] Research Associates:

Ramji Srinivasan Benjamin Dorr

• We maintain that investors still underestimate the impact the Internet will have in changing business process and consumer behavior on a global basis — and we believe that China is emerging as a market that helps prove this point.

• China is the second-largest market for Internet users (80MM as of year-end 2003) and will likely be the largest within five years. Historical constraints on media and communication have created an especially receptive environment for rapid growth in Internet usage.

• Already advanced in messaging and online gaming, China should enjoy increasing scale advantages in wireless messaging and other Internet data applications.

• Revenue generation from online advertising and eCommerce, while ramping nicely, are still in nascent stages in China in large part due to relatively low levels of GDP per capita and low levels of disposable income.

• The Chinese government, after a period of resistance, appears to support the Internet as a critical tool for local and global economic progress.

• While Morgan Stanley chief economist Steve Roach is concerned about China’s slowing economy and China economist Andy Xie considers Chinese equities, in general, to be overvalued, Steve and Andy remain optimistic about the long-term outlook for underlying economic growth and market capitalization appreciation.

• A balanced approach to investing in this especially early-stage market is key.

• The slide presentation summarizing this report can be found on page 192.

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Internet – April 14, 2004


Table of Contents — Report Roadmap Any industry analysis is filled with moving parts, and that is particularly the case with the Internet in China. With this report, we endeavor to create a one-stop-shop for understanding the status, and potential evolution, of the Internet in China. The report is divided into eight sections: Overview .................................................................................................................................................................................... 6 China and the Internet in a Global Context............................................................................................................................ 9 Thoughts on the China Internet opportunity and the attendant risks. Perspective on the Global Landscape for Technology Companies ..................................................................................... 12 Relative comparisons of US and China labor costs, engineering graduates, technology innovation and global public technology company market capitalizations. China and the Internet — Industry, Competitive and Macro Themes .............................................................................. 16 We focus on fourteen key themes — related to industry, competitive and macro issues — that we believe are key indicators of the ongoing development of this dynamic market.

China Internet Industry Landscape ............................................................................................................................... 17 1. Number of Internet users is significant and growing rapidly 2. Relative Web site usage momentum is strong 3. Younger users are active on the Internet 4. Development of online media is still in the early growth stages 5. Wireless messaging services linking mobile phones with the Internet are ramping quickly, though transitions are

occurring 6. Broadband acceptance is growing rapidly 7. eCommerce is in the very early stages and governors exist

China Internet Competitive Landscape ......................................................................................................................... 37

8. Challenges for multinational companies create opportunities for Chinese companies 9. Third generation Internet entrepreneurs are impressive, though broad-based experience/leadership is still not

abundant 10. Sustainability of Internet-related revenue and profits is still unproven but market opportunity is large

China Macro Landscape for the Internet ...................................................................................................................... 48

11. Government is focused on ramping Internet users 12. The government’s strategy, in part, reflects the need to boost domestic (urban to rural) as well as global trade 13. Economic momentum is strong, though slowing 14. Capital markets have been robust

China Reading/Viewing List................................................................................................................................................... 56 A series of sources that assist understanding of social, political, cultural and economic dynamics in China.



Global Internet Company Overviews .................................................................................................................................... 63 We highlight eight public and twenty private Chinese Internet companies. We also highlight four Taiwanese/Singaporean, four Japanese companies, nine Korean, four American companies, and two European companies as we believe they provide perspective on regional market trends. We also present overviews and/or profiles of 49 public and private Internet companies along with historical income statements, balance sheets and stock charts for the public companies. The companies are ordered by market capitalization, then alphabetically.

ChinaOverviews Sina .................................................................................. 70 NetEase ............................................................................ 71 Sohu ................................................................................. 72 Profiles chinadotcom ..................................................................... 73 Tom Online ...................................................................... 74 Ctrip ................................................................................. 75 Linktone ........................................................................... 76 Huicong/Zhongsou ........................................................... 77 21CN ................................................................................ 78 3721.................................................................................. 79 51job................................................................................. 80 Alibaba ............................................................................. 81 Baidu ................................................................................ 82

Profiles (continued) BabyCare ..........................................................................83 ChinaLOOP ......................................................................84 Dangdang ..........................................................................85 eBay EachNet....................................................................86 eLong ................................................................................87 joyo.com ...........................................................................88 KongZhong.com ...............................................................89 Ninth City .........................................................................90 PRCEDU...........................................................................91 Shanda Networking...........................................................92 SouFun ..............................................................................93 Taobao ..............................................................................94 Tencent..............................................................................95

Taiwan/SingaporeProfilesChinese Gamer ................................................................ 99 Gamania ........................................................................ 100 Waei .............................................................................. 101 ZUJI .............................................................................. 102

Japan OverviewsYahoo! Japan.................................................................. 106 Softbank ......................................................................... 108 Rakuten .......................................................................... 111 Trend Micro ................................................................... 112

KoreaOverviews NCsoft ............................................................................ 116 NHN............................................................................... 117 Daum ............................................................................. 118

Profiles Webzen ...........................................................................119 Bugs Music .....................................................................120 Nate.................................................................................121 NetMarble .......................................................................122 Nexon..............................................................................123 Sayclub ...........................................................................124

USOverviews eBay ............................................................................... 127 Yahoo!............................................................................ 129 InterActive...................................................................... 130 Amazon.com .................................................................. 131

EuropeOverview T-Online ......................................................................... 135

Profile Wanadoo .........................................................................136



Appendix ................................................................................................................................................................................ 182 Data and charts related to global and Asia/Pacific trends in Internet usage. Includes links to our most recent reports.

Summary Slides ..................................................................................................................................................................... 192 A slide presentation summarizing this report. In addition, the US Internet Research team’s slide presentation on Internet themes can be found online (see link).



Morgan Stanley Overview of Global TMT Markets China Stands Out Across the Board

2002 2002 Telephone 2002 2002 Mobile 2002 2002 Internet 2002 Credit/Debit

2002 GDP Telephone Line Installed PC Mobile Phones Cable Cable Internet Users Credit/Debit Card

Country Population per Capita Lines Penetration PCs Penetration Phones Penetration Subscriptions Penetration Users Penetration Cards Penetration

(000's) (US$) (000's) (000's) (000's) (000's) (000's) (000's)N. America USA 280,562 37,231 177,000 63% 198,469 71% 140,767 50% 70,343 66% 162,100 58% 785,300 280%

Canada 31,902 22,813 22,043 69% 16,201 51% 14,316 45% 8,133 67% 14,200 45% 54,240 170%

Total 312,464 199,043 214,670 155,083 78,476 176,300 839,540 Weighted Average 35,759 64% 69% 50% 66% 56% 269%

Asia China 1,284,303 963 214,000 17% 29,159 2% 206,616 16% 100,000 28% 59,000 5% 496,500 39% Non-Japan India 1,045,845 480 40,451 4% 7,818 1% 10,650 1% 40,000 23% 15,000 1% 10,817 1%

Indonesia 231,328 749 7,750 3% 2,744 1% 11,602 5% 125 0% 4,500 2% 9,745 4% Pakistan 147,663 441 3,047 2% 591 0% 520 0% 30 0% 744 1% 0 0% Philippines 84,526 912 2,600 3% 2,062 2% 15,200 18% 1,438 9% 2,800 3% 5,176 6% Thailand 62,354 2,027 6,472 10% 1,983 3% 17,532 28% 156 1% 3,700 6% 2,700 4% South Korea 48,324 9,550 23,267 48% 12,988 27% 32,342 67% 3,865 26% 26,270 54% 104,800 217% Malaysia 22,662 4,199 4,905 22% 3,813 17% 9,339 41% 50 1% 6,800 30% 4,400 19% Taiwan 22,548 12,485 13,098 58% 4,791 21% 19,335 86% 4,949 72% 10,000 44% 31,600 140% Australia 19,547 20,417 10,628 54% 11,070 57% 13,354 72% 1,146 15% 5,500 28% 9,500 49% Hong Kong 7,303 22,317 3,842 53% 3,082 42% 6,219 85% 605 28% 2,900 40% 9,100 125% Singapore 4,453 20,265 1,934 43% 2,382 53% 3,245 73% 330 34% 2,000 45% 3,200 72% New Zealand 3,908 14,932 1,986 51% 1,648 42% 2,500 64% 38 3% 1,600 41% 2,916 75%

Total 2,984,764 333,980 84,132 349,100 152,732 140,814 690,454 Weighted Average 1,250 11% 3% 12% 22% 5% 23%

Japan Japan 126,975 31,441 61,888 49% 49,010 39% 79,082 62% 14,830 31% 52,800 42% 683,994 539%

Europe Russia 144,979 2,390 34,088 24% 8,348 6% 18,001 12% 16,184 32% 5,910 4% 6,438 4% Germany 83,252 23,906 56,541 68% 36,183 43% 59,532 72% 22,542 59% 34,240 41% 111,599 134% UK 59,778 26,050 35,947 60% 23,731 40% 48,722 82% 3,349 14% 32,000 54% 121,274 203% France 59,766 23,808 36,293 61% 22,306 37% 38,587 65% 3,430 14% 21,000 35% 39,639 66% Italy 57,716 20,583 27,505 48% 12,181 21% 49,058 85% 720 3% 20,375 35% 36,634 63% Spain 40,077 16,346 17,748 44% 7,841 20% 33,530 84% 850 7% 9,950 25% 54,408 136% Poland 38,625 4,897 10,792 28% 4,077 11% 13,800 36% 5,408 39% 5,140 13% 16,837 44% Netherlands 16,068 26,130 7,858 49% 7,483 47% 12,666 79% 6,633 96% 8,900 55% 20,617 128% Belgium 10,275 24,019 4,947 48% 2,485 24% 7,437 72% 3,834 89% 3,400 33% 13,540 132% Czech Republic 10,257 6,836 3,661 36% 1,794 17% 8,591 84% 872 24% 1,840 18% 5,423 53% Portugal 10,084 12,109 4,556 45% 1,326 13% 8,572 85% 1,287 35% 3,260 32% 12,880 128% Hungary 10,075 6,352 3,736 37% 1,165 12% 6,863 68% 1,800 48% 2,300 23% 5,662 56% Sweden 8,877 27,071 6,568 74% 5,518 62% 7,935 89% 2,369 53% 5,290 60% 6,517 73% Austria 8,170 25,239 3,096 38% 3,288 40% 6,703 82% 1,064 32% 3,213 39% 7,930 97% Switzerland 7,302 36,631 4,249 58% 4,264 58% 5,661 78% 2,727 85% 2,305 32% 7,405 101% Denmark 5,369 32,106 3,277 61% 3,094 58% 4,130 77% 1,442 57% 3,364 63% 2,452 46% Finland 5,184 25,507 2,763 53% 2,347 45% 4,478 86% 1,020 44% 2,547 49% 2,171 42% Norway 4,525 41,931 1,802 40% 2,381 53% 3,470 77% 852 41% 3,293 73% 5,422 120% Ireland 3,883 31,368 1,286 33% 1,651 43% 3,252 84% 650 54% 1,021 26% 2,630 68%


Lat. America Brazil 179,030 2,605 39,000 22% 14,138 8% 35,060 20% 3,482 7% 16,600 9% 108,610 61% Mexico 103,400 6,083 15,927 15% 8,472 8% 26,444 26% 3,076 13% 1,921 2% 42,881 41% Colombia 41,008 1,981 7,726 19% 2,053 5% 4,393 11% 719 8% 1,380 3% 11,588 28% Argentina 37,813 2,644 8,250 22% 3,749 10% 6,367 17% 8,058 77% 4,188 11% 23,313 62% Peru 27,950 2,033 1,737 6% 1,568 6% 2,294 8% 419 7% 3,450 12% 2,917 10% Venezuela 24,288 3,251 2,800 12% 1,488 6% 6,677 27% 2,464 46% 1,495 6% 7,637 31% Chile 15,499 4,250 3,700 24% 1,882 12% 6,134 40% 761 19% 3,110 20% 4,342 28%


Rest of Other 1,346,210 12,974 58,274 4% 46,658 3% 14,400 1% 2,108 5% 25,736 2% 140 0%

World(ROW) Nigeria 129,935 329 755 1% 910 1% 45 0% 417 2% 165 0% 3,190 2% Egypt 70,712 1,210 8,080 11% 1,348 2% 11,715 17% 790 6% 800 1% 731 1% Turkey 67,309 2,716 19,043 28% 2,911 4% 23,544 35% 1,278 8% 3,125 5% 37,008 55% Iran 66,623 1,597 12,384 19% 5,154 8% 3,769 6% 367 3% 1,300 2% 306 0% South Africa 43,648 2,400 3,926 9% 3,314 8% 20,045 46% 2,539 25% 3,900 9% 19,614 45% Algeria 32,278 1,677 2,136 7% 247 1% 123 0% 210 4% 72 0% 292 1% Saudi Arabia 23,513 8,122 3,627 15% 1,535 7% 3,788 16% 483 17% 410 2% 5,503 23% Israel 6,030 17,033 3,036 50% 1,438 24% 5,363 89% 1,074 59% 2,492 41% 3,900 65%

Total 1,786,258 111,261 63,516 82,793 9,267 38,000 70,684 Weighted Average 10,265 6% 4% 5% 7% 2% 4%

TOTAL 6,223,711 1,052,024 596,140 1,094,415 351,318 609,406 2,965,437

Growth Rate 1.1% 2.9% 2% 13% 19% 7% 26% 9%

Average Weighted Penetration 17% 10% 18% 21% 10% 48%

Population & GDP figures represent data from The CIA World Factbook 2002 & IMF -- GDP per Capita is the calculated using this data. Telephone lines represent total (business & commercial) lines in use; source - World Bank, Morgan Stanley estimates. The numbers for Cable Subscribers is based on information from The World Bank, cross referenced with Kagan World Media Ltd and Informa Media Group.; source - World Bank, Morgan Stanley estimates, Kagan, Informa Media Group. PC numbers represent the raw total (business and commercial) PC figures, both desktop and laptop; source - World Bank, Morgan Stanley estimates, IDC. Mobile Phone subsciptions data is sourced from the World Bank, Morgan Stanley estimates, The International Telecommunication Union and IDC. Internet users reflect the number of users accessing the Web (users may share/use multiple devices, users accessing the web from home and work are counted only once); source - Morgan Stanley estimates, IDC. Credit Card figures include debit cards; source - Morgan Stanley estimates, The Nilson Report (DRI/McGraw Hill). Penetration figures are calculated by dividing the relevant data point by the population, except in the case of Cable penetration, where we divide by the number of households (source - Kagan, Morgan Stanley estimates). http://www.morganstanley.com/institutional/techresearch/2003TMT.html

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Overview Background…

This is the report we wish we had been able to read before we began to dig into the market for the Internet in China. We have been intrigued by the potential in China for more than half a dozen years but did not think the time was right for a big ramp in focus until the middle of last year. Around that time, based on a variety of metrics, the market for the Internet in China began to gain tangible traction. So we set off for a recent visit with some straightforward goals: 1) understand the key drivers and issues; 2) build a framework for how the Internet would continue to evolve in China; and 3) begin to determine the online winners. Like many, we came away from China with more questions than answers, with a powerful sense of awe and enthusiasm about the opportunities, but also concern about the many risks.

China is currently the second-largest market of Internet users (with 80MM in C2003) behind the US, and it could assume the leading slot in five years. The momentum is real; the government mandate is there; the people are especially hungry for news, information, entertainment, communication and connectivity; businesses are using the Internet for global expansion efforts, in part, to capitalize on low relative labor costs; and Internet penetration levels (6% of China’s population) are very low. China’s strong momentum in Internet user/usage growth and online messaging and gaming, in our view, bode well for ongoing growth. But while the top-line opportunities are clearly there, the risks associated with emerging companies, emerging technologies, emerging economies and evolving government regulation are not going away anytime soon.

We are enthusiastic about the outlook because of the role the Internet should play in helping the Chinese economy develop and because of the wealth-creation opportunities we see over the long term. It is going to be a fascinating decade or two.

This is the fifth in a series of reports we have published over the past decade. In the series, we have attempted to understand the issues and establish our frameworks related to the evolution of a market that we believed would prove to be dynamic and large. The other reports are:

The Internet Report –1995 (see link)

The Internet Advertising Report –1996 (see link)

The Internet Retailing Report –1997 (see link)

The Online Classified Advertising Report: It Is About Search, Find and Obtain (SFO) –2002 (see link)

In this report we provide our observations about the status and evolution of the Internet in China. It is not about stock picks. With our other reports, we have noted that they should be considered to be our puck on the ice at the beginning of a very long game… and here we are again. As we have watched these markets evolve over the past few years, we have concluded that the opportunities, and changes related to them, will be more significant than we could have predicted.

We revisit Paul Saffo’s comment about the Internet from 1995: “…it’s a very consistent pattern in this business that collectively as a society and as individuals we all suffer from what I call macro-myopia. A pattern where our hopes and our expectations or our fears about the threatened impact of some new technology causes us to overestimate its short-term impacts and reality always fails to meet those inflated expectations. And as a result our disappointment then leads us to turn around and underestimate the long-term implications — and I can guarantee you this time will be no different. The short term impact of this stuff will be less than the hype would suggest but the long term implications will be vastly larger than we can possibly imagine today.”

Development of the Internet is important for China’s economic growth…

Years from now, it seems to us, the Chinese government would like to be able to point to its Internet efforts today as comparable to the rollout of the US Interstate highway system in the 1950s — in effect, taking a big bet, putting a lot of resources to bear on an important initiative, and watching it help drive growth in the economy.

The top priority for China’s leaders is long-term, sustainable, economic growth with relatively high levels of employment. The designated vehicle for driving that growth is technology. In recent years, the Internet has been at the core of technology innovation, and this should remain so for some time to come. And recent successes by leading public and private Internet companies — based on revenue, profit and wealth creation — plus the sheer impact of Internet usage growth and volume have reinforced the importance of the Internet in helping modernize China.

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As Morgan Stanley economists Steve Roach and Andy Xie stress, the Internet is the only cost-efficient way that China can push into the central and western parts of the nation, while simultaneously striving for transnational connectivity. Integrating these less developed areas into the rest of China requires a huge infrastructure and urbanization effort — a logistical challenge for an unwired and unconnected country. As a result, the Internet is critical to productivity in this vast nation, suggesting that the government will likely continue to support its growth. In addition, Chinese manufacturers can use the Internet as a powerful, new, and equitable distribution channel to get products and information to the world — especially for high-quality, low-price products.

For evidence of what the Internet can do, recall eBay’s mantra that it makes markets more efficient, and Google’s mantra that it makes finding and creating information more efficient. As a channel for efficient trading and as a tool for supply-chain management, the Internet is still in its infancy worldwide, and its growth outlook only strengthens as more countries and resources move online.

One only needs to look at the CQ4:03 data points from some of the companies we have dubbed “Internet optimizers” to understand the efficiency point: 1) Dell had only three days of inventory on $12B (up 18% Y/Y) in sales and a cash conversion cycle of negative 36 days; 2) eBay had zero inventory with $7B (up 53% Y/Y) in gross merchandise sales; 3) Amazon.com's cash conversion cycle was a negative 27 days in C2003; and 4) Cisco indicated it had Internet-related savings in F2003 (July) of $2.1B ($920MM from customer care, $800MM from workforce optimization, $270MM from supply chain management and $140MM from e-learning).

It is true that the modern history of economic and business initiatives in China is filled with disappointing efforts in areas ranging from agriculture to autos to consumer products. Typically, the crux of disappointments was simple — someone was trying to push things to consumers that they did not want or could not afford. With the Internet, while there is government “push,” there is also significant consumer “pull.” Internet connectivity not only fosters the government’s aim of developing global trade across a range of existing and emerging industries, but it also helps satisfy a significant consumer market for content and media. With the wide availability of Internet cafés, relatively low-cost Internet access, and a huge mobile phone user base, the price, for many, is affordable. Today, China already has more mobile and fixed-line phone users and cable

households than any other country, and it will likely have more Internet users in five years and PC users in ten.

An ‘open system’ for an opening economy…

The rapid global acceptance of the Internet — the most significant “open system” ever — has given the Chinese opportunities to regain their lost glory. China is the world’s most populous country, with 1.3 billion people and 21% of the world’s inhabitants, and as Steve Roach notes, as recently as 1850, it accounted for about one-third of world GDP. At its nadir in 1991, China had fallen to just 1.7% of world GDP. Today, IMF statistics put that share at just 4% at market exchange rates and 13% as measured by purchasing-power-parity. And its economy is opening at the same time as the global economy is opening to forces related to Internet connectivity, giving China a special opportunity. The people know it, and they have an impressive history of being able to focus and mobilize when they have important long-term goals to achieve. Now it all comes down to the most challenging thing of all — execution.

The Internet’s potential to promote trade and economic development may account for why the government has embraced it as a top priority. But, it doesn’t explain why tens of millions of Chinese users have taken it up. As elsewhere, the Internet has hit a chord with younger people in China, who think of it as entertaining, cool, affordable, and, best of all, linked to mobile phones. For many users, the Internet in China means wireless messaging, online gaming, news, and other means of social interaction. As a result, the relative market penetration of technologies related to wireless messaging and online gaming appears to be more advanced than in the US, similar to what we have seen in other Asian markets.

Lots of companies are priming the Internet pump in China…

Among global Internet companies, eBay, with its local and global trading system (see sidebar), may be in one of the best relative positions in China owing to its vast user communities and early partnership with Shanghai-based EachNet (now eBay EachNet). Competitors in this market include Taobao, an online consumer trading business, and Alibaba, an online sourcing business. Both were funded by Japan’s Softbank or its founder, Masayoshi Son, and both have impressive listing momentum. Note that Softbank has focused intently on pan-Asian technology and Internet businesses for a long time, and Japan has been China’s largest trading partner over the better part of the last decade.



In addition, Sina, China’s leading online portal, and Yahoo!/3721, leading search providers, have partnered to launch a Chinese online trading effort in the next six months, with a desire to leverage 3721’s small business relationships, Yahoo!’s search technology and Sina’s reach.

Apart from the wireless messaging arena, most Chinese Internet companies appear to have been content to follow their global counterparts when it comes to product development. Yet the multinationals face inherent challenges in China, creating opportunities for local players with an edge. Emerging Chinese leaders in mobile messaging and online gaming are showing promise with impressive relative creativity. The jury is still out on whether relatively inexperienced management teams can build long-term competitive advantage and unique creativity. Despite the significant numbers of Internet users in China, the revenue and profit levels for Internet companies in

China are still tiny — combined CQ4:03 revenue and profit for Sina, Sohu and NetEase was $83MM and $39MM, respectively. Like the US in the mid-1990s, we may be just at the beginning.

Many disruptive forces in China create both opportunities and risks: dramatic growth in Internet and mobile phone usage, aggressive investing, the impact of slowing economic growth, unemployment related to mass layoffs from state-owned enterprises, problems in the banking system, corruption, the adjustment to WTO accession, a move to more open trading, the impact of the 2008 Olympics in Beijing, rising competition, and the evolution of “capitalistic communism.” Indeed, the complexity, challenges and opportunities are epic. In the words of a pal of ours, a seasoned veteran of doing business in China: “Strap in!”

eBay — A Proxy for Global Online Trading

eBay has proven to be the definitive grassroots business, and this could lend itself quite well to China… Net, combining eBay’s platform with China’s economic and social missions could prove to be a very big idea…

We think eBay is the best proxy for global online trading and commerce, and its metrics illustrate the power of market momentum. In CQ4:03, eBay’s gross merchandise sales (GMS) rose 53% Y/Y to $7B (while eBay’s reported revenue rose to $648MM); estimated items traded rose 47% to an estimated 147MM; PayPal payments (in units), on and off eBay, rose 74% to 68MM; active users rose 49% to 41MM; non-US revenue rose 96% to 42% of reported regional transaction revenue and cross-border trade accounted for nearly 15% of GMS.

Perhaps most notably, eBay has never had a down sequential quarter for GMS or revenue growth — we are challenged to find a company of its size (using GMS and/or revenue) that has achieved this milestone, and we do not believe that another company has grown as quickly as eBay at its current stage of development.

We focus on eBay’s data points as we believe they demonstrate the momentum and magnitude of the opportunity for global online trading and commerce. The eBay model has provided an eCommerce spark in geographies ranging from the US to Germany to Brazil and in markets ranging from collectibles to clothing to

computers to autos. And it has proven that it can be successful by helping facilitate trades for items with an estimated average selling price of only around $47 in C2003 (up from $40 in 1998). It is notable that per an April 2003 survey conducted by the company, 46% of users were searching for “used” items on the site while 39% were searching for “bargains.” In our view, these trends bode well for the price/performance desires that are especially important to consumers in emerging markets.

eBay observes that it has a rapidly growing base of global sellers (430K as of 2/04) selling full-time or part-time on its site, thus illustrating the impressive volume of entrepreneurial sellers on the eBay platform.

Bottom line, the Internet has helped empower eBay’s buying/selling/trading ecosystem to grow rapidly around the world. And eBay has increasingly helped make trade more efficient in a rising number of product categories (45K+ as of CQ4:03).

While eBay’s efforts in China, via eBay EachNet, are still in the early stages (with 4.3MM [up 231% Y/Y] confirmed registered users, as of CQ4:03), the opportunity for the eBay platform to serve a growing need for trade in practically anything in China could prove substantial as it lets sellers and buyers connect easily, both locally and around the world.



China and the Internet in a Global ContextEvolution of the Internet varies globally…

In order to understand the potential evolution of the Internet in China, it is important to understand the myriad ways that Internet development has occurred globally and the historical development in China thus far. While there are many similarities to the evolution on a region-by-region basis, there are also timing and evolutionary differences in each market.

Exhibit 1 summarizes relative Internet technology and services leadership for the US, Europe, Japan, South Korea and China. The more shaded a circle, the higher the corresponding country’s or region’s relative leadership in the given technology/service.

Exhibit 1

Relative Internet Technology and Services Leadership US, Europe, Japan, South Korea, China

South Korea

Japan

Europe

US

China

Internet Users Broadband Adoption eCommerce Online Advertising Messaging (Like SMS) Online Gaming Legend:

Strong

Weak Source: Morgan Stanley Equity Research.

The US is the most advanced market based on volume for eCommerce, online advertising and search. Many vertical markets — like ticketing, travel, trading and job search — are also most developed in the US, reflecting the breadth and depth of the US economy, strength in innovation in software and services, and a history of entrepreneurship and dynamic competition.

On the other hand, the US does not yet have the very high penetration of Internet users seen in some Northern European countries (such as Norway, Denmark and Sweden). And markets related to mobile-Internet messaging and gaming are more developed in Asia-Pacific countries like Japan, South Korea and China — in part because of demographics and/or the relative lag in fixed line deregulation, which initially led to relatively cheaper access via mobile services. The landscape is changing rapidly as fixed network unbundling and increasing competition have led to cheaper fixed-line/broadband access. Companies in the US typically draw distinct divisions between access and content; companies in Europe such as carrier-owned T-Online (Germany) and Wanadoo (France) lean toward access-provision services and have limited presence in content due to natural linguistic and geographic limitations.

Broadband services have also taken off strongly in the Asian markets. South Korea is the global leader in consumer broadband penetration (at 70% of households, per IDC, as of year-end 2002), and it is notable that online gaming and other streaming content usage is exceptionally high in South Korea as a result.

Nevertheless, the global Internet leaders (according to multi-market user/usage data) continue to be US-based companies, including Yahoo!, Microsoft, Google, eBay and Amazon.com. In our view, the intense, competitive rivalries among the US-based global leaders will likely continue to drive their aggregate and individual successes as they continue to improve the user experience and, in turn, gain market share from offline businesses. However, success will also depend on global expansion — and the size and scale of the China market is imprudent to ignore.

The global companies have found it somewhat challenging to localize in Asian markets, apart from investing in local partners. The communications infrastructure in these markets has often had a strong hold over usage/vendor behavior, and online payments have sometimes lagged, leading to a more fragmented, dynamic competitive picture. This situation has helped the emergence of such local players as Yahoo! Japan in Japan; Daum in South Korea; and Sina, Sohu, NetEase, Tom Online, eBay EachNet (eBay), 3721 (Yahoo!), Shanda Networking, and Tencent in China.



China Internet companies are capitalizing on local opportunities…

The local China companies that we highlight, and with which the global Internet leaders have to compete, run the gamut of online services, from portals to gaming sites to bookstores. Of particular note are the Chinese portals — Sina, Sohu, NetEase and Tom Online (as Tom.com) — which rode into the public markets mostly dependent on advertising revenue, but managed to survive, in part, through business diversification into the likes of wireless messaging services and online gaming.

There are distinctive Chinese upstarts in the mix, such as 3721 (partnered with Yahoo!), a search engine that sells Chinese-language/character keywords to businesses, and Baidu, a Chinese-language search engine. Other vertical market players have also begun to emerge, focused on areas such as gaming, education, commerce, travel and jobs.

Morgan Stanley analyst Minyan Liu notes that traditional media companies in China are not media conglomerates as they often are in other parts of the world. In general, she says, TV players have limited presence in newspapers, and vice versa. In addition, most TV and newspaper companies don’t have a meaningful presence on the Internet. That said, it is notable that CCTV (China Central Television), the national television station of China, is the #18-ranked Web site in China, based on Alexa.com rankings as of 4/12/04 (see page 18 for a description of Alexa rankings and limitations). Asia technology analyst Eric Wen believes that its high ranking is due to its reputation as the primary source of information on China, with legions of journalists on the ground, as well as its bevy of free, streaming video links on CCTV’s homepage. He estimates that 50–70% of the links on the homepage are one-to-two clicks away from full, free streaming news video.

While merger and partnership activity in the Internet space has been robust in recent quarters, we believe that the pace will remain active in the coming year as companies endeavor to bolster the depth and breadth of their Internet product and service offerings.

And online ‘content’ is still evolving in China…

A pal of ours points out that online content may evolve differently in China than it has in other parts of the world. Here are the dynamics: 1) underdeveloped and fragmented local offline content with fragmented distribution channels; 2) high levels of piracy for global offline content; 3) rapid

growth in broadband and wireless connectivity; 4) extraordinarily high interest in online entertainment and communication; and 5) well-developed micropayment systems for wireless messaging and online gaming. Net, the opportunity for business models to emerge that deliver low-price, high-volume and high bandwidth digital content to users could prove to be very interesting in China. This may occur, in part, because traditional (offline) vendors have a lot less to lose than they do in more established markets.

No major market comes close to China’s 2003 ratio of 3.5 mobile users for every one Internet user (see Exhibit 27). Simply based on volume, interest and momentum, it is likely that China will possess increasing scale advantage in mobile phone and Internet connectivity/messaging. The impressive thing here is just how quickly China has assumed the pole position. And based on China’s low relative market penetration, the race (and subsequent lapping) has likely just begun (see page 27).

Developing efficient online payment systems represents another greenfield opportunity. China at present lacks the kind of mass payment system that is key to the Internet’s evolution, along with the user-generated feedback rating systems that have proven so effective for companies such as eBay, Amazon.com, and Yahoo! There are a number of possible competitors (see page 46), but it is way too early to determine who the winners will be…

At a macro level, however, in some respects the China Internet market is evolving as the US market has evolved — with broad-based portals grabbing initial momentum, followed by vertically oriented companies gaining traction in targeted markets. The portals have made a series of acquisitions of vertical companies. Witness Sina’s purchase of Crillion (SMS) in 3/04, MeMeStar (SMS) in 1/03 and Fortune Trip (Travel) in 12/03, and Sohu’s acquisitions of 17173 (Gaming) in 11/03 and Focus.cn (Real Estate) in 11/03. That said, many standalone vertical players, including Shanda Networking (Gaming), Alibaba (B2B/Sourcing), and Baidu (Search), appear to have strong momentum. And several key Chinese players, for instance eBay EachNet and 3721, have developed deep relationships with eBay and Yahoo!, respectively.

Yet at this macro level there’s an important difference between the US and China in the strength of offline competition. The US has an infrastructure built over multiple decades of technological and social innovation, whereas China, in many respects, is dismantling an old



infrastructure and starting afresh. This could have consequences for the evolution of next-generation applications and services — as we have already started seeing in countries like Japan. The Chinese like to focus on the idea that new technologies can let them leapfrog older services, as the ramp in mobile versus fixed-line phones shows.

But China’s Internet efforts/companies are not without risks…

In our view, the biggest investor questions regarding the China Internet companies relate to:

• sustainability and consistency of highly profitable SMS and messaging-related revenue for the portals, especially as the transition from SMS to next generation messaging services evolves;

• intramural competition among the companies (as in Sina vs. Sohu) as they strive to gain sustainable long-term competitive advantages, especially in an environment where business management experience is still in its early stages of development;

• competition in, and monetization of, emerging categories (like gaming and commerce) as companies endeavor to gain an edge in what may prove to be the next big markets;

• development of nascent online advertising and eCommerce businesses;

• ongoing expansion and development of Internet content initiatives including those related to streaming media, user-generated content, feedback systems and search;

• clarity on potential evolution of online billing/ payment, trust/safety and offline logistics/distribution systems;

• potential size and scope of some of the Internet vertical markets;

• ability of foreign entrants (like eBay and Yahoo!) to gain market traction;

• evolution of potential Internet efforts by China Mobile (market capitalization of $58B as of 4/12/04) and China Unicom (market capitalization of $12B as of 4/12/04);

• determining appropriate risk-adjusted valuation methodologies;

• impact of a slowing Chinese economy on evolution of the Internet in China and on China Internet companies.

As always, a balanced investment approach is key…

In general, for the Internet in China, we remain encouraged by high revenue growth rates and large and growing monetizable user bases. For investors, at a meta level, we believe that the aggregated market value supported by the most highly capitalized China Internet companies appears low relative to the potential market opportunity that should play out over time in China.

In our view, Sina is the best proxy for the Internet in China, and, for now, Ctrip is the best proxy for the online vertical markets that are emerging in China.

It’s still very early days for the Internet in China, and investors should expect that volatility will be status quo in this emerging market. As always with early-stage market investing, a risk-adjusted investment approach is key.

While Morgan Stanley is very constructive on China’s opportunity for the longer term, we note that near-term, global economist Steve Roach is very focused on the fact that the Chinese economy is slowing after a period of torrid growth, and Morgan Stanley’s China economist, Andy Xie, believes that there is significant risk on the downside for China’s economy and equity prices.

We will provide more detail on the local market players, and related competitive dynamics, in subsequent reports.



Perspective on the Global Landscape for Technology CompaniesGiven the recent focus on competitive dynamics between China and America, we are adding some observations and data points to the mix. If you are interested in this topic, we encourage you to read Steve Roach’s recent note “Why We Ought to Be Thanking the Chinese” (see link) or his recent speech (see link) at the China Development Forum.

Technology, Technology, Technology, China, China, China, Jobs, Jobs, Jobs…

It is hard to spend any time with technology executives in China without also discussing the business culture that has given rise to so much technology innovation in the US — and that so many Chinese business persons now seek to emulate. The Chinese, in part by using the Internet to grease the skids, are attempting to model key parts of their economy on the US success stories they admire.

Yet we also heard from some of the Chinese we met that, to them, America today appears to be distracted by several factors:

• A preoccupation with terrorism at the expense of technological advance, including broadband adoption, that could benefit the economy (although we don’t quite see why these should be mutually exclusive);

• Efforts to increase restrictions in what is viewed as the most efficient and effective capital markets system in the world;

• Moves to clamp down on incentive structures (such as stock-option plans) that have, in part, helped (based on risk/reward) spur innovation in technology;

• A lack of targeted focus on rewarding and inspiring relative academic achievement (especially in technology-oriented areas); and

Upon returning to Silicon Valley after our China trip, we were also struck by how many technology veterans seemed resigned to ongoing strong economic and manufacturing growth in China, an echo of similar concerns about Japan and non-China Asia in the 1970s and 1980s.

Yes, indeed, China’s relative labor costs are compelling…

As has been widely reported, Chinese labor-cost math can turn heads. Note the following stats from Ctrip, a Chinese online/offline travel company. As of CQ4:03, Ctrip had 1,600 employees and annual operating expenses (opex) of

only $6,751/employee. This especially low level of opex per employee, given its magnitude, is noteworthy, though we add that nearly half of Ctrip’s employees are in the company’s call centers, which constitute a very liquid labor pool.

For the sake of comparison, we scanned the FactSet database of the S&P 500 (primarily US) companies and found that the median annual opex per employee (based on the sum of R&D plus SG&A for 255 companies with available data) was $73K, and that the median opex percent of revenue was 28%. A similar scan for China shows that, based on the 37 companies in the Hang Seng China Enterprise Index (HSCEI), the median annual opex per employee (based on the sum of R&D + SG&A) was $7K, and the median opex as a percentage of revenue was 8%.

Obviously, investors and technology executives need to consider relative labor cost trade-offs on a case-by-case basis. China remains a developing country, with 2003 GDP per capita of $1,062 (compared with $37,312 in the US), and it carries many of the problems associated with this low relative GDP. For the intermediate term, we can expect the primary technology challenge for the US to be how to retain its leadership in innovation, and for China, how to use the Internet to connect with other markets to maintain growth and gain manufacturing share (by leveraging low relative labor costs) from its Asian neighbors.

America has been at the forefront of technology innovation…

Given the historical track record, it is hard not to be optimistic about the future for innovation in US technology. The past has proven that a few good ideas can go a long way in driving competition, creativity, investment, business process development, job growth and wealth creation. Over the past quarter century or so, we recall the pace set by the likes of Hewlett/Packard (HP); Noyce/Moore/Grove (Intel); Jobs/Wozniak (Apple); Rosen/Canion (Compaq); Gates/ Allen/Ballmer (Microsoft); Ellison (Oracle); McNealy/Joy/ Bechtolsheim (Sun Microsystems); Bosack/Lerner/ Morgridge/Valentine/Chambers (Cisco); Cook/Proulx (Intuit); Hawkins/Gordon/Probst (Electronic Arts); Dell (Dell); Jacobs (Qualcomm); Case (AOL); Clark/Andreessen (Netscape); Yang/Filo/Semel (Yahoo!); Bezos (Amazon.com); Omidyar/Whitman (eBay); and, most recently, Brin/Page/Schmidt (Google).

https://secure.ms.com/eqr/rlink/webapp/Research?action=streamFile&docId=346381&headline=Special+Economic+Study%3A+Global+Rebalancing+and+the+China+Play&docFileType=1&lastParam=/msk75250.pdf

http://www.morganstanley.com/GEFdata/digests/20040312-fri.html



As things played out in the 1980s and 1990s, the US lost ground in manufacturing, in part to regions with lower labor costs, but it tended to make it up in software, Internet, services and VLSI (Very Large-Scale Integration) design, thanks in part to innovation and engineering talent and effective incentive structures.

But there is a correlation between innovation and education…

When the ability to innovate in technology — especially in broadband and wireless — is added to the advantage of low labor costs offshore enabled by the Internet, however, Americans who are used to having it all may have cause for more concern. Steve Roach notes that although only 400,000 US business process jobs have gone offshore to date, the trend is likely to accelerate (see link).

As other countries develop strong engineering and technology centers, the potential erosion of the educated labor pool in the US only compounds this risk. According to the National Science Board’s Science & Engineering Indicators — 2002 (see link):

“The United States may face increasing international competition for highly educated personnel. Furthermore, its relative attractiveness may erode as living standards rise in developing countries and as other industrial nations intensify their international recruitment efforts. US preeminence in S&T (Science and Technology) may erode as competing centers for excellence are established elsewhere. Foreign graduates may find returning home more attractive than staying in the United States after their training, and industry may locate increasingly sophisticated functions overseas… On the other hand, more than half of the younger foreign students who have earned S&E (Science and Engineering) doctorates in the United States stay in the US, and this trend has changed little over time.”

We cannot end this thread without adding another stat that’s often thrown around. In 2002, according to Morgan Stanley economists Andy Xie and Chetan Ahya and the National Center for Education Statistics, 460K+ Chinese and 292K+ Indians received undergraduate degrees in engineering, compared with 73K+ Americans. When combined with the nearly 40K+ of foreign nationals of India and China who return home after study abroad, the difference grows wider.

Because engineering talent is at the center of technology development, the increasing number of engineering graduates from India and China may indicate that the engine

of innovation could be moving offshore, too. However, these numbers fail to capture the culture of innovation, let alone the importance of management skills, developed capital markets, intensity/depth/breadth of education, and experience, in general. Innovation in Silicon Valley occurred not only because of the vast number of engineers who have congregated there (many of them foreign-born, US-educated), but also because of the subculture of risk-taking created by the market that rewards the best ideas in a disproportionate way.

Right now, as Chinese companies struggle to get started and grow revenue and profits, it is often less risky in the short term to buy proven technology than to spend sales and marketing dollars developing technology that exists elsewhere. As a result, it has been commonplace that engineers in China have less experience working on cutting-edge technology, and this, quite simply, can govern innovation and creativity.

While market capitalization can tell a story of the past and the present, it doesn’t always sync with the future…

North America accounts for the majority of global public technology companies with a market capitalization in excess of $10B. We look at the company-specific market values (as of 4/12/04) for the five core global technology sub-sectors (hardware, communications equipment, semiconductors, Internet and software/IT services) and sort the companies with a market capitalization in excess of $10B on a regional basis (see Exhibit 2).

The company-specific global market values indicate that 55% of the 86 global tech companies are in North America (including Nortel in Canada), 27% are in Japan, 13% are in Europe, and 6% are in the Asia-Pacific region. Of the fivecompanies in the Asia-Pacific, three are in Taiwan (Hon Hai in hardware and TSMC and UMC in semiconductors), one is in South Korea (Samsung in semiconductors), and one is in India (Infosys in services). The largest concentration for any sub-sector in any region is software in North America, where 12 (or 75%) of the companies (including the likes of Microsoft and Oracle) are located.

For the time being, there aren’t any Chinese companies on the $10B-plus list — the largest public Chinese technology company, based on market capitalization, is UTStarcom (communications) with a market value of $4B, followed by Legend (hardware) at $3B. The combined market capitalization of the three leading pure-play Internet

https://secure.ms.com/eqr/rlink/webapp/Research?action=streamFile&docId=347992&headline=Global%3A+Daily+Economic+Comment%3A+Offshoring+-+Myth+and+Reality&docFileType=1&lastParam=/sroa032904a.pdf

http://www.nsf.gov/sbe/srs/seind02/



companies (Sina, Sohu and NetEase) in China is near $5B (on 4/12/04).

Andy Xie and China technology analyst Viktor Ma believe that several Chinese technology companies (such as UTStarcom, Legend and others) have the potential to surpass $10B in public market value within the next ten years, thanks to their dominance in specific sectors in the fast-growing China market and the tremendous export or outsourcing opportunities they may have in the low cost structure in China. Internet-enabled outsourcing opportunities should also allow China (with India) to continue their focus on ramping efforts in IT services. The leading Chinese Internet companies, in aggregate, will likely continue to support strong growth, but growth will probably be limited to the home market for years to come, although opportunities for expanding global footprints could arise in online messaging and gaming. In software, given the economies of scale and knowledge bases required for success, it may likely be many years before China is able to have a global impact. That said, the development of Linux in China should be monitored, especially in possible partnerships with local or global Internet and software leaders.

And innovation often blooms where focus, intensity and IQ points meet…

In technology, the big winners usually become big winners by finding/developing/creating new markets and driving their technology standards and intellectual property to market-share leadership along the way. One of the fascinating things about the Internet is that since its commercial launch with the Netscape Web browser in 1995, it has become a global open computing system at an especially rapid clip. And because of the speed of its adoption and the various needs and opportunities in different markets, extensions (wired and wireless) of it have evolved at different paces around the world (see sidebar).

The Internet is growing very rapidly, and the opportunities for setting new standards in emerging areas are still on the drawing board. Lots of folks around the world have their markers on their virtual white boards. It is an irony that a few years ago some people thought the Internet was over — well, it has just started, and it is not all made in America.

Speedy Adoption of New Technologies

Just a decade ago, you’d be hard pressed to find anyone who would have accurately predicted any of the following things that hold true today:

• China would have 80MM+ Internet users; • broadband usage, on a relative basis, would be higher in

South Korea than in any other country; • online gaming company (Shanda Networking in China)

would have 236MM non-unique registered users; • estimated annual revenue in 2003 for the global mobile

phone ringtone market would exceed $3B with Europe accounting for about two-thirds of the market;

• one out of every six mobile phones sold globally in 2003 (or 70-80MM) could take pictures that, in seconds, can be sent to other devices;

• Apple would have 70%+ market share of the global online paid-music market;

• a global Internet company (Yahoo!) would serve up more than one billion streaming sessions (primarily music videos) in the previous twelve months;

• a global search engine (Google) would have a news site that averaged 4MM+ US visitors/month and aggregated news from 4.5K+ sources with no human intervention;

• a global online trading company (eBay) would facilitate trades for $7B, up 53%Y/Y, in goods in CQ4:03;

• Japan would lead the world in Voice-over-IP (VoIP) attached broadband subscribers, with 4MM at Softbank group’s “Yahoo! BB” as of 3/04; and

• Cisco would have a global installed base of 2MM+ VoIP phones.



Exhibit 2 Global Public Technology Companies, Market Capitalization > $10B, Sorted by Sub-Sector and Region

(US$ in Billions, Metrics in Millions)

North America* Europe Japan Asia-Pacific Hardware** IBM

Dell HP EMC Sun Micro Xerox Lexmark Apple Pitney Bowes Flextronics

$158 91 70 31 16 12 12 10 10 10

– Canon Sony MEI Hitachi Sharp Ricoh Toshiba Mitsubishi Elec. Tokyo Electron Keyence HOYA Sanyo Nitto Denko TDK

$46 39 38 26 20 15 15 13 12 12 11 10 10 10

Hon Hai $11

Communications Cisco Motorola *Nortel Lucent Corning Agilent Juniper Research in Motion

$166 43 25 19 15 15 11 10

Nokia Siemens Ericsson Philips Alcatel

$8267474022

Kyocera Murata Fujitsu (Many from Japan Hardware included here)

17 16 13

–

Semiconductors Intel Qualcomm TI Applied Materials Analog Devices Maxim Xilinx Linear Broadcom Micron KLA-Tencor

$177 54 51 38 19 16 14 12 11 11 10

Philips Elec. STMicro Infineon

$402111

Rohm NEC

16 16

Samsung TSMC UMC

$793816

Internet eBay Yahoo! InterActive Amazon.com Adobe Time Warner

$50 37 21 19 10 76

Wanadoo T-Online

$1615

Yahoo! Japan Softbank

$47 19

–

Software / Services

Microsoft Oracle First Data ADP State Street Computer Associates Electronic Arts Symantec Paychex Accenture Veritas EDS

$275 64 38 26 18 16 16 15 14 13 11 10

SAP $53 Nintendo NTT Data

$14 13

Infosys $11

Internet Users 176 169 53 141 PCs 215 151 49 84 Mobile Phones 155 341 79 349 Fixed Lines 199 267 63 322

Source: Market capitalizations as of 4/12/04. User data as of YE2002. * Nortel is in Canada. ** Japanese hardware/communications companies are conglomerates, many are active in telecommunications equipment and components.



China and the Internet — Industry, Competitive and Macro Themes In this section we drill down on fourteen key themes — related to industry, competitive, and macro issues — that we believe are key indicators of the ongoing development of the dynamic Internet market in China. China Internet Industry Landscape 1. Number of Internet users is significant and growing rapidly 2. Relative Web-site usage momentum is strong 3. Younger users are active on the Internet 4. Development of online media is still in the early growth stages 5. Wireless messaging services linking mobile phones with the Internet are ramping quickly, though transitions are occurring 6. Broadband acceptance is growing rapidly 7. eCommerce is in the very early stages and governors exist China Internet Competitive Landscape 8. Challenges for multinational companies create opportunities for Chinese companies 9. Third-generation Internet entrepreneurs are impressive, though broad-based experience/leadership is still not abundant 10. Sustainability of Internet-related revenue and profits is still unproven, but market opportunity is large China Macro Landscape for the Internet 11. Government is focused on ramping Internet users 12. The government’s strategy, in part, reflects the need to boost domestic (urban to rural) as well as global trade 13. Economic momentum is strong, though slowing 14. Capital markets have been robust



China Internet Industry Landscape

1. Number of Internet users is significant and growing rapidly

China is No. 2 in Internet users and could be the largest market within five years…

With its 80MM Internet users (up 40% Y/Y) in 2003, China ranked an impressive No. 2 behind the 185MM users (up 14% Y/Y) in the US. If the near-term annual estimated growth rates are sustained (say, 10% annually for the US and 30% for China), China could have the largest number of Internet users in the world within five years. Note that relative penetration levels in China are quite low — in 2003, an estimated 6% of the population used the Internet in China compared with 60–65% in the US.

China is already No. 1 in other key TMT markets…

While not all technology, media and telecommunications (TMT) markets are the same, in order to understand market-penetration opportunities, we have found it useful to benchmark growth and penetration rates of the five leading TMT markets (telephone lines, installed PC, mobile phones, cable subscriptions and Internet users) against one another (see Exhibits 3 - 7).

As of year-end 2002, China held the No. 1 position for three of the five core markets, while the US ranked No. 1 in two of the five markets. And given current growth rates, China could be No. 1 in all five markets within 10 years. Given the breadth of China’s potential market presence in these key technology-oriented markets, China covets developing its own intellectual property and becoming more of a standard-setter in these increasingly interrelated markets.

Exhibit 3

China’s Leading Global Rank in TMT Categories, 2002

TMT Category Global Ranking Units (MM) 2002 Growth Mobile Phones 1 207 43% Cable TV Subscriptions 1 100 10 Telephone Lines 1 202 13 Internet Users 2 59 75 Installed PCs 4 29 21 Source: Morgan Stanley Research. Exhibit 4

Leading Mobile Phone Markets, 2002

Country Mobile

Phones (MM) 2002

Growth PenetrationWorldwide

Share 1 China 207 43% 11% 18% 2 USA 141 10 50 13 3 Japan 79 9 57 7 4 Germany 60 6 68 5 5 Italy 49 0 85 4

Source: Morgan Stanley Research. Exhibit 5

Leading Telephone Line Markets, 2002

Country Telephone Lines (MM)

2002 Growth Penetration

Worldwide Share

1 China 214 20% 17% 20% 2 USA 177 (4) 63 17 3 Japan 62 2 49 6 4 Germany 57 3 68 5 5 India 40 6 4 4


Leading Installed PC Markets, 2002

Country Installed PCs (MM)

2002 Growth Penetration

Worldwide Share

1 USA 198 12% 71% 33% 2 Japan 49 11 39 8 3 Germany 36 14 43 6 4 China 29 21 2 5 5 UK 24 9 40 4


Leading Internet User Markets, 2002

Country Internet

Users (MM) 2002

Growth PenetrationWorldwide

Share 1 USA 162 14% 58% 27% 2 China 59 75 5 10 3 Japan 53 27 42 9 4 Germany 34 14 41 6 5 UK 32 33 54 5

Source: Morgan Stanley Research.



2. Relative Web site usage momentum is strong

Internet usage for the leading Asian sites is substantial…

Nine of the twenty-five most trafficked Web sites in the world are based in China, compared to eight in the US, six in intensely broadband-enabled Korea, one in Japan, and one in Hong Kong (see the Alexa rankings for April, 2004 in Exhibit 8).

Alexa, owned by Amazon.com, creates Web-site user and usage data/trends based on three months of aggregated historical traffic data from its toolbar users. Alexa estimates that roughly 20MM Alexa toolbars had been downloaded (as of 2/04), and roughly 500K were in use monthly. The methodology of collecting independent Internet user and usage metrics is not highly developed in China or, frankly, in most markets around the world. While we are hopeful that the efficacy of such data gathering tools and surveys should improve over time, for now we are using the data and acknowledging the biases and limitations.

For example, Alexa data may be somewhat skewed to the Asian countries given that the results are a function of opt-in downloads of the Alexa toolbar. Nevertheless, we believe they do have directional significance for site traffic and interest. In addition, it is notable that the sites in broadband-intensive Korea appear in the rankings as high as they do — this highlights how active and intense online activity can be when broadband access is widely available.

Ramps in China’s Internet usage should drive traffic growth…

On an absolute basis, China will likely add more Internet users annually than any other country for the foreseeable future. So it is likely that the traffic momentum of these sites, in aggregate, could continue to outpace others simply based on the underlying growth of the core market.

Global Internet leaders — like Yahoo!, Microsoft, Google, eBay and Amazon.com — will increasingly need to focus on China, owing to the country’s market size…

Until now, eBay (through its relationship with eBay EachNet in China) has been the most aggressive and successful, in our view.

Exhibit 8

Alexa — Global Web Site Traffic Rankings Rank Site Name Country

1 Yahoo! USA2 MSN USA3 Google USA4 Sina China5 daum.net Korea6 Yahoo! Japan Japan7 Naver.com Korea8 Microsoft USA9 Sohu China10 163.com (NetEase) China11 eBay USA12 Passport.net USA13 3721 (Yahoo) China14 baidu.com China15 Tom.com China16 Newsgroup.com.hk HK17 Amazon.com USA18 Tencent.com China19 Nate Korea20 Sayclub.com Korea21 Go USA22 21CN China23 Bugs.co.kr Korea24 ChinaRen (Sohu) China25 NetMarble Korea

Source: www.alexa.com, 4/12/04.

In Exhibit 9, which charts the leading portals’ traffic ranking from Alexa on a daily basis, we note that the top three sites — Sina, Sohu and NetEase (listed as 163.com in the chart) — have maintained relatively impressive traffic rankings. For the most part, the sites have been among the top 20 global sites.

Exhibit 9

China — Daily Traffic Rankings for Portals on Alexa

Dai

ly T

raffi

c R

ank

2003 2004

sina.com.cn 163.com sohu.com tom.com

2

20

40

80

Source: www.alexa.com, 4/12/04, 163.com is NetEase.com.



3. Younger users are active on the Internet

On the Web, usage patterns by kids may foreshadow usage trends for all…

70% of China’s Internet users are younger than 30-years-old (see Exhibit 10), and for them, the price has become affordable — thanks, in part, to the wide availability of Internet cafés and relatively low-cost Internet access.

Exhibit 10

China — Internet User Age Demographics

Ages

31-35

12%

Ages 60+

1%

Ages 18-24

34%

Ages

36-40

8%

Ages

41-50

6%

Ages 51-60

3% Under 18

19%

Ages 25-30

17% 70% under 30

53% under 24

Ages

31-35

12%

Ages 60+

1%

Ages 18-24

34%

Ages

36-40

8%

Ages

41-50

6%

Ages 51-60

3% Under 18

19%

Ages 25-30

17% 70% under 30

53% under 24

Source: CNNIC, 13th Statistical Survey Report on the Internet Development in China, Jan 2004.

Chinese Internet usage, at the margin, tends to be more interactive than in some other markets…

While email, search, news and Web-site navigation dominate the list of most frequently used online services per CNNIC (China Internet Network Information Center) (Exhibit 11), interactive services (including online chat, bulletin boards and gaming) are also actively used in China; however, PC-to-phone SMS is used less as a means of communication than the much more popular phone-to-phone SMS. The usage patterns suggest the Internet has opened up venues for increased interaction in a culture where self-expression and interaction have not been hallmarks. On the other hand, online commerce and online music are used less frequently by Chinese users compared with American users.

Exhibit 11

China — Most Frequently Used Online Services

% of SurveyOnline Service Respondents

Email 88%Search Engine 62News 59Navigation of Web sites/Web pages 47Online Chatting 39Software Downloading/Uploading 39Community Bulletin Boards/Forums 19School & Classmate Bulletin Boards/Forums 16Online Gaming 15Multimedia Entertainment (MP3, FLASH, etc.) 8Online Purchasing 7Online Education 6Personal Websites 5Online Recruiting 5Online Banking 5E-magazines 4SMS 4Stock Trading 4Video Streaming 4Live Webcasts 2

Source: CNNIC 13th Statistical Survey Report on the Internet Development in China, Jan 2004. Includes data gathered on 12 previous surveys. The survey uses multiple survey methods including automatic searching with computer, an online component, an offline sampling component, and data reported from relevant organizations. Respondents were allowed to reply with multiple answers.

Young people in China like to socialize online, and often from a semi-social offline setting…

The social aspect of the Internet in China should not be underestimated. China ranked No. 1 in the world for the average number of friends that online users have met online but not in person, illustrating the importance of community and connectivity in the market (see Exhibit 13). And, it’s conceivable that this dynamic could be supported, in part, by China’s efforts with its “one-child policy.” In China, there is a saying, “one mouth, six pockets,” implying that the young people, as only children, have financial resources, owing to the incomes of their parents and grandparents, and their focus on the happiness of the child. Not only do people connect with others when they go online, but they also often physically gather in Internet cafés in order to do so. A full 20% of Chinese Internet users visit the cafés (see Exhibit 12).



Exhibit 12

China — Percentage of Internet Users by Access Location

0% 1% 1%

18% 20%

44%

66%

0

20

40

60

80

100%

Others PublicLibrary

MobileAccess

School Internet Café Office Home

Source: CNNIC, 13th Statistical Survey Report on the Internet Development in China, 1/04. Respondents are allowed multiple responses for access location.

Exhibit 13

Average Number of Online Friends Never Met in Person

2.6 2.83.2 3.3 3.3

7.7

1.1

0

2

4

6

8

10

Japan USA Singapore Korea Hungary Macao China -Urban

Num

ber o

f Cyb

er F

riend

s

Source: World Internet Project, UCLA Center for Communication Policy Jan, 2004.

In China, Internet cafés provide important locations for accessing the Internet. Viktor Ma estimates close to 5MM PCs may be in use in more than 200K venues around China. Viktor believes the majority of PCs in Internet cafés are outside of the major metropolitan areas, located in second-tier cities with population size ranging from one to four million people. Income levels and home PC penetration in these areas are low relative to the mega cities in the eastern costal areas. The large migrant worker population in the cities has further augmented the ranks of Internet café users. And the low cost of access is attracting a lot of new users. In some

places, like Chongqing, Internet cafés charge only RMB0.30 ($0.03–0.04)/hour (see Exhibit 17).

The Chinese government is concerned about “improper” access of the Internet in Internet cafés. The police monitor Internet traffic, and periodic crackdowns on Internet cafés are common across the country, but they have failed to stem the growth of the business, whether licensed or not. In an attempt to regulate and weed out smaller players in the Internet café sector, China’s Ministry of Culture has issued ten licenses for nationwide franchises in 2003 and announced a freeze on additional nationwide Internet café franchise licenses on June 5, 2003. A nationwide Internet café franchise is required to have a minimum registered capital of $6MM and to open at least 20 outlets in at least two provinces, autonomous regions or centrally-administered municipalities. In addition, all Internet cafés are required to be at least 200 meters away from any primary or middle school. So far, China Unicom is the only company with a national franchise plan. It plans to have 700 cafés in 2003 and, in 2004, to expand to 150–200 directly owned stores plus 2,500–2,800 franchise stores.

Exhibit 14

Average Hours of Internet Use at Other Places per Week (other than home/work/school)

0 0.1 0.2 0.2

0.6 0.6 0.71

1.2

1.6

2

3.2

0.2

0

1

2

3

4

Italy

Japa

n

German

y

Singap

ore

Sweden

Hunga

rySpa

in

Taiwan

Macao

USAChil

eKore

aChin

a

Hou

rs

Source: World Internet Project, UCLA Center for Communication Policy Jan, 2004.

It is notable that China ranks No. 1 in the world for the average number of hours per week that the Internet is used outside of home/work/school (see data from the recent UCLA World Internet Project report in Exhibit 14). These data points reinforce the relevance of both Internet cafés and mobile Internet access in the Chinese market.



More often than not, kids don’t have a lot of disposable income — and China is no exception…

While low relative incomes in China determine overall consumer and business purchasing power, purchasing power on the Internet in China is especially low owing to its younger demographic. The relatively young age of China’s Internet users drives the way the Internet is used and the amount of money that is spent online. Roughly 66% of Internet users earn less than $180 (RMB1,500)/month, according to the China Internet Network Information Center (CNNIC). Andy Xie adds that the average monthly household income in China is $195 (RMB1,600), with an average of $110 in rural areas and $350 in urban areas.

But, a lot of small change (yes, micropayments) can add up…

Many of the very high volume for-pay services that cater to younger demographics (including ringtones and community-based experiences such as messaging, games, and dating) carry very low prices. And as noted in Exhibit 15, for the leading Chinese Internet portals, the revenue streams related to messaging and gaming services have begun to add up.

Exhibit 15

China — Internet Portal Revenue Breakdown CQ4:03 Company Revenue ($MM) Advertising Messaging Gaming/Other

Sina $38 34% 60% 6%Sohu 25 39 58 4

NetEase 20 16 40 44Tom Online 18 3 82 15

Source: Company reports, Gaming is included in Messaging for SOHU and was less than 2% of revenue in CQ4:03. Shanda Networking’s recent F1 filing stated that the price of its online games is RMB0.28–0.55/hour ($0.03–0.07). Unlimited access for a period of time (2–30 days) costs RMB5–45 ($0.60–5.44). Assuming the average online gamer plays 9–10 hours a week and Internet access costs $0.24/hour, an average player can get by on $2.90/week. To give this some kind of framework, Shanda Networking had 11.2MM active paying accounts in CQ1:04. Payment is typically usage-based via pre-paid/virtual cards or micropayments included with monthly mobile phone bills.

The entertainment, coolness, and low cost associated with Internet access and links with mobile phones seem to hit a chord with younger people in China. And — owing to the micropayment requirements for interactive online services — the Internet is helping foster one of the first technology-oriented markets in China that isn’t subject to rampant piracy.

An estimated 90%+ of applications software in China is illegally copied, compared with a world average of 39%, per the Business Software Alliance (see link).

Online gaming is growing rapidly in China…

Online gaming is a significant market opportunity for the younger demographic, as noted in Exhibit 11. While many industry figures are bandied about, Eric Wen estimates that there are approximately 15–20MM online gamers in China, 4-5MM of whom pay fees to explore the electronic worlds of Shanda Networking’s Legend of Mir II or NetEase’s Westward Journey II, to cite two examples. These popular games, like many on the market, are Massively Multiplayer Online Role Playing Games (MMORPG). First-person shooters are also very popular in Internet cafés. Other online gaming options are quick-and-simple board-type games, but these have been historically less monetizable.

IDC reports that the average age of a China online gamer is 23, and NetEase, a licenser of foreign games and developer of local ones, reports that 50% of its users play games in Internet cafés. Exhibit 17 captures the current market structure for online gaming in China, as well as the revenue-sharing relationships among developers, operators, carriers, and the Internet cafés.

Eric believes that Chinese interest in online gaming is partially a cultural phenomenon for young people, due to the open-ended play of online gaming, which stands in contrast to the rigidity of the educational system. Content also succeeds given the popularity of mythology and martial arts.

Exhibit 16

China — Online Games Played by Different Age Groups

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

40-44

35-39

30-34

25-29

20-24

Below 19

RPG Strategy Simulation Chess/Cards Puzzle Source: ChinaLabs.

http://global.bsa.org/globalstudy/2003_GSPS.pdf



Exhibit 17

China — Online Game Value Chain

Developer Operator

National Distributor

Provincial Distributor

Retail Outlet

Internet CafeChain

Internet Cafe

Web sales

Carrier

IDC

ICP

30% discount of prepaid card

Custom

ers

ISP

RMB0.30-0.40/hrExclusive license ~ $1-2MM, plus 20-30% of revenue

Revenue sharing

10-12% discount of prepaid card

~20% discount of prepaid card

Non-exclusive license

Developer Operator

National Distributor

Provincial Distributor

Retail Outlet

Internet CafeChain

Internet Cafe

Web sales

Carrier

IDC

ICP

30% discount of prepaid card

Custom

ers

ISP

RMB0.30-0.40/hrExclusive license ~ $1-2MM, plus 20-30% of revenue

Revenue sharing

10-12% discount of prepaid card

~20% discount of prepaid card

Non-exclusive license

Source: Morgan Stanley Research, Eric Wen. Exhibit 18

China — Online Gaming Market Share (US$ in Millions)

2001 Market 2001 2002 Market 2002Service Provider Rev. Share Rank Rev. Share RankShanda Networking $16 34% 1 $30 31% 1Waei 11 24 2 17 17 2Enix Softstar 0 0 9 12 12 3Online-game 3 6 4 7 7 4Asiagame 2 5 5 4 4 5ourgame 3 8 3 4 4 6AcerTWP 1 3 6 3 3 7Netease 0 0 9 3 3 8NC Gamania 1 2 7 2 2 9Interserv 1 2 8 1 1 10Others 7 15 15 15

Source: IDC, Q1 2003. May not reflect publicized results.

While both online and offline gaming demand is easy to understand, we believe online gaming, specifically, has greater room for growth. From a supplier perspective, micropayments provide a more profitable alternative to offline gaming for content providers. Combining this supply factor with the high cost of console hardware and the social phenomenon of online gaming in Internet cafés, one can see why online gaming appears to represent the best market opportunity for interactive entertainment for the younger demographic. The market leaders experienced high growth in C2001 and C2002 (see IDC data in Exhibit 18).

IDC reports that the majority of online gaming content is dominated by foreign (i.e., Korean) content providers who have merely localized (with China or Taiwan partners) their current games for the China market. While Korean content may continue to dominate the market over the next 1–2 years, we expect a trend toward more local development of content over the long-term for the following reasons:

• Cost of licensing and converting Korean content has increased over time, according to companies such as NetEase;

• Local cultural content may be more appealing to local gamers;

• Government is encouraging greater local development; and

• In Taiwan we see a historical precedent of greater mix of local content vs. localized content, despite a wave of Korean-influenced media in the past few years.

See Exhibits 19 and 20 for the current top ten paid online games and the current top ten online games in beta test (soon to be released as paid versions). Note that Korean games dominate the beta list, suggesting no near-term weakening of their market leadership.

Exhibit 19

China — Top Ten Paid Online Games Country of

Game Operator Developer OriginRO Softworld GRAVITY KoreaMU The9 Webzen KoreaWestward Journey II NetEase NetEase ChinaJX Online (Swords Online) Kingsoft Kingsoft ChinaCrossgate Softstar Enix JapanLegend Shanda Networking Actoz KoreaLegend 3 OPTISP Actoz KoreaLegend World Shanda Networking Shanda Networking ChinaJin-Yong's Legends Chinesegamer Softworld TaiwanStoneage Waei Waei China Source: E-Play, as of 2/04. Exhibit 20

China — Top Ten Beta Online Games Country of

Game Operator Developer OriginTS Online Chinesegamer Chinesegamer TaiwanA3 AsiaGame/Haihong Actoz KoreaWestward Journey Fantasy NetEase NetEase ChinaAsgard Zhaoh Tech Nexon KoreaM2 Qile Entertainment Interserv TaiwanGTH Online Jinyutianli JYSTECH KoreaKarma Online Tom.com DragonFly KoreaNetDream eNet Codinet KoreaSurvival Project HappyDigi Hanbitsoft KoreaTQZF NetDragon NetDragon China Source: E-Play, as of 2/04.



Electronic gaming is a hits business and full of challenges for vendors…

While we believe online gaming looks promising as a key market for growth, not all new entrants will achieve the same early-stage success of Shanda Networking, let alone be able to develop them.

Online gaming companies face the same risk as the other Internet companies profiled in this report — their fragmented market creates an execution risk on the part of the developers, especially when they are trying to hit the moving target of “cool.” Eric Wen observes that there are 54 games in beta testing, compared to only 59 games in the market. An oversupply of online games could hurt non-diversified developers without deep pockets, while a glut of poorly produced titles could hurt the industry as a whole — similar to what happened in the early 1980s to video-game manufacturers in the US.

But more importantly, the gaming market could develop to be centered around a few big hits. An MMORPG becomes successful if users become immersed in the game, creating a sunk cost that fosters some loyalty; an MMORPG also becomes successful due to network effects. Both of these factors tend to suggest a coming war for market leadership.

It is important to note a comparison to US-based Electronic Arts which was founded in 1982. Electronic Arts has become the largest independent entertainment software company in the world in terms of growth and market value, but only in recent years has it been viewed as a player with long-term sustainable competitive advantages.

As a result of these risks, while we believe online gaming looks promising as a key market for growth, not all new entrants will achieve the same early-stage one-franchise success of Shanda Networking, let alone be able to develop them.



4. Development of online media is still in the early growth stages

On a relative basis, the Chinese have an especially high interest in news flow and information…

Historical governors on media (from TV to print to entertainment) have created an especially fertile environment for emerging online media, as the Internet (with and without mobile phones) is able to deliver information that simply couldn’t be sent, received or interacted with before. In a market that had been cut off from news flow for years, the ability to receive information and the ability to express oneself cannot be underestimated. Across the Web, user generated content (UGC) is becoming more prevalent and relevant. While government censorship and surveillance remain issues in China, they appear to be targeted at areas related to “controversial” politics and pornography.

When one takes a step back to look at the evolution of media, technology and the Internet in China, one can be reminded of the old programmers joke: “How did God create the world in six days? He didn’t have an installed base.” China surely has an “installed base” of highly motivated, intelligent, curious people and an impressive history and culture and land and people mass. But it doesn’t have a massive “installed base” of many of the things the Internet can provide in an inexpensive and efficient way, ranging from access to global news/information/entertainment/education, to interactive means for expressing oneself and interacting with others, to the ability to buy/sell goods directly on a global basis.

In a surprise to many, the Internet has helped effect some political change…

Eric Wen notes that the Internet has served a role in monitoring and effecting political change. And, subsequently, Internet usage in China has increased as the Chinese increasingly endeavor to find unedited and independent information and use the Internet as a means for expressing concerns about issues. Eric highlights two situations where the Internet helped create forums for public opinion that led to positive changes:

1) In the Sun Da-Wu case (11/03), a successful entrepreneur in China’s Hubei Province was accused of illegally

collecting bank deposits and siphoning them for personal gain. Mr. Sun argued that his real crime had been to refuse to pay bribes to local authorities. Reacting to this case, many Chinese citizens pushed a debate on the treatment of gray wealth accumulated in periods when rule of law did not exist. Ultimately, Mr. Sun received a suspended sentence and a relatively small fine.

2) In the Sun Zhi-Gang case (3/03), a professional working in Guangzhou died in police custody after he was rounded up by police as an illegal immigrant because he did not carry his resident ID. In this incident, discussions led by Chinese citizens on the Internet helped lead to the abolition of the 50 year-old law of “Collecting and Deporting Illegal Migrants in Major Cities” by the Chinese Congress, and 12 people were ultimately convicted for their role in beating him to death while he was held in a police clinic.

Advertisers follow eyeballs — always have, always will…

The positive trends for usage and revenue ramps in online games, messaging, advertising and search are impressive, in our view. However, on an absolute and relative basis, monetization levels are quite low, as the markets are in nascent stages, though the trends are moving in positive directions. We see the same base challenge as for most Internet companies — finding effective ways to capture small payments from tens of millions of users and actions.

The overall market for advertising and marketing in China — both online and offline — appears to be underpenetrated. Advertising and marketing revenue as a percentage of nominal GDP in China was 1% in 2003, compared to 4% in the US (see Exhibit 21).

And we also believe, as we do for the rest of the world, that online advertising in China is underpenetrated. Using the online advertising estimates in Exhibit 21, in 2003, Sina, Sohu and NetEase accounted for 85% of the market. Of that revenue, we estimate that 80%+ was derived from core online advertising, while the remainder was derived from search. This compares with Interactive Advertising Bureau (IAB) data for the US market for C2003, which indicate that 71% of online advertising revenue was from core online advertising, while 29% was related to search (up from 8% of revenue in C2002 — over 300% Y/Y growth).



Exhibit 21

China and US Advertising Markets (US$ in Millions, Metrics in Millions)

China US2003E 2003E

Total Advertising & Marketing Services Industry $12,484 $450,844Y/Y Growth 12% 4%

Agency Revenue $5,040 $54,101% of total advertising industry 40% 12%Y/Y Growth 5 4

Total Net Advertising & Marketing Services Revenue $7,444 $396,743% of GDP 1% 4%Y/Y Growth 17 4

Net TV Advertising Revenue $3,350 $37,422TV Households 294 108% of total advertising 45% 9%Y/Y Growth 20 1

Net Newspaper Advertising Revenue $2,527 $39,576% of total advertising 34% 10%Y/Y Growth 14 2

Net Radio Advertising Revenue $322 $17,364% of total advertising 4% 4%Y/Y Growth 15 1

Net Magazine Advertising Revenue $230 $15,421% of total advertising 3% 4%Y/Y Growth 15 5

Net Other Media (Outdoor and Transit Advertising) $920 $4,554% of total advertising 12% 1%Y/Y Growth 15 3

Net Online Advertising Revenue $96 $7,217% of total advertising 1% 2%Y/Y Growth 52 20

Pay TV Revenue (1) $2,399 $28,200Y/Y Growth 16% 6%

Population 1,287 290

Internet Users 80 185

Basic Cable TV Subscribers 90 64

GDP $732,760 $9,684,351Y/Y Growth 8% 3%

E = Morgan Stanley Research Estimates Source: IDC, SAIC, Zenith Optimedia, Morgan Stanley Research, based on Exchange Rate = 8.28 RMB/USD. (1) Includes basic revenue, digital, advertising and premium and PPV revenue.

Search / Find / Obtain (SFO) is just beginning to ramp in China…

The search market in China is at an earlier development stage than the search markets in the US and Europe where the likes of Google, Yahoo!, eBay, Amazon.com and Microsoft have cranked up the volume. Although there is no clear-cut consensus as to the search engine market share leader in China, both 3721 (#1 per ChinaLabs) and Baidu (#1 per iResearch), seem to have significant traction (see Exhibit 22). The difference in rankings may be because of a difference in methodology — results from 3721 searches conducted directly in the Internet user’s toolbar may not be counted in iResearch. iResearch results are conducted by survey questionnaire, whereas the ChinaLabs CLSI index is based on a modified Alexa ranking (see Section 2 for more on Alexa and its limitations).

Exhibit 22

China — Market Share for Leading Portals

Rank iResearch Share ChinaLabs CLSI Index1 Baidu 48% 3721 1,4562 Google 30 Baidu 1,0083 3721 10 Sohu 584 Sina 4 Huicong 545 Sohu 3 Sina 32

Source: ChinaLabs as of 3/04, iResearch of 12/03. See text for commentary on methodology.

In CH2:03, Baidu was removed from the sites of several portals (Sina, Sohu, NetEase, and Tom), owing, in part, to a desire to diversify their search supplier base. Instead, the portals partnered with either Google or Huicong/Zhongsou (a competing search company).

As part of its increasingly focused efforts in China, Google launched a Chinese-language version of AdWords in 2/04. In addition, one of the key reasons why Yahoo! acquired China’s leading keyword search company, 3721, in 11/03 and announced an online trading partnership with Sina in 1/04 was to bolster its efforts in online search in China.

Net, the competitive dynamics in Chinese search will be key to monitor over the next year. Given the lack of offline infrastructure for effectively SFO-ing most things in China, the relative online opportunity should prove especially compelling.

To illustrate, we provide a brief comparison (see Exhibits 24- 26) of leading search-related Web sites in China: 3721, Baidu, and Huicong (recently rebranded as Zhongsou).

3721, a Chinese “real name” keyword search engine, allows users to type the Chinese characters (or the “real name”) of the company rather the URL in the address bar of Microsoft’s Internet Explorer. To get 3721, users download the program from 3721’s site. 3721 has 90%+ reach for Internet users in China, according to company reports as of 3/04. 3721’s popularity stems from the convenience it offers to Chinese users — for native Chinese speakers, remembering an English URL is difficult. With 3721 installed, a user can simplify the process by typing the Chinese characters for, say, “Lenovo”, a computer manufacturer, and go directly to the company site.



Exhibit 23

Daily Traffic Rank Trends for Chinese Search Engines

Dai

ly T

raffi

c R

ank

2003 2004

10

100

1,000

10,000

100,000

baidu.com3721.com huicong.com


Baidu is a Chinese-language search engine. Baidu offers Web page, news, mp3, image and local search through its Web site. Using software that can deliver Chinese-language content over low-bandwidth networks, Baidu can differentiate between two- and three-character Chinese names. The company also provides search-engine services and pay-per-click ad placement through its Web site.

Huicong/Zhongsou is the search provider to the larger portals, and can be integrated into the desktop, allowing users to search from inside Microsoft Word, Excel and PowerPoint. Both types of searches may be underrepresented in Exhibit 23 as the Alexa results indicate traffic only to a Web site, among its other limitations. Traffic generated from executing queries from a larger portal may be credited to that portal (and not to the underlying search engine providing the results), while search traffic originating from Microsoft Office Suite may not be picked up at all.

Search Results for 数码相机 (Digital Camera) Across Three China Search Engines

Exhibit 24

3721 — Search Results for Digital Camera

Source: www.3721.com, 2/27/04.

Exhibit 25

Baidu — Search Results for Digital Camera

Source: www.baidu.com, 2/27/04.

Exhibit 26

Huicong/Zhongsou — Search Results for Digital Camera

Source: www.zhongsou.com, 2/27/04.



5. Wireless messaging services linking mobile phones with the Internet are ramping quickly, though transitions are occurring

China will likely continue to possess increasing scale advantages for mobile phone and Internet connectivity…

Mobile phone sales have taken off strongly in China because they have become affordable and they provide people with unprecedented connectivity and entertainment. China is now the world’s largest market for mobile phones (269MM in C2003, up 30% Y/Y). One of the things we have heard time and again is that the Internet market is different in China not only because of the volume of mobile phone and Internet users but also because of the powerful ratio of mobile phone to Internet users and how the Chinese people use the Internet to communicate with their mobile phones.

No major market comes close to China’s 2003 ratio of 3.5 mobile users for every one Internet user (see Exhibit 27). Simply based on volume, interest and momentum, it is likely that China will possess increasing scale advantages in mobile phone and Internet connectivity/messaging. The impressive thing here is just how quickly China has assumed the pole position. And based on China’s low relative market penetration, the race (and subsequent lapping) has likely just begun.

Mark Shuper and Lina Choi, Morgan Stanley Asia/Pacific Telecommunications analysts, note that increasingly fast mobile download speeds will drive innovation in Wireless Value-Added Services (WVAS). China should benefit from the concentration among a small number of largely regionally focused cellular providers, which makes it easier to adopt and implement standards than in markets like the US, where there are multiple nationwide carriers. By providing attractive revenue-share agreements for the software and content developers, mobile providers in China ensure that their messaging platform ecosystems will continue to develop and thrive. Like all mobile-phone companies, China Mobile and Unicom are focused on increasing their ARPU (average revenue per user), and they see ramps in wireless data services revenue (8% of China Mobile and 5% of China Unicom’s CQ4:03 revenue) as important growth opportunities.

Exhibit 27

Leading Markets for Mobile Phones and Internet Users

Country

Mobile Phones

(MM)

Internet Users(MM)

Mobile Phone to Internet

User Ratio

Installed PCs(MM)

China 207 59 3.5 : 1 29 US 141 162 0.9 : 1 198 Japan 79 53 1.5 : 1 49 Germany 60 34 1.8 : 1 36 UK 49 32 1.5 : 1 24 Italy 49 20 2.5 : 1 12 South Korea 32 26 1.2 : 1 13

Source: Morgan Stanley Research - Global Market Sizing of TMT Products and Services- 9/03; 2002 Year-end data. China is now the No. 1 market for SMS message volume, driving substantial growth in Internet portal revenue…

The Internet leaders in China have been increasing their exposure to the short message service (SMS) market through internal initiatives as well as a series of acquisitions. The first SMS messages in China were served by China Mobile in 2000. And over the course of 2001, Web portals such as Sina, Sohu, NetEase and Tom Online launched the first Web-based SMS links to the mobile phone providers. Sina boosted its SMS business with the acquisitions of mobile value-added service providers MeMeStar, in 1/03, and Crillion, in 3/04. And Tom Online increased its subscriber base by 1MM through the acquisition in CQ4:03 of the Wu Ji Network, a wireless Interactive Voice-Response (IVR) service provider. For a description of the services, see Exhibit 28.

As of CQ4:03, the four pure-play Internet companies supported a total of 34MM (or 26% of the total) active SMS subscribers, with Sina leading the pack at 11MM, followed by Sohu at 10MM, Tom Online at 9MM, and NetEase at 4MM, according to company reports.

Exhibit 28

Wireless Messaging Product Matrix

Product Description SMS • Basic text messaging MMS • Picture/Graphic messaging WAP • Web browsing (including search) IVR • Voice-based access to information and entertainment

Source: Morgan Stanley Research



Exhibit 29

Sina.com — Examples of SMS “Push” Content

-News-Sports-Finance-Lottery tickets-Tech-SMS magic-Entertainment-Games-Jokes-English-Lifestyle-Business

Weather forecast

Subscribe Unsubscribe

SMS Subscription

Source: www.sina.com

There’s a bevy of content available on the Internet (ranging from news stories to jokes), and the portals have made it very easy for their users to send (via wireless messaging services) that content to mobile phone users and vice versa. (For a demonstration of how a typical user might sign up for, say, a daily weather update “pushed” to a phone on Sina, see Exhibit 29). The market for messaging and related products/services has been quite dynamic; numerous start-up companies, such as Linktone, focus on creating/selling specialized value-added services (VAS) for mobile phones and have helped drive innovation.

There are two types of SMS messages:

1) Peer-to-peer messages. When a mobile user sends an SMS to another mobile user the sender is charged, on average, $0.012 (RMB0.10) for each message sent. Web portals are not involved in this type of SMS;

2) PC-to-mobile messages. When a mobile user “pulls” content (such as a ringtone) from a site, or when a site “pushes” content (such as a daily weather update) to a phone, a content fee ranging from $0.12 to $0.60 (RMB1–5) is then charged to the mobile user, and the portal is reimbursed by the mobile provider for this service. These messages are not classified as peer-to-peer SMS.

Exhibit 30

China — Portal Revenue and Wireless Tallies Revenue WVAS Revenue WVAS % of Rev.

Sina $114 $64 56%Sohu 80 47 59Tom Online 77 56 72NetEase 66 32 49Total $337 $199 59%Y/Y Growth 171% 318% 19

Source: Company Reports, C2003. Total for WVAS % of Revenue is Average %. Y/Y Growth for WVAS as % of Revenue is in percentage points.

The China portals increased their overall revenue and wireless revenue by impressive amounts in C2003 (see Exhibit 30). Notice the significant increase in the average percentage of revenue derived from wireless services — from 40% in C2002 to 59% in C2003.

Exhibit 31

China — Estimated Number of SMS Messages

116

200

90

0

50

100

150

200

250

2000 2001 2002 2003

SMS

Mes

sage

s Se

nt in

Chi

na (B

)

Source: Morgan Stanley Research. All in, growth in SMS usage has been strong, with an estimated 200B messages sent by 130MM+ registered users in 2003, up 122% Y/Y (see Exhibit 31). While more than 75% of SMS traffic is conducted directly between mobile phones, the remainder is estimated to be conducted from PCs to mobile phones or vice versa.

According to Mark Shuper, half of Chinese cellular subscribers have begun sending person-to-person SMSs and roughly a third have used non-SMS data services over their mobile phones. In contrast, some 80–90% of Japanese cell-phone users now access some form of wireless data, whether through DoCoMo's i-Mode service or those offered by its rivals.



As an indicator of how large the market for wireless value-added services has grown, we highlight a familiar related market — ringtones. The ARC Group estimates the global downloadable ringtone market generated ~$3B in revenue (up 40% Y/Y) in 2003. Estimates vary widely for this. The ARC Group estimate assumes approximately 6B ringtones sold at an average price of $0.60. The region with the highest penetration was Europe, which grabbed 63% of the market, according to estimates by Durlacher and the ARC Group.

Yet, growth in SMS has been slowing in C2003 due to the law of large numbers, regulatory changes and the transition to next-generation wireless services…

Lina Choi observes that regulatory risk will likely remain a fact of life for the messaging industry in China. The regulator, the Ministry of Information Industry (MII), appears to have been less concerned with licensing tariffs than with keeping a very close eye on Internet content — contrarian political views and aggressive content are prohibited.

In CQ3:03, the MII ordered a clean-up of objectionable content, which resulted in a significant slowdown in SMS volume for the industry as a whole, stalling portals’ revenue growth for 3–6 months. In Exhibit 32, we highlight an example of slowing growth for Tom Online, disclosed in its 3/04 F-1 filing — of particular note are the slowing rate of SMS paying subscription net adds, which declined from 3MM in CQ2:03 to 1MM in CQ4:03, and the number of downloads per subscriber, which fell from 15 in CQ1:03 to 8 in CQ4:03.

Exhibit 32

Tom Online — SMS Operating Data

(Metrics in Millions, Except Downloads/Subscriber in ones)CQ1:03 CQ2:03 CQ3:03 CQ4:03

Registered Users 16 18 22 27New Users -- 2 4 5SMS Subscriptions 6 9 9 9SMS Net Adds -- 3 (0) 1SMS Downloads 83 89 79 73Downloads/Subscriber 15 10 9 8 Source: Company Reports. As next-generation service momentum builds and SMS growth slows, and as mobile services transition from basic communication to content to applications (see Exhibit 33), Lina Choi believes that China could prove to be one of the leaders with next-generation wireless messaging technologies (including multimedia messaging service [MMS], Wireless Application Protocol [WAP] and Interactive Voice Response [IVR]) though higher prices for next-generation products/services could govern momentum.

Exhibit 33

China — Mobile Platform Evolution

SMS

WAP

Location-smart

ApplicationsMobile Banking

MMS

Mobile Commerce

Conferencing

Focus

Medium Margin

High Margin

Low Margin

Mar

gin

ApplicationContentCommunication

A/V Streaming

Collaboration

Content Distribution

VoiceSMS

WAP

Location-smart


MMS

Mobile Commerce

Conferencing

Focus

Medium Margin

High Margin

Low Margin

Mar

gin


A/V Streaming

Collaboration


Voice

Source: IDC 2003.

However, consumers might need some time to transition from SMS to higher-level applications, in part due to higher prices for MMS/WAP products and price sensitivity among Chinese cellular users. This should be qualified with the observation that messaging fee levels in China, already low compared to global standards (see Exhibit 34), may be unlikely to fall further because of mobile operators’ implementation of “bucket plans” to drive usage volume.

Exhibit 34

China — Messaging Fees vs. Other Asia Pacific Nations (US$)

SMS MMSper msg per msg

China $0.01 $0.24Australia 0.16 0.59Hong Kong 0.06 0.64Korea 0.03 0.86New Zealand 0.14 --Phillipines 0.02 0.27Singapore 0.06 0.50Thailand 0.08 0.26Taiwan 0.09 0.29

Source: Morgan Stanley Research, Lina Choi, Figures in USD.

China’s transition to MMS and next-generation wireless services creates opportunities and risks for the portals…

Because of the limitations of credit card and online payment system use in China, it is difficult for Web portals to collect content fees directly from their users. As a result, the portals collect their messaging-related revenue by billing it via the mobile phone providers. Under current deals, the mobile



providers remit approximately 80–85% of this revenue stream to the Internet companies (see Exhibit 35). While there is concern that the mobile companies may tighten these terms, the near-term threat is limited as the mobile operators receive much larger revenue streams from point-to-point SMS. Some estimate that for each point-to-point message that is sent there is a “multiplier effect” as mobile phone message recipients often forward the message to other users. And for these incremental messages, the mobile phone providers do not share revenue with the portals.

As MMS dollar volume increases, to $221MM in 2003 (up 84% Y/Y) according to IDC, the carriers may rethink their previous revenue-sharing agreements (see Exhibit 35). Although Lina Choi notes that one cannot rule out the risk of cellular operators demanding a higher revenue share, it is unlikely to be a near-term threat.

Both China Mobile and Unicom derive most of their wireless data revenue from additional airtime and transmission fee from Service Providers (SPs); content-sharing revenue is a very minor portion of their total revenue pie. Therefore, we believe the mobile players have more incentive to stimulate usage by providing sufficient economic interests for the SPs.

Potential revenue-share pressure could also be partially mitigated by the potential entry of new cellular carriers, China Telecom and China Netcom, if they receive 3G cellular licenses in the next 12–18 months. In the future, the relationship between cellular carriers and SPs should be a multi-party to multi-party one.

All in, the increasing demand by consumers for wired and wireless connectivity will likely continue to push Internet and mobile phone companies to collaborate with new product initiatives. And, in many areas, the Asian markets — including China — are leading the charge. That said, China, relative to Korea and Japan, may have plenty of room for growth in data services. If we take SK Telecom and NTT DoCoMo as the standard-bearers for regional data usage, then the upside could prove compelling (see Exhibit 37).

Exhibit 35

China — Messaging Fees, Revenue Share Arrangements (US$)

Content Fees Transmission FeeFee Per Fee Per Revenue Fee Per

Service Provider Message Monthly Sub. Share MessageSMS (China Mobile) 0.012–0.242 0.242–3.625 85% 0.006–0.010SMS (China Unicom) 0.006–0.242 0.242–3.625 83 NoneMMS (China Mobile) 0.036–0.483 0.604–4.833 85 0.016–0.036WAP (China Mobile) -- 0.242–1.208 85 None Source: Tom Online F-1. (1) Share of the content fees may range between 55% to 83%, however, in 2003, Tom Online generally received 83% of the content fees for wireless data services that they provided to users through China Unicom’s platform. Exhibit 36

China — MMS and SMS Revenue Breakdown

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

$2,000

2002 2003

(US$

MM

)

SMS MMS and Other Mobile Data

Source: IDC.

Exhibit 37

China — Data as % of Operator Revenue vs. Korea and Japan

2

7

19

25

0

5

10

15

20

25

30%

2002 2003E CQ3:03 CQ3:03

Growth

Potential

China Korea Japan

Source: IDC, NTT DoCoMo - Japan, SK Telecom — Korea.



6. Broadband acceptance is growing rapidly

Broadband growth remains key to the expansion of Internet usage…

Although broadband technology in China is still ramping up toward speeds seen overseas — with average speeds of 500 Kbps vs. an advertised 1.5–2.0 Mbps in other global markets (and a high of 46 Mbps in Japan) — the number of broadband users in China still rose to 17MM (up 164% Y/Y) in 2003, according to CNNIC.

Mark Shuper and Lina Choi estimate that over 80% of China’s broadband access is ADSL-based and operates at an average uplink speed of 500 Kbps. Average monthly revenue per broadband user, based on China Telecom’s F2003 figures, was about $18/month. China Netcom (CNC), China’s primary ADSL-based broadband access provider in the Northern ten provinces, expects the number of broadband subscribers to continue to grow quickly as cheaper monthly plans (such as $10/month for 30 hours of usage) are offered. We expect broadband growth will remain key to the development of Internet usage for two simple reasons: 1) high speed and 2) “always on” functionality. In addition, growth drivers related to government focus, general improvements in the online user experience, online gaming ramp and potential bundling of more services into the broadband offerings should serve as catalysts for growth.

Exhibit 38

China — Internet User Access Methods

6

17

27

49

0

10

20

30

40

50

60

ISDN Broadband Leased Lines Dial-Up

Inte

rnet

Use

r Acc

ess

Met

hods

(MM

)

Source: CNNIC 13th Statistical Survey Report on the Internet Development in China, Jan 2004. Users using multiple approaches are repeatedly counted into each category, so the sum of all categories ( 99MM) is larger than total users (80MM). Leased lines = those who first access LANs via Ethernet and then access Internet via private leased lines. Broadband = those using xDSL, Cable Modem, etc.

Exhibit 39

China — Estimated Broadband Users

7803,280

17,400

32,906

43,817

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2001 2002 2003 2004 2005

Bro

adba

nd U

sers

(000

s)

E = Morgan Stanley Research Estimates Source: CNNIC, Lina Choi.

Lina Choi observes that China Telecom and Netcom plan to increase their broadband subscriber base by 15–20 million in F2004, up from a combined base of 11MM as of CQ4:03. In Exhibit 39, we present estimated broadband user data for China, with the observation that the subscriber-to-user ratio was 63% at YE2003.

And more broadband may mean more online gaming, and vice versa…

If Korean Internet usage is indicative of where Chinese Internet usage may go and if the momentum of leading game companies in China is sustainable, it is fair to say that growth in online gaming and broadband access should be symbiotic. Online gaming should be an important driver of broadband adoption in China, and broadband usage should help drive increased recreational usage time for online gaming.

Compared to China, South Korea has a higher broadband adoption rate and a higher online gaming penetration rate — in 2002, 45% of Internet users played online games. About 32% of South Korean Internet users paid for online games, generating $289MM in revenue, according to IDC. But on an absolute basis, the China market could surpass these figures thanks to its sheer size, despite much lower penetration. Shanda Networking, the leading China gaming company, boasted 236MM registered non-unique users of its games and concurrent usage of up to 1.2MM, as of December 2003. Shanda Networking increased its revenue to $72MM in C2003, up 84% Y/Y, with net income of $28MM, up 66% Y/Y. (See Exhibit 40 for Shanda Networking operating metrics.) The potential of the China market is just one of the



reasons why many Korean providers have partnered in China through licensing agreements (witness Shanda Networking and Actoz/Wemade’s success with Legend of Mir II, even if now they are in an acrimonious legal struggle, or the9.com and Webzen through 9Webzen and GameNow) and why many Korean providers had previously partnered in Taiwan (witness Gamania and NCsoft, now involved in the China market as NC Gamania) with similarly successful results.

Exhibit 40

Shanda Networking — Financial and Operating Metrics (US$ in Thousands)

2001A 2002A 2003ARevenue $550 $39,414 $72,490

Y/Y Growth % 92% 7067% 84%Registered Accounts (1) 1,900,000 88,000,000 236,000,000

Y/Y Growth % -- 4532% 168%Peak Concurrent Users 72,035 627,276 1,185,844

Y/Y Growth % -- 771% 89%Average Concurrent Users 43,736 278,186 683,917

Y/Y Growth % -- 536% 146%Average Revenue per User-Hour for MMORPGs (2) $0.014 $0.017 $0.021

Y/Y Growth % -- 17% 21% Source: Shanda Interactive Entertainment F1 filing, 4/2/04. (1) Users must register new accounts for each different title played, and users may have multiple accounts for a single title. (2) Calculated based on 12/31/03 RMB8.2767/US$ exchange rate per Shanda filing for Y/Y consistency. Filing indicates RMB amounts.

As the macroeconomic environment (household income, media spending per household, etc.) improves in China, the gaming environment could very well change as it is affected by other interactive entertainment options, including game consoles. In other words, the market opportunity for online gaming should not shrink, but the type of market opportunity that exists now and in the near future may be redefined.

It was only 20–30 years ago that arcades in the US served as a similar social environment as online gaming in an Internet café. Because dual structures between home and social play exist in other Asia-Pacific nations — in Korea, IDC reports that 92% of online gamers play at home and 57% play in Internet cafés — the Chinese online gaming market may see a shift, more than likely, between public and private play in the years ahead. So, while the issues of piracy and cost may still impede console adoption (time will tell), private broadband access could drive a change in market structure or even demographics. And this relationship works both ways — as more gamers want to access games from their homes, the online gaming market could help foster the growth of the broadband market as well.



7. eCommerce is in the very early stages and governors exist

eCommerce usage in China is quite low…

Only 21% of urban Chinese Internet users purchase products online, compared with 38% of US Internet users (see Exhibit 41) — and the Chinese number may be inflated owing to apples-and-oranges comparisons for types of products purchased (as in virtual products like ringtones and dating services in China vs. physical products like books and movies in the US).

The penetration of business-to-business (B2B), business-to-consumer (B2C) and consumer-to-consumer (C2C) eCommerce in China is, in part, constrained by infrastructure limitations in the country, including the following: 1) poor credit/payment systems; 2) inefficient logistic/distribution systems; 3) low levels of trust; 4) low PC installed base; and 5) low income levels.

While Chinese online media development may lag the US by a few years and online gaming and wireless communication development may lead the US by a year-plus, it appears that the development of eCommerce in China may lag the US by four-plus years.

The good news for eCommerce in China may be that, in general, most of the buildout of the country’s physical and financial infrastructure for offline and online commerce remains to be done. In our view, the impact of the Internet in helping shape the future of consumer and business finance, logistics and wholesale/retail trade and distribution in China should not be underestimated.

In addition, as eBay EachNet is proving in China, eCommerce is not just about trade. While 90%+ of eBay EachNet’s trading volume took place in urban areas a few years ago (often for products like computers), today, more than half the trades take place in rural areas. Cosmetics, jewelry and clothing have become the most highly listed products on eBay EachNet’s site. And an interesting thing is happening as eBay EachNet is, in ways, becoming a fashion trend-setter (and educator) — people in remote locations not only are able to find what’s hot, but they are also able to find and buy items that were not available to them in the past.

Exhibit 41

Percentage of Internet Users Who Make Online Purchases

6% 8%11% 13% 15%

31% 31%34%

38% 41%48%

21%

6%3%

0%

20%

40%

60%

80%

100%

Hunga

ry

Chile (

Santia

go)

Spain

Singap

ore

Macao

Taiwan Ita

ly

China (

Urban)

Japa

nKore

aBrita

inUSA

Sweden

German

y

Source: World Internet Project, UCLA Center for Communication Policy — January 2004. Exhibit 42

Asia/Pacific — Internet Buyer Online Purchasing Payment Method by Geography

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

China India Singapore Taiwan Korea Hong Kong Malaysia Australia

Credit Card Do not pay immediately Other

Source: IDC, Marco Polo Survey, 2003. In the US and other developed countries, eBay has built an impressive business by trading hard-to-find, end-of-life, collectible and pre-owned items, and bargain-priced in-season retail products. In China, given that in-season retail products are so hard for so many consumers to purchase offline, this market, on a relative basis, could be much larger for eBay EachNet in China than it is in many other markets.



Five reasons why China lags in eCommerce…

1) Poor credit/payment systems — China tends to be a cash-based economy, in part, because of fear of fraud on both sides of transactions and because of an underdeveloped financial services industry. On the Internet, online payments account for only 36% of online transactions compared with a hefty 50% for cash-and-carry plus post office transfers, per CNNIC. See Exhibit 42 for a comparison of China’s online purchasing payment methods to other Asia Pacific nations. According to China Union Pay data, as of YE2003, there were 650MM bank cards in circulation, of which the majority were debit or deposit cards, and of which 4.8MM were true credit cards (with no deposit requirement and with revolving credit) in use. Net, it will likely take a long time for online payment systems in China to develop — we visit some of the key issues on page 35.

2) Inefficient logistic/distribution systems — Often in China, compared with more developed countries, there aren’t always efficient ways to get products from point A to point B. The OECD sums up the logistic/distribution issue in its report highlighted on page 61: The development gap between distribution in China and in OECD countries is profound. The distribution sector is in its infancy in China. No better example illustrates this than the following: if a company has two warehouses in two locations and goods are moved from one to another, then the local tax bureau must treat the transfer as a sale and tax it accordingly. While the national postal network (China Post) has extensive coverage of the country and serves as the primary distribution trading facility (for delivery and payment), its customer service is considered poor and its costs for transferring money are unreasonably high, according to Eric. China Post is a state-owned enterprise with 500K employees, 76K branches, 40K trucks, and 10 planes as of 2002. As noted on page 60, China Post has entered overnight delivery, bill payment, savings and logistics and is endeavoring to improve its technology efforts, in general.

Eric Wen notes that in an effort to surmount logistic/distribution/transportation issues, leading online retailers in China — joyo.com and Dangdang — are developing their own delivery networks. joyo.com has introduced delivery to 22 cities. Some of Dangdang’s local delivery partners use couriers (often on bicycles) to deliver goods to the end-users, collect the money and wire it back to the company.

3) Low levels of trust — Low trust and high levels of fraud create challenges when purchasing products sight unseen. Trust, safety and fraud have been big issues for the Internet in general; in China, where corruption is more prevalent than it is in many countries, it is an even bigger issue. This is due, in part, to the lack of a common law system, vigorous enforcement and active consumer outcry. Eric notes that many regional governments do little to stop enterprises engaged in fraud, because the local bureaucrats believe that putting these fraudulent companies and their employees out of business would do more damage to the regional government’s standing than would letting fraud go unchecked. As a result, people are uncertain about the government’s willingness to protect them from fraud. Eric also notes that consumer activism also plays an important component in building a trust “feedback loop,” and in China, where authoritarianism still lingers, there is scant public outcry on fraud. Regarding trust and safety, note that in addition to its feedback system, eBay EachNet has developed a seller verification program — eBay EachNet matches the seller’s national identity number with a government database, a system that helps control fraud.

4) Low PC installed base — Bottom line, a hefty installed base of PCs is key to the growth of eCommerce, and PC penetration in China is still relatively low. Viktor Ma estimates that China’s PC installed base in 2003 was 65MM of which 19MM, or 29%, were in homes. In the US, Rebecca Runkle estimates that the PC installed base was 225MM, of which 95MM, or 42%, were in homes. However, it is worth noting that these installed home PCs are concentrated in large cities, where PC penetration rates could be as high as the 100% that was claimed by Guangzhou in 2002 on a household basis. Viktor estimates that on a household basis, the home PC penetration rate is around 50% in major cities like Beijing,



Shanghai and Shenzhen. This could mean that these economically more advanced cities are ready for eCommerce at least from the hardware prospective.

5) Low income levels — Low levels of relative nominal GDP per capita ($1,062/person in 2003, compared with $37,312/person in the US and world levels of $5,649/person in 2003) speak for themselves. Andy Xie adds that the average annual disposable income for each Chinese person of the 18–25 age group in major big cities is $2,000. Subsequently, as noted on pages 20- 21 there’s not a lot of money for the types of discretionary items that are often found online. Income of the urban households is three times that of those in rural areas. While the urban households’ spending on education, cultural and reaction services has increased from 9% of total living expenditure in 1990 to 15% in 2002, the typical rural household is still spending almost half of its income on food (compared with 13% spent by the average American household).

Developing effective online payment systems is critical to the development of eCommerce in China…

In our view, developing efficient online payment systems (assisted by the user-generated feedback rating systems that have proven to be so effective for companies such as eBay, Amazon.com and Yahoo!) is a critical development need for the evolution of the Internet in China. That said, it is still a greenfield opportunity, and it is way too early to determine who the winners will be…

Mobile Phone Providers?

China clearly lags behind its Asian peers when it comes to online payment systems (see Exhibit 42). However, China’s mobile phone providers (China Mobile and China Unicom) have built payment mechanisms that make it possible for online purchases to be charged against a customer’s mobile phone bill. While not exclusive to China, this payment model has gained a lot of traction, as SMS-related purchase payments make up a larger percentage of total online purchases in China compared to the rest of the Asia/Pacific region (see Exhibit 44). In addition, the online gaming providers (in part, with pre-paid cards) have been quite successful. It is notable that both pre-paid cards (where the bearer has the funds) and mobile billing relationships (where a phone number links to an individual) are relatively effective at limiting fraud owing to the implied respective accountability.

Exhibit 43

Mobile Phone Subscribers by Leading Country (US$ and Subscribers in Millions)

CQ4:03 MarketCompany Country Subscribers CapitalizationChina Mobile China 173.0 $59Vodafone United Kingdom 128.6 167China Unicom China 96.0 12Telefonica Moviles Spain 46.4 47Cingular & AT&T Wireless (1) United States 46.3 37NTT DoCoMo Japan 46.2 109Telecom Italia Mobile Italy 44.9 49Orange France 44.6 57AMX/Telcel Mexico 39.3 26Verizon Wireless United States 37.4 104T-Mobile (2) Germany 30.3 74KDDI Japan 23.1 25 Source: Company data, Morgan Stanley Research, Market Capitalization Data as of 4/9/04. (1) Market Capitalization data is for AT&T Wireless. (2) Market Capitalization data is for Deutsche Telekom.

To us, it seems like a natural for the mobile providers to determine how to leverage their competitive advantages with their significant user bases and expanded billing systems; a partnership with the financial services institutions would help jump-start the online payment business in China. As of CQ4:03, China Mobile had 173MM (up 23% Y/Y) and China Unicom had 96MM (up 45%Y/Y) mobile subscribers (see Exhibit 43). Given their own Web sites and relationships with Chinese portals such as Sina, Sohu and NetEase, the two providers could potentially play a more significant role in the evolution of online payment systems if they are motivated and allowed to develop their efforts.

That said, Mark Shuper notes that for the time being, the mobile value-added services collection platform cannot be used for online purchases of products/services other than those that are messaging related. There are regulatory hurdles on telecom operators performing banking services, a legal prohibition against third-party debt collection, and consumer privacy concerns over trading of customer data.

Bank Cards?

The credit-card industry is growing in China, evidenced by strong growth in outstanding credit-card balances (up 87% to $575MM in CQ3:03), based on China Union Pay data, as compared with overall loan growth of 21% in 2003, according to People’s Bank of China (PBOC) data.

There is a good chance that credit cards may not be the single form of payment on the Internet in China. China Union, the Visa or MasterCard equivalent in China and a consortium of eighty-five domestic financial institutions and companies established in 3/02, is the sole bankcard settlement



organization in China providing a nationwide bankcard information switch and interchange network to enable interoperability of bankcards and industry development in China. Bank cards carrying the China Union Pay logo numbered 206MM as of CQ3:03, representing 32% of total bankcards, according to China Union Pay.

Bank cards could become an alternative form of payment on the Internet. And it is notable that China Union Pay (in Guangzhou and Shenzhen) and Capital E-store (in Beijing) have introduced payment by SMS.

Exhibit 44

China — Online Purchase Payment Methods Compared To Rest of Asia/Pacific

0% 10% 20% 30% 40% 50% 60% 70% 80%

SMS

Credit

China Rest of Asia/Pacific

Source: IDC.

PayPal?

The global leader for online payment systems is PayPal (division of eBay), with 40MM registered accounts (as of CQ4:03) and 13MM active accounts (up 67% Y/Y). With eBay’s global expansion plans for PayPal, the service seems to be well positioned for ongoing growth. While the majority (77% of CQ4:03) of PayPal’s business was in North America, the PayPal service is in use in 37 countries and has been formally rolled out in the United States, Canada, and the United Kingdom (pending ELMI approval).

We believe China is a significant market opportunity for PayPal, given eBay’s presence there with eBay EachNet. But for now, from a Chinese regulatory perspective, PayPal’s online payment services fall into the online banking business that can only be provided by banks and are accordingly subject to the approvals from the China Banking Regulatory Commission (CBRC).



China Internet Competitive Landscape

8. Challenges for multinational companies create opportunities for Chinese companies Issues related to the regulatory, investment and political environments in China create special challenges for competition. Patrick Hardy and the China-based team at law firm O’Melveny & Myers LLP (see link) helped us pull together the following thoughts on the issues. Please note that information relating to Chinese law and regulation is intended for informational purposes only and is not intended as legal advice or as a substitute for legal consultation in any particular case or circumstance.

The Chinese market is complex, especially for non-China companies…

Foreign companies/investors must face the practical challenge of less local expertise, late-mover disadvantages and the language barrier, for both transacting business and providing content. In addition, the Chinese government (local and national) has created barriers related to content distribution of media/entertainment and foreign equity ownership in media/entertainment companies. All in, these issues can provide significant near-term advantages to the home teams.

Historically, foreign companies, especially in the technology sector, have been challenged by China. For example, we estimate that Microsoft generates only 10% of its potential revenue in China due to rampant piracy. And Yahoo! and Microsoft’s Internet portal efforts have been bested by local players like Sina, Sohu and NetEase owing, in part, to their deeper knowledge of local content market dynamics.

Foreign investment is very restricted…

Media

Foreigners face significant restrictions on their ability to invest in media, a sector in which the Chinese government is particularly sensitive about foreign participation and influence. Minyan Liu notes that foreign investment is prohibited in Chinese radio, TV stations, cable networks and newspapers and is limited in movie theaters and distribution of newspapers, magazines and audio-visual

products. Foreign co-production of TV content and movies is permitted if a license on Sino-foreign co-production of movies/TV series is obtained from the State Administration of Radio, Film and Television (SARFT). Foreign investment in the production of TV content and movies was prohibited until 02/04. In 02/04, the law was relaxed so that SARFT, for the first time, will now permit “prestigious” foreign TV program producers to form joint venture program-producing companies with state-owned TV program producers, but such joint ventures must be majority-owned by the Chinese parties. The meaning of “prestigious” is not defined and is a matter of interpretation for SARFT. In addition, there are limits on the number of foreign films that can be imported and released in China each year.

Internet and Telecommunications

Internet and Telecommunications restrictions are slightly more lax than the media governors. After China joined the WTO, the Chinese government partially lifted restrictions on foreign-invested enterprises (FIEs) so that foreign investors could hold in aggregate up to 49% of the total equity ownership in any value-added telecommunications business, including an Internet Content Provider (ICP) business. This percentage ceiling was increased to 50% in 12/2003. However, despite this relaxation, we are not aware of any 49% or 50% foreign invested ICP companies being approved by the authorities to date.

Software

Software development and production falls under the “encouraged” category according to the Chinese Catalogue Guiding Foreign Investment in Industries, thus entitling foreign investors to a more streamlined approval process and preferential treatment in establishing such a business in China. However, there are indications of the central government’s protectionist policy in the software business. Pursuant to two Circulars issued by the State Council in June 2000 and September 2002, domestic software products and services are to be given priority in government procurement. In addition, according to press reports as of 3/04, the People’s Republic of China (PRC) is expected to introduce a law by summer 2004 requiring that the government purchase a certain percentage of its software, including operating systems, from domestic firms. Although we don’t have a sense of the exact

http://www.omm.com/webcode/navigate.asp?nodehandle=519



percentage, reports have pegged this number as high as 70%. This restriction could be a stimulant for domestic Linux providers and a potential challenge for Microsoft as well as other software developers.

The Internet in China is highly regulated…

Despite what seems to be a burgeoning open system, any foreign investor in a China Internet company will need to grasp the myriad bureaucratic steps required for an Internet company to be a viable, fully functioning entity.

Regulations have been set up in order to enhance China’s competitive positioning and make sure that foreign investment helps create jobs, develop national competencies and stimulate local enterprises. An Internet portal in China operates under a legal regime that consists of the State Council, which is the highest authority of the executive branch of the PRC central government, and various ministries and agencies under its leadership. Therefore, it will not only need to conform to standards laid out by the Ministry of Information Industry (MII) but also the State Administration of Industry and Commerce (SAIC), the General Administration of Press and Publication (GAPP), the State Council News Office, the Ministry of Public Security, the State Secrecy Bureau, the Ministry of Culture and other various central or local administrative bodies.

While this catalogue of regulatory bodies may seem overwhelming, one can break down the nature of regulation into two types: industry and content. First, we will discuss the governing industry bodies such as the MII/State Council and then consider the other organizations that mainly govern content.

Industry regulations and requirements…

Working in conjunction with the State Council, the MII is responsible for the full range of telecommunications industry governance including: granting licenses, defining the scope of business activities, defining interconnection arrangements, formulating tariff and service charge policies and maintaining competition. Upon its creation, in 1998, the MII assumed the responsibilities of the former Ministry of Post and Telecommunications.

In September 2000, the State Council issued the Telecom Regulations that categorized telecommunications business into either basic or value-added telecom businesses. Pursuant to the re-adjusted Catalogue of Classification of

Telecom Business, effective April 1, 2003, Internet companies, including Internet Service Providers (ISPs) and ICPs, were classified as value-added telecom businesses and were required to obtain the requisite license. Furthermore, the Administrative Regulations on ICPs (ICP Regulations) subdivided the value-added telecom business licenses into inter-provincial and inner-provincial ones. Inter-provincial value-added telecom business licenses apply to ICPs that intend to operate business in multiple provinces, autonomous regions and centrally administered municipalities, which are subject to the approvals of the MII; whereas, the inner-provincial licenses are issued by the provincial counterparts of the MII. The ICP Regulations also require any ICP to display its license on its home page.

In 2001, the MII issued the Administrative Regulations on Foreign-Invested Telecom Enterprises (Telecom FIE Regulations) that defined foreign investment guidelines and requirements. The Telecom FIE Regulations lifted restrictions on foreign ownership and provided for a smoother transition upon China’s entrance into the WTO. Under the terms of the Telecom FIE Regulations, the MII functions as the primary governing body for foreign investment in telecom businesses. In addition to the foreign ownership restrictions previously stated, a foreign investor in value-added telecom business must also have experience in the same business in its domestic market, and an inter-provincial value-added Telecom FIE must have a minimum registered capital of $1.2MM. All such ventures are required to be structured as Equity Joint Ventures (EJVs).

Content regulation and requirements…

From a content oversight perspective, a number of government organizations provide regulations that are enforced by either the specific organizations or the MII, under jurisdiction of its permits.

The restrictions can be as narrow as bans on gambling or as broad as bans on the dissemination of “heretical teachings or feudal superstitions,” as similar to US policy as a restriction on slander or as different from US policy as a restriction on content that “harms the dignity or interests of the state.” This broad but somewhat ambiguous restriction can be summarized as the prohibition on ICPs to produce, duplicate, announce or distribute information containing any content which is found to jeopardize state sovereignty, harm state unity, stir up ethnic hatred,



propagate obscenity, violence or terrorism, or disturb social stability.

Furthermore, the Ministry of Public Security can censor disruptive foreign content by ordering ISPs to block foreign Web sites wholesale. Accordingly, it is not uncommon to find certain foreign Web sites “temporarily unavailable” during certain sensitive periods, for example, in the days leading up to the recent Taiwan presidential election. Internet content in China is also regulated and restricted from a state security standpoint. The State Secrecy Bureau can block domestic Web sites that are accused of leaking state secrets.

While some companies may find such content restrictions and censorship a significant impediment to doing business, most content regulation is not about restricting content but rather about overseeing the dissemination of legally accepted content.

• The Ministry of Health and the State Food and Drug Administration (SFDA) regulate the online dissemination of medical and drug-related information; online diagnosis or medical treatment is prohibited while pharmaceutical eCommerce is subject to additional approval and daily supervision from the SFDA.

• The State Council News Office regulates the dissemination of news by news and non-news agencies. Central news agencies and central or provincial news organs are allowed to establish news sites with approval. Non-news organization Web sites may only be approved to post news coming from domestic news sites. If the Web sites intend to provide links to overseas news sites, additional approvals must be obtained in advance.

• The GAPP approves Internet publishers that engage in selecting, editing, processing works and making such works publicly available on the Internet.

• The SAIC regulates advertising activities and issues advertisement business licenses.

• The Ministry of Culture requires licensing for “Internet Culture Activities”, defined as audio-visual products, games, plays/dramas, arts and

animated cartoons that are produced, distributed and circulated through the Internet.

• Provincial authorities may require additional licenses for certain services, similar to state requirements in the US. For instance, although there is no national legislation specifically covering SMS in China, the Shanghai Communications Administration requires that short message content providers operating in Shanghai must obtain SMS business licenses.

Given the host of regulatory requirements, combined with the actual or perceived selective enforcement of these requirements, the China market still favors those investors with experience on the inside.

Investors must also deal with complex structuring schemes and legal jurisdiction issues…

In order to deal with restrictions on foreign ownership in the Internet business, most foreign participants in Internet businesses in China have very complex structures, including multiple offshore holding companies and contractual operating agreements, many of which are of questionable legal enforceability. This creates difficulties for investors, because should the need for a shareholder lawsuit or other legal action arise, those same complex structures that enabled investment in the first place become structures that hinder jurisdictional claims and effective enforcement.

For example, the ownership structure for NASDAQ listed pure-play Internet companies (such as Sina, Sohu and NetEase) has proven to be convoluted, generally involving Cayman Islands Incorporated companies in contractual partnerships with their Chinese counterparts. For example, because of current Chinese laws and restrictions, Guangzhou NetEase operates the (actual) NetEase Web sites and Beijing Guangyitong Advertising Co., Ltd., or Guangyitong Advertising, an 80%-owned subsidiary of Guangzhou NetEase, operates the online advertising business pursuant to contractual arrangements with (the actual) NetEase. Guangzhou NetEase is 80% owned by (the actual) NetEase founder, Chief Architect and a director, William Lei Ding, and 20% owned by (an actual) NetEase former employee Bo Ding, William Lei Ding's brother. Bo Ding owns the remaining 20% of Guangyitong Advertising. Got that?



In simple terms, these contractual arrangements are aimed at giving the foreign company effective management control of the domestic company (whose control they are prohibited from exercising through equity ownership) and the right to recognize most of the revenues generated by the domestic company. The use of these arrangements appears to be solely in reaction to China’s regulations limiting foreign investment in the Internet sector. Although they are widely used by foreign companies, including a few that are listed on NASDAQ, these arrangements run a risk of being deemed by the Chinese government as illegal and unenforceable. Despite post-WTO relaxation, the arrangements appear to remain the preferred contractual structure. In certain situations foreign companies claim 100% beneficial ownership of a Chinese company by consolidating its financials into their own financial statements, although up to 100% of the legal ownership of the Chinese company may actually controlled by Chinese individuals who serve as a local proxy or nominee for the “parent" company. According to company filings, we note that Sina conducts its Internet business in China mainly through Beijing Sina Internet Information Service Co., Ltd. (Beijing Sina), a Chinese company included in Sina’s consolidated financial statements but controlled by Sina through contractual agreement. Beijing Sina is 3% owned by Yan Wang, Sina’s Chief Executive Officer and director, and 97% owned by 6 other of Sina’s non-executive PRC employees. As such, the foreign company is at risk given that the domestic company may violate its agreements with the foreign company without effective recourse in China for the foreign company. In practice, however, this serious risk has been somewhat mitigated by the fact that these domestic captive companies are typically set up by the founders or key employees of the foreign company.

In fact, China’s legal system itself can present problems because it is a civil law system based on written statutes as opposed to a common law system that values precedent in addition to interpretation of written statutes — a precedent system which tends to promote greater predictability on the outcome of disputes. Enforcement of judgments and awards, and foreign currency conversion and remittance are additional hurdles that foreign investors face in doing business in China.

Entry into the WTO may help limit implicit technology transfer, but time will tell…

Historically, China frequently encouraged technology transfer through provisions in foreign investment policies in order to nurture domestic companies. Companies provided education or technology to a local affiliate (or perhaps would-be competitor) in exchange for market access. IBM, for example, once provided PC training in exchange for access to the PC sales market. Sometimes collaboration took the form of assembly, production or local content requirements. However, on the negative side of this was an implicit understanding that the government would look the other way when it came to intellectual property violations. And while China looks to improve its protection of intellectual property and remove technology transfer barriers in order to fulfill WTO (and other) requirements, foreign investors should be cognizant of examples of the existing protectionist framework.

As trade policies began to open over the last 20 to 30 years, China became a haven for foreign investment. Many foreign companies bid against each other, increasing the amount of technology transfer required to do business there. As a result, many companies partnered with each other (i.e., sales partnerships in the 1980s and 1990s between Microsoft and Oracle) in order to increase their negotiating leverage, although others accepted the transfer of intellectual property as a cost of entry. In the report, US Commercial Technology Transfers to the People’s Republic of China (see link), by the US Bureau of Industry and Security (formerly the US Bureau of Export Administration), it was noted that the cost of entry was a mixture of de facto and de jure regulation. In 1988, China issued the “Implementing Regulations on Technology Import Contracts” (1988 Regulations) that set to formalize certain technology transfer practices that were in many ways pro-China licensees. These regulations were superseded by the Administrative Regulations on Technology Import and Export, issued on Dec. 10, 2001, which represent a significant step forward in lifting many requirements that disfavor foreign licensors (see Exhibit 45).

While technology transfer grew in the private sector, it also grew in the public sector. One of the largest sources of technology transfer has been the US government itself through military technology. While these transfers helped further modernize the country in order to establish better political and economic stability, some criticize the policies for US security reasons and for fostering overseas outsourcing.

http://www.bis.doc.gov/defenseindustrialbaseprograms/OSIES/DefMarketResearchRpts/techtransfer2prc.html



Exhibit 45

Technology Transfer Requirements — 1988 vs. 2001

1988 Regulations 2001 Regulations Approval Process

All technology. transfer contracts must be approved by MOFCOM or its local offices. Foreign parties, in effect, faced two rounds of negotiation: first with the Chinese parties and then with Chinese authorities.

Most technology. transfers only need to be registered with MOFCOM. Only under limited circumstance do technology transfers require approvals.

Utilization Rights

Includes a list of nine “unreasonable” restrictions that foreign parties are prohibited from imposing on technology transfer contracts with Chinese partners, such as restricting sales channels or forbidding use after contract expiration.

Includes a list of seven restrictive provisions that licensors are prohibited from imposing on technology transfer contracts with licensees, such as restricting the licensees’ sourcing of raw materials or requiring the licensees to accept unnecessary conditions.

Performance Guarantees & Feasibility Studies

Performance guarantees are required by foreign licensor (despite often difficult conditions); feasibility studies are essential for contract approval.

--

Protection of Trade Secrets

“During the process of negotiation and contract approval, the intended licensee has no obligation to keep the foreign technology confidential or refrain from using it unless a separate confidentiality agreement is signed.” Work units, but not employees, are potentially liable for misappropriation of proprietary information. Technology licenses usually expire after 5-10 years or at end of contract, allowing Chinese partner free and unrestricted use of technology

Allows the duration of each contract and of any confidentiality provisions to be negotiated by the parties. Contracts may also prohibit the licensee from using the technology after the expiration of the contract term.

Source: US Bureau of Export Administration, US Department of Commerce, O’Melveny & Myers LLP.

And despite WTO restrictions on technology transfer between member nations, recent examples show that China still has protectionist frameworks that must be restructured. The recent, ongoing strife concerning Wireless LAN ICs and the semiconductor VAT are but two examples. In the WLAN dispute, China has adopted standards for WLAN ICs that differ from those of the IEEE in a move to protect domestic encryption technology. Foreign firms would be required to work with specially selected local firms in order to import products, and as a part of this arrangement, foreign firms could be required to share a large amount of intellectual property wholesale. Intel and Broadcom balked at the requirement, but China is not shifting its position. In the recent semiconductor VAT dispute, China has imposed a 17% value-added-tax to imported chips while domestic firms would pay only 3–6%. On March 18, 2004, the U.S. filed a formal complaint against China to the WTO on this subject. In response to the U.S. complaint, China agreed to hold discussions on the semiconductor VAT on March 26, 2004.

Positive impacts of China’s WTO entry on foreign investment…

China’s 12/01 accession into the World Trade Organization (WTO) has in many respects changed the way foreign companies do business with and in the world’s most populous country and vice versa. At a high-level, WTO membership liberalizes more industries and speeds up reform while pushing China towards a more open market economy based on free trade. Further, increased foreign direct investment (FDI) activities should help China improve its capital and human efficiency.

On a more granular level, China’s membership in the WTO should help enforce compliance with a rules-based regulatory regime, increase transparency on policy making process, improve progress toward international best practices, phase out protective tariffs, and break down non-tariff barriers. In addition, China’s WTO membership enables clearer definition and better protection of ownership rights, encourages a more developed and efficient legal framework, improves protection of intellectual property in line with TRIPS (Trade-Related aspects of Intellectual Property Rights), and encourages a more level playing field/competitive environment through non-discriminatory import, export and tariff policies. The bottom line is that China’s WTO accession should make the country a more attractive place for foreigners to do business.



That said, China has made a series of multi-year phase-in commitments, but it has been slow to implement many of them. For example, it was not until over a year after foreign investment restrictions were lifted that foreigners were allowed to set up auto-financing companies in China. Developments here will be key to monitor. Moreover, there remain many non-tariff barriers that are theoretically applicable to both domestic and foreign companies but in effect operate to disadvantage foreign newcomers in those industries.

As noted in Exhibit 46, it is noted that the WTO helps open the door for investment in Internet Services, at least theoretically, to a very high degree.

In addition to the opening up of sectors and the loosening of restrictions on foreign investment, other trends are shaping the interactions of foreign businesses with China after entry into the WTO. Companies that previously established greenfield projects in China are now acquiring strategic interests in existing operations. The reopening for foreign investment of non-tradable state-owned shares and legal person shares in China’s A share companies, for

example, has been enthusiastically received by foreign strategic and financial investors alike. Single project vehicles for separate operations are being consolidated into unified vehicles. And finally, there appears to be a shift in time horizon — from limited-term to perpetual.

In February 2004, the US Department of Commerce reported on the status of China’s accession into the WTO. From a US perspective, some of the China’s commitments have yet to be fulfilled, including: 1) enforcement of intellectual property rights; 2) regulatory transparency; 3) conformance to international standards and creation of competing standards; and 4) non-discriminatory tariff policies. However, overall, the Commerce Department’s tone was positive and supportive of China’s turnaround.

For additional information on China’s accession to the WTO, please see O’Melveny & Myers LLP’s “China Law and Policy Digest” (see link), Baker & McKenzie’s “Guide to China & the WTO” (see link), the WTO’s “Report on the Working Party on the Accession of China” (see link), and Freshfields Bruckhaus Deringer’s “China enters WTO: An Overview of the Changes” (see link).

Exhibit 46

Effect of China’s WTO Membership for Selected Industries Relative to Historical Degree of Protectionism

BankingInternet Services

ChemicalsDistribution / Retailing

Insurance

Agriculture and Agribusiness

Securities

Telecom Services

Energy

Autos

Processed Foods, Consumer Goods

Pharmaceuticals

Electrical Equipment, Electronics

0

50

100

150

0 50 100 150Low Medium High

Historical Degree of Protectionism

Negligible

Effe

ct o

f WTO

Mem

bers

hip

Moderate

DramaticBankingInternet Services


Insurance


Securities

Telecom Services

Energy

Autos


Pharmaceuticals


0

50

100

150



Negligible

Effe

ct o

f WTO

Mem

bers

hip

Moderate

DramaticBankingInternet Services


Insurance


Securities

Telecom Services

Energy

Autos


Pharmaceuticals


0

50

100

150



Low Medium High


Negligible

Effe

ct o

f WTO

Mem

bers

hip

Moderate

Dramatic

Negligible

Effe

ct o

f WTO

Mem

bers

hip

Moderate

Dramatic

Source: United States-China Business Council, McKinsey Analysis.

http://www.omm.com.cn/digest/

http://www.aial.com/bmwto.html

http://trade-info.cec.eu.int/doclib/html/113814.htm

http://www.freshfields.com/places/asia/publications/pdfs/2744.pdf



Channel and sales control are often strongholds of local companies…

While foreign companies often have a technology lead, duplicating the effective distribution capabilities of their local competitors often proves difficult. Foreign entrants face the challenges of localizing technology and crafting effective marketing messages for a market where local tastes are rapidly changing.

For example, in 2003, foreign handset manufacturers like Nokia and Motorola saw Chinese handset manufacturers increase their market-share to 56% from 40%. A majority of this market-share gain can be attributed to effective promotion programs, leverage of China’s local labor costs, and effective direct-channel distribution.

For China Internet companies, frequent promotion and channel “carpet bombing” are favorite tactics for increasing market share. In online travel, Ctrip has been known to give out free booking cards at major airports. In order to increase channel coverage in the gaming sector, developers and operators have set up their own online sales platforms to link the vast number of Internet cafés around the country.

Domestic companies become more competitive…

When China first opened up to foreign trade, foreign goods were symbols of quality and status. And despite numerous trade restrictions imposed by the government, consumers demanded these (mostly Japanese) foreign products. However, this is increasingly not the case, as higher quality, lower-priced products from JVs and domestic companies have continued to proliferate in the market. Domestic products have attained significant market share in such markets as white goods, TVs, DVD players and handsets, and the China government has continued to hail the success of local companies that are competing with global ones.

A state of flux…

With all of this in mind, the level of regulation, the implicit protectionist environment, the sales and marketing disadvantages for foreign firms, and the increasing competitiveness of local firms, multinational global corporations must temper their enthusiasm for the China market with these difficulties. The best companies will be able to act dynamically in a market that is truly in a state of flux.



Exhibit 47

China — Foreign Investment Models for Selected Companies

Model Enterprises Comments Motorola (100%) • Motorola’s WFOE status is fairly unique, driven by its large

investment and continuous investment in China Avansys (Emerson 100%) • Emerson acquired 100% of Avansys from Huawei, a private

sector company

Wholly Foreign-Owned Enterprises (WFOE)

• Strict technology transfer and export requirements may apply despite 100% foreign ownership

Leshan Phoenix (ON Semi 60%)

Siemens Shanghai Mobile (Siemens 60%) 3Com Huawei (3Com 49%) - 3Com has the option to own 51% in two years

Majority-Owned “Foreign-Invested Enterprise” (FIE)

Shanghai Bell (Alcatel 50% + 1 share)

• Various legal structures may exist, e.g.: − Sino-Foreign “Cooperative” Joint Venture (CJV) − Sino-Foreign “Equity” Joint Venture (EJV)

• In most cases, ventures are limited liability companies (LLC). Reincorporation into a Company Limited by Shares (CLS) possible

Huahong-NEC (NEC 29%) ASMC (Philips 38%)

Minority-Owned “Foreign-Invested Enterprise” (FIE)

Tsingtao (Anheuser-Busch 27% stake, 20% voting rights)

• MNC is influential but not controlling entity. Many of these forms likely to be restructured / bought out with advent of WTO if MNCs seek greater control of destiny

Leshan Phoenix (Motorola 10%) Grace Semiconductor (SST 5%)

China Aluminum (Alcoa 8%)

Ping An Insurance (HSBC 10%) Sinopec (ExxonMobil, Shell, BP Amoco 8.3%) eBay EachNet (1)

Strategic “Anchor”

3721 NSC (Relationship with Yahoo! Hong Kong Ltd) (2)

• Can take many corporate forms • Strategic players may participate for multiple reasons:

− Secure capacity − Secure operating JVs − Secure technology licensing relationship − Financial investment − Demonstrate local commitment − Meet local commitment

PICC (AIG 9.9%) Minsheng (Newbridge 4.82%) SH Pudong Development Bank (Citibank

4.62%, with option to be increased to 24.9%)

Huajing (Agere) ASMC (Nortel)

SMIC (Toshiba)

Technology Licensor

Grace (OKI)

• SMIC and Grace are “new generation” entities that have relied entirely on financial (non-strategic) capital and limited but significant local government investment

• Strategic players involved as technology suppliers or passive financial venture partners

Source: Morgan Stanley Research (1) eBay EachNet is a Delaware corporation that, in cooperation with local subsidiaries, operates www.eachnet.com, an eCommerce Web site in the PRC. eBay and EachNet first formed a strategic relationship in March 2002, at which time eBay acquired a 33% interest in EachNet. In 2003, eBay acquired the remaining 67% of the stock of EachNet. (2) 3721 Network Software Company Limited (3721 NSC) is a Hong Kong company that is in “technological cooperation” with Beijing 3721. In January 2004, Yahoo Holdings (Hong Kong) Limited, a subsidiary of Yahoo Inc., completed its acquisition of 3721 NSC.



9. Third-generation Internet entrepreneurs are impressive, though broad-based experience/leadership in general is still not abundant

Chinese Internet leaders have proven to be fast followers relative to their global peers…

First-generation entrepreneurs (such as Edward Tian of China Netcom) and second-generation entrepreneurs (including the leaders of Sina, Sohu and NetEase) have paved important paths, and third-generation entrepreneurs (at hosts of private companies) appear to be especially well rounded, innovative, experienced, educated and aggressive.

So far, the Chinese Internet leaders have proven to be fast followers relative to their global peers, and they have been very effective at creatively adapting Internet business models to Chinese conditions. Many of these leaders were educated in the US during the 1990s and moved back to China to pursue their Internet efforts. But we think the jury is still out on unique creativity. That said, emerging Chinese leaders in mobile messaging (such as private company Tencent) and online gaming (such as private company Shanda Networking) are showing promise with impressive relative creativity and leadership; nevertheless, like most Chinese Internet companies, they haven’t had the time or experiences to demonstrate that they can create and sustain businesses that are “built to last,” to nab a phrase from author/consultant Jim Collins.

When will we see China’s Bill Gates, Michael Dell or Larry Ellison?

While there have been impressive business successes in China, there’s still a dearth of skilled and experienced business managers and hard-core technology-oriented leaders/visionaries. The Chinese people have a long tradition of curiosity, thoughtfulness, entrepreneurship and risk-taking, but the impact of constraints over the years (including the lack of open debate) may be felt for some time to come. Many entrepreneurs are very enthusiastic about the underlying market and government trends (like focus on ramping ownership of property), but we have also noted an ongoing deep-seated concern that everything could change overnight and a more repressive environment could return.

We always revert to our ‘Winning Company Attribute List…’

Our approach to investing has developed over a twenty-year-plus Wall Street career. If you read our stuff, you know that we have a checklist of twenty attributes we look for in identifying winning companies (see link). Over the course of time, winning companies tend to become winning stocks — we will make that bet, year in and year out; to us it is as logical as the rising sun. Our attributes for identifying winning companies follow, and note that before we decide to recommend a stock, we aggressively endeavor to determine if the company has, or has the potential to have, the right stuff.

1) Large market opportunities — it is better to have 10%, and rising, market share of a $1 billion market than 100% of a $100M market;

2) Good technology/service that offers a significant value/service proposition to its customers;

3) Simple, direct mission and strong culture; 4) Missionary (not mercenary), passionate, maniacally-

focused founder(s); 5) Technology magnets (never underestimate the

power of a Bill Joy… a Jim Clark…); 6) Great management team/board of directors/

committed partners; 7) Ability to lead change and embrace chaos; 8) Leading/sustainable market position with first-

mover advantage; 9) Brand leadership, leading reach and market share; 10) Global presence; 11) Insane customer focus and rapidly growing

customer base; 12) Stickiness and customer loyalty; 13) Extensible product line(s) with focus on constant

improvement and regeneration; 14) Clear, broad distribution plans; 15) Opportunity to increase customer “touch points”; 16) Strong business and milestone momentum; 17) Annuity-like business with sustainable operating

leverage assisted by barriers-to-entry; 18) High gross margins; 19) Path to improving operating margins; 20) Low-cost infrastructure and development efforts.

Net, this should be the type of checklist we use for measuring the Chinese Internet companies…



10. Sustainability of Internet-related revenue and profits is still unproven, but market opportunity is large

Wireless messaging has been a blessing for the Internet pure-plays…

While the top-three pure play Chinese Internet leaders (Sina, Sohu and NetEase) have seen their revenue and profits rise sharply over the past eight quarters, this has been primarily driven by over-the-transom growth of messaging (primarily SMS). In aggregate, messaging accounted for 60% of CQ4:03 combined revenue (and most of profits — note that the average operating margin for these companies was 45% for the three companies rising from 28% in CQ4:02). (See Exhibit 48 for details.)

Will wireless messaging continue to be a blessing?

1) Will the mobile carriers renegotiate terms at the expense of the portals, and what is the outlook for SMS growth?

Near-term, we believe the SMS revenue dependency may be a blessing and a curse. While we cannot ignore this potential risk, Lina Choi believes that the situation is ultimately a net positive for the Internet players; mobile carriers would like to cultivate a robust environment for content development, in part, by providing sufficient incentives for the portals. For now, mobile providers appear to believe that they can continue to maintain the win-win environment for themselves and the portals. Additionally, the transition from SMS to next-generation messaging that is currently underway could create dislocations (and opportunities) for the core players.

2) Are especially high operating margins for the leading Chinese Internet companies sustainable in the long term?

Fundamentally, we believe that the Internet companies should support high operating margins owing to 1) inherently high gross margins (on average, in excess of 69% in CQ4) and 2) low relative opex. That said, any negative swing in messaging-related revenue would hurt operating margins, as would the need to ramp opex (especially research & development and sales & marketing spending).

What’s the next blessing?

One of the key challenges for the Internet companies in China is that new markets seem to develop especially quickly — and the competitive advantage of the early innovators seems to be taken away by imitators just as quickly. As illustrated by the recent momentum of Tencent in online messaging and Shanda Networking in online gaming, emerging companies can set new rules for the competitive game to which more established companies must adapt quickly. And the companies tend to behave like seven-year-old soccer players all running for the same ball on a playing field. This makes it difficult to gain relative sustainable competitive advantages and generate annuity-like cash flow streams.

By comparison, the leading Internet companies in the US (eBay, Yahoo!, Amazon.com, Google and Microsoft) have broken away from the pack, and although they have different primary focus areas, they are increasingly competing with one another. This type of breakaway has not happened yet in China.

That said, we believe Sina showed the beginnings of differentiation in CQ4:03 in terms of absolute revenue ($38MM vs. Sohu’s $25MM and NetEase’s $20MM) and revenue growth (197% Y/Y — also off a larger base versus 133% and 78% for Sohu and NetEase respectively). Yahoo!’s selection of Sina as a partner for its online trading business in 1/04 speaks to Sina’s relative market presence. See Exhibit 48 for a comparison of CQ4:03 results.

Exhibit 48

China — Internet Portal Revenue Breakdown CQ4:03 (US$ in MM)

Company Operating % of RevenueName Revenue Margin Messaging Advertising Gaming/Other

Sina $38 45% 60% 34% 6%Sohu 25 40 58 39 4NetEase 20 61 40 16 44Tom Online 18 32 82 3 18Average $25 45% 60% 23% 18%

Source: Company reports, Gaming is included in Messaging for SOHU and was less than 2% of revenue in CQ4:03.

We highlight the strategic paths that Sina, Sohu, NetEase, Tom Online and chinadotcom took to arrive at their present positions. Initially all began as portals, but to survive the aftermath of the Internet bubble, each company followed a different avenue to differentiate itself and diversify its revenue stream. NetEase began forays into online gaming,



which Sina and Sohu both followed. Sina drove differentiation through its entry into SMS, aided by the acquisition of MeMeStar, a mobile VAS provider in China, in 1/03. Tom Online leveraged its diverse, cross-media asset base. And chinadotcom sought to reinvent itself as an enterprise software/outsourcing company.

In our view, if the Internet leaders can sustain solid revenue growth in messaging, advertising, gaming and other new initiatives in 2004, they should be well established for subsequent years…



China Macro Landscape for the Internet

11. Government is focused on ramping Internet users

The Internet and the Chinese Government…

The Chinese public’s initial enthusiasm for the Internet in the 1990s was met with skepticism from the authorities. But in the past few years, as Internet usage surged (see Exhibit 49), official policy has been embracing the Internet as a major national priority. In the Proposal on the Tenth Five Year Plan of National Economy and Social Development issued by the Central Committee of the Communist Party of China, expanding Internet usage and enhancing Internet access was made an action item from 2001 to 2005. And as noted in Exhibits 49-50, growth in Internet, mobile phone and PC users has been impressive.

It seems to us that years from now, the China government would like to be able to point back to its Internet efforts of today as comparable to the US government’s rollout of the Interstate highway system in the 1950s — in effect, taking a big bet, putting a lot of resources to bear on an important initiative, and watching it help drive growth in the economy.

Exhibit 49

China — Internet Users

29

1732

59

80

0

50

100

150

200

250

1998 1999 2000 2001 2002 2003

Inte

rnet

Use

rs (M

M)

Source: IDC, CNNIC 13th Statistical Survey Report on the Internet Development in China, Jan 2004, Morgan Stanley Research.

Economic and technology growth could go hand-in-hand

The number-one priority for China’s leaders is long-term, sustainable, economic growth. And the designated vehicle for driving that growth is technology. In its latest five-year plan, rolled out in 2001, the Communist Party of China (CPC), spelled out its target to transform the Information industry into the leading industry in the economy. And that policy seems to be already reflected in the significant growth in Internet users and Mobile Phone subscribers (see Exhibits 49 and 50).

To support its efforts, China (the government plus Chinese companies) invested $10–15B on data and Internet-related network infrastructure from 2001 to 2003, according to Mark Shuper and Lina Choi. The government has offered tax incentives for IT enterprises and is increasingly encouraging ownership by risk-taking entrepreneurs. But although current trends are positive, we also note examples from history when the CPC has changed direction quickly for unexpected non-economic reasons.

Exhibit 50

China — Mobile Phone Subscribers

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

1998 1999 2000 2001 2002 2003E 2004E 2005E 2006ESubscribers (000s)

E = Morgan Stanley Research Estimates Source: IDC, CNNIC 13th Statistical Survey Report on the Internet Development in China, Jan 2004, Morgan Stanley Research, Lina Choi, Mark Shuper.



Exhibit 51

China — Installed PC Base

1 36

11

18

27

39

0

20

40

60

80

1998 1999 2000 2001 2002 2003 2004E

Inst

alle

d PC

Bas

e (M

M)

E = Morgan Stanley Research Estimates Source: IDC, CNNIC 13th Statistical Survey Report on the Internet Development in China, Jan 2004, Morgan Stanley Research, Viktor Ma.

Eric Wen views the Internet as a restructuring force in the Chinese economy. As the government uses the IPOs of the SOEs to help restructure them with global accounting standards and business practices, IPOs also help enable Internet companies to compete, stimulate or replace offline industry, most of which belongs to the old planning economy. As of 4/04, almost all public Chinese Internet companies are listed in non-China markets and are subject to US GAAP and investor scrutiny. And for some Chinese companies, a NASDAQ listing can help address some of the concerns related to corruption in the old economy in China.

Equally important, the Chinese government, in part, views the Internet as an enabling force. This is evident in the Tenth Five-Year plan and the participation, at all levels, of government entities in Internet ventures.

Lastly, Internet companies have helped the government recruit Chinese citizens (many with technical expertise) who had been living overseas back to China.



12. The government’s strategy, in part, reflects the need to boost domestic (urban to rural) as well as global trade

East meets West… in China?

With 60% (per Andy Xie) of the population living in rural areas (where Internet penetration is relatively low), connecting rural and urban dwellers is a significant challenge and a key to balanced economic growth for China.

The Internet can enable more broad-based education — witness PRCEDU (see page 92) — and entrepreneurialism, and it can enable links to low-cost producers of goods and services with buyers outside of China. The early stages of development of these markets are evinced by strong item and user growth for online trading companies like eBay’s eBay EachNet, Alibaba.com (with B2B focus) and Taobao (with C2C focus) — see Exhibits 53 - 55. In addition, the recent establishment of an online trading joint venture between Sina and Yahoo! (with its 3721, Overture and Inktomi assets) is an indication of the stakes in the market of connecting buyers and sellers.

Note that one of the reasons there is high interest in the online trading process in China is the grassroots nature of the process. The online trading process can be suited to economies with significantly different relative income levels, as the online trading systems are, in effect, price- and product-insensitive and are inherently scalable. For example, a $2 post card, a $5 shirt, a $1,000 computer and a $30,000 car all sell on the same system — it’s up to the seller and buyer to determine the economics that suit their situations.

Andy Xie and Steve Roach stress the Internet is essential as the only cost-efficient way that China can push west — into the less-developed central and western parts of the nation —

and strive for transnational connectivity at the same time. Integrating these newly developed areas into the rest of China requires a huge infrastructure and urbanization push. This presents an unwired and unconnected China with a huge logistical challenge. As a result, the Internet is critical to productivity in this vast nation — suggesting that the government will likely continue to support its growth. In addition, the ability for Chinese manufacturers to use the Internet as a new and equitable distribution channel to get products and information to the world is quite powerful — especially for high-quality, low-price products.

And, East meets West… in the world?

Encouraged, in part by the WTO push to increase exports, many smaller privately held manufacturers that have primarily served as OEMs are ramping their branded businesses through Web-based efforts (oftentimes standardizing on the English language for trading).

In addition, the Web provides Chinese manufacturers like appliance and electronics maker Haier with a new high-growth, low-cost, distribution channel. And, in this case, given the low relative product pricing and high product quality, the probability of especially high online feedback ratings for the products can create a positive selling cycle. Outstanding customer reviews, which bolster the confidence of potential buyers and tend to be self-reinforcing, can help lead to more sales. For kicks, visit www.amazon.com and type “wine refrigerator” to understand the power of online feedback for a company like Haier.

With online feedback, in effect, the Good Housekeeping Seal of Approval has been turned on its ear and the opportunities for savvy vendors to grab market share online are compelling, in our view. The market transparency created by the Internet as a distribution channel, combined with the user-generated online feedback ratings (pioneered by eBay, Amazon.com and Yahoo!), help create new standards for judging product quality/experience on a real-time basis.



Exhibit 52

China — Internet Users Concentrated in Coastal Regions and Major Metropolitan Areas

Source: CNNIC, 13th Statistical Survey Report on the Internet Development in China 2003, 1/04.

1.5 %

Tianjin 1.8%

West China 20.9 %

Coastal China (including Beijing, Tianjin, Shanghai)

57.3 %

1.0 %

0.1 %

0.3 %

7.5%

2.1%2.9% 12.0 %

4.0%

5.7%

Shanghai 5.4%

7.7%

7.9%

3.7%

1.8%

2.8%

1.1%3.3% 2.1%

4.8%

2.8%

2.3%

1.5%

1.9%3.6%

2.5 %

0.5 %

Beijing5.0%



Exhibit 53

eBay EachNet — Web Page and Listings Information

Total Listings 567,969M/M Growth 16%

Top CategoriesCosmetics 106,507Jewelry 54,561Clothing 41,113Collectibles 35,698Toys 31,581Home 28,628Cell Phones 27,425Computers 25,273Music 24,357Sports 21,267

Source: www.eachnet.com, Top Categories as of 3/17/04, M/M growth from 2/17/04 to 3/17/04. Exhibit 54

Alibaba — Web Page and Listings Information


Top CategoriesHome Supplies 31,425Apparel & Fashion 23,308Industrial Supplies 21,218Gifts & Crafts 18,798Electronics 18,006Home Appliances 12,938Sports & Leisure 12,607Textiles & Leather 12,299Construction 11,798Business Services 9,849

Source: www.alibaba.com, Top Categories as of 3/17/04, M/M growth from 2/17/04 to 3/17/04. Exhibit 55

Taobao — Web Page and Listings Information


Top CategoriesBooks 286,632Cosmetics 105,796Clothing 77,305Movies 72,394Music 58,343Jewelry 55,062Home 29,402Computers 27,836Cell Phones 23,915Home Theater 10,174

Source: www.taobao.com, Top Categories as of 3/17/04, M/M growth from 2/17/04 to 3/17/04.

Exhibit 56

Alibaba/eBay EachNet/Taobao Traffic Ranks

Dai

ly T

raffi

c R

ank

2003 2004

10

100

1,000

10,000

100,000

eachnet.com alibaba.com taobao.com


Online trading businesses have strong momentum and are developing nicely though still early stage…

Among global Internet companies, eBay could prove to be in the best position in China owing to its early partnership with Shanghai-based eBay EachNet.

That said, Alibaba and Taobao, two companies founded by Jack Ma and backed by Japan-based Softbank and/or Softbank founder Masayoshi Son, have listings momentum versus EachNet, thus creating one of eBay’s most competitive markets as they work to empower both buyers and sellers.

As highlighted in the screenshots and listings information to the left (see Exhibits 53 to 55), as of 3/17/04, Taobao led the pack with 987K listings (up 18% M/M) and EachNet followed with 568K listings (up 16% M/M). Alibaba lagged with 251K listings (up 2% M/M), though its lower listing volume, is likely a function of its B2B versus consumer focus.

Taobao’s listings lead over eBay EachNet may be a function of the fact that Taobao offers free listings to sellers (with automatic re-listing if an item does not trade) while eBay EachNet charges a fee of a maximum commission of $0.97/transaction. Listings volume and growth don’t always tell the full story of market momentum as conversion rates for listings to actual trades are key. And we are challenged to determine conversion levels for Taobao and eBay EachNet. While it may seem counter-intuitive, often the user (buyer and seller) experience is far better when the seller is focused on turning the item because the listing is being paid for — urgency and desire are increased. And it’s our sense that eBay EachNet’s conversion data may be significantly higher than Taobao’s. Note that eBay’s corporate conversion level, by our estimates, is 40–50%.

Lastly, when one looks at the daily traffic trend data, per Alexa, Taobao has shown strong growth relative to eBay EachNet over the past six months (see Exhibit 56). Note that part of Taobao’s ramp may be a function of Web-hosting relationships that the company provides to many of its partners and related hits to their respective Web sites. On a go-forward basis it will be important to monitor eBay EachNet traffic trends, as its presence on some of the portals may be reduced, owing to changes in the competitive landscape. Despite Alexa’s limitations (see page 18), we believe relative traffic trends can have directional significance.

Emeralds

Watches

Diamonds

New CDMA handsets

Used mobile phones & parts

Costume Jewelry

Textiles

Transportation Publishing

Mechanical & Industrial



13. Economic momentum is strong, though slowing Morgan Stanley analysts, Steve Roach (chief economist) and Andy Xie (China economist) write thoughtfully and prolifically about the economic and business environment in China. Here we lift some of their thoughts…

Things can only be as good as they are…

The strong economic momentum in China in recent years has given a boost to the development of the Internet. China, however, has embarked on credit tightening and the economy is due to slow sharply ahead. The country's Internet development could feel a certain pressure amid the economic downturn, yet we believe this could be partly cushioned by the booming Chinese consumption that is expected to take off for the following years. That said, even the PRC leadership is wary that the Chinese economy has become too hot to handle, according to Steve Roach, Andy Xie and Morgan Stanley China Economist Denise Yam in their report “The China Slowdown.” (see link).

Steve Roach observes that China’s economic growth remains strong, but in a needed turn, it has begun to slow and will likely continue to slow — surprises are likely to be on the downside….

I am convinced that a slowdown in the Chinese economy is at hand. China’s leadership is clearly worried about the risks of overheating. And those worries will likely translate into actions that should result in a meaningful deceleration of Chinese GDP growth over the course of 2004. For world financial markets and global commodity markets that are expecting the China boom to continue, a likely soft landing could come as quite a surprise. For China’s trading partners who are counting on open-ended support from the Chinese demand dynamic, a slowdown could come as a rude awakening.

Chinese authorities are now at work in tempering some of the recent excesses in the economy. China’s bank loan growth averaged RMB 151 billion in the five months ending February 2004, down sharply from average monthly gains of RMB 275 billion in the first three quarters of last year. This points to a credit-induced slowing in the Chinese economy, especially for property investment and infrastructure projects. And it is necessary given the property bubbles in Shanghai and elsewhere in China’s

coastal region driven by the excess credit creation in recent years.

Early signs of the impacts of such a downshift on the real economy are now apparent: Growth in industrial output slowed to 16.6% in the first two months of 2004, down from the 18.1% Y/Y pace evident in December 2003. At the same time, export growth has eased to a 28.8% average annual rate in January and February 2004, a notable deceleration from the 40.5% pace hit in CQ4:03. And the inflation rate has also begun to recede, declining to a 2.1% Y/Y rate in February 2004 from average gains of 3.2% in both December 2003 and January 2004.

Global commodity markets should begin to feel the impacts of a China slowdown. On the heels of last year’s China growth spike, many industrial commodity prices shot up — especially metals such as cooper (+50%) and nickel (+125%); moreover, in recent months, prices have also surged for aluminum and steel. According to Morgan Stanley metals analyst, Wayne Atwell, China currently consumes about 20% of most global commodities, up dramatically from its 4% share in 1985. Its impact on the demand for nickel is emblematic of the China factor now driving industrial commodity markets. By Atwell’s calculations, while China accounted for 11% of the level of world consumption of finished nickel in 2003, its growth dynamic — 29% average annual gains in nickel consumption over the past three years — was powerful enough to mean that China accounted for fully 44% of the growth in global nickel demand in 2003. Moreover Ma Kai, Chairman of China’s National Development and Reform Commission, recently estimated that in 2003, China accounted for 7% of the world’s total consumption of crude oil, 31% of global coal, 30% of iron ore, 27% of steel products, 25% of aluminum and 40% of the world’s total cement consumption.

Steve adds that, given the impact of China on the global economy, changing dynamics in the market will affect many players…

Multinational corporations have moved rapidly to integrate China into the global supply chain. More than $50 billion in foreign direct investment went to China in each of the past two years, making it the world’s largest recipient of such flows. Chinese subsidiaries of multinationals and joint venture partners from Japan, the US, and Europe have accounted for 65% of the cumulative increase in total Chinese export growth over the past decade. Outsourcing has become an increasingly important element of corporate

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efficiency strategies around the world, allowing high-cost operations in developed countries to be replaced by low-cost production in developing countries such as China. Ultimately, these benefits are also passed on to consumers around the world. Note that the US purchased more than $150 billion (12% of imports) of inexpensive, high-quality Chinese products in 2003, which helped hold down the inflation rate.

Employment is growing in China’s export sector primarily because multinational corporations are expanding their Chinese subsidiaries. And, China’s demand for foreign-made goods is supporting employment elsewhere in the world.

Chinese import demand rose 40% in C2003 — as China erects the infrastructure of a modern economy, it does so with capital equipment and technologies it purchased from countries such as Japan, South Korea, Taiwan and Germany. Inasmuch as these same nations suffer from deficiencies of internal demand, their China export businesses have become important sources of growth — in 2003, China accounted for 21% of US export growth.

Steve notes that China is aggressively trying to do the right things for the short and long terms…

China should be commended for its commitment to dismantle its state-owned economy. For China, this is the only avenue to sustained prosperity. For other nations, it is an opportunity to tap an enormous market. Westerners should not worry that China will play unfairly on the road to reform. China’s willing accession to the WTO guarantees that it will be held accountable to a system based on Western rules. By committing to such an extraordinary transformation, China has thrown down the gauntlet to the rest of the world. Yes, China’s success is also a challenge: It puts the rigid and outdated economies of Europe and Japan on notice that they must also change or risk being left behind in an increasingly fast-moving time. Far from being a threat, China is an important example for others to emulate. The major economies of the world are at their best when they rise to meet the challenges of competition.



14. Capital markets have been robust

There’s investing and there’s speculation — they are different and they can be the same — and hindsight is 20/20…

Both money and speculation seem to follow opportunity, and the capital markets in China have been no exception.

Andy Xie observes that China is challenged by balancing acts on multiple fronts related to a number of extreme conflicts: debt vs. growth; fixed vs. floating currency; corruption vs. ethics; poverty vs. wealth; communism vs. capitalism; unemployment vs. employment; and SOEs vs. entrepreneurship. As China has opened its markets to foreign investment over the past twenty years, it is estimated that $550B has been invested mainly in Chinese manufacturing for exports. Andy expects FDI could rise further by US$100B per year within the next ten years.

The development of China’s stock market is hampered by the government’s concern that a big market decline could affect social stability. Regulators appear to have been controlling the pace of fund raising to endeavor to manage the market. Thus, the total fund raising was $16B last year compared to an increase of $335B in bank lending and a $391B increase in total domestic credit.

Given high debt-to-equity levels in the Chinese economy and a high level of non-performing loans, the Chinese government appears determined to endeavor to restructure the financing sector in order to withstand the competition

from foreign financial institutions in 2006. The government is now focused on restructuring and listing the four state banks China Construction Bank, the Industrial and Commercial Bank of China (ICBC), the Bank of China, and the Agricultural Bank of China. It seems to be a matter of time before the government decides to restructure the stock market.

China’s gross national savings are 45% of GDP and household savings are 30% of household disposable income. The high savings rate should help keep the cost of capital low despite China’s high growth. It would also mean that stock valuations in China could be higher than elsewhere, even after the government stops rationing fund raising and allows the market to clear, similar to the situation in Taiwan. Nevertheless, risk premia could shift meaningfully as restructuring advances, as evidenced in other emerging markets (for more on this, see link). Over the longer term, Andy is positive on the prospects for the Chinese stock market.

Chinese Internet business trends and stocks have been especially volatile…

Like their global counterparts, the three pure-play Internet leaders in China (Sina, NetEase, and Sohu) have experienced extreme volatility, starting with their IPOs in C2000 (aggregate market value of $1.2B), to their CQ2-CQ4:00 peaks ($2.7B), to their CQ2-CQ4:01 troughs ($82MM), to concerns about NASDAQ de-listings in CQ3:01, to garnering an aggregate of $265MM from convertible financings in CQ2/CQ3:03, and to their current aggregate value of nearly $5B (as of 4/12/04).

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China Reading/Viewing List We have found five sets of sources that we believe serve well as introductions to the dynamics of the social, political, cultural and economic landscapes in China — one focuses on history, one on rule of law, one on the basic Tenth Five-Year Plan from CPC (Communist Party of China), one on the technology/ telecommunications-specific areas of the Tenth Five-Year Plan, and one on China’s progress in the world economy. Highlights follow…

1) China: A Century of Revolution. (see link) This six-hour documentary (available on DVD) details the development of China over the past century. It focuses on the impact of the leadership of Chiang Kai-shek, Mao Zedong and Deng Xiaoping and provides contextual relevance as to why China is the way it is. It drills down key events in China’s history including: 1) civil war; 2) foreign invasion; 3) rollout of communism; 4) Long March; 5) Great Leap Forward; 6) Cultural Revolution and the Red Guard and 7) efforts to develop a socialist market economy — an untested hybrid of communism and capitalism.

2) The Developing Rule of Law in China (see link). This article, written by Dr. Zhenmin Wang, Vice Dean, Tsinghua University School of Law and published in Harvard Asia Quarterly, Autumn, 2000, focuses on the challenges and opportunities for the evolving legal system in China. An essential feature of any modern society is the rule of law, which can be broadly understood as “a governing structure dependent on the consistent and systematic application of legal rules.” China’s legal system was nearly destroyed during the Cultural Revolution in the 1960s. Beginning in the early 1980s, China began to focus on the needs/process for deploying a modern legal system. In 1997, the CPC explicitly incorporated the rule of law as a basic guiding principle and proposed that a comprehensive legal framework would be instituted by 2010. While a solid legal framework is important to protecting public interests and human rights, it is also key in assisting economic and social development and the international business practice requirements posed by the WTO.

3) Report on the Outline of the Tenth Five-Year Plan for National Economic and Social Development (see link). This speech, delivered by Zhu Rongji, Premier of the State Council, at the Fourth Session of the Ninth National

People’s Congress, March, 2001, focuses on a review of the Ninth Five-Year Plan and the then proposed Tenth Five-Year Plan. These plans, created by the CPC on a bi-decade basis, define the “objectives, guiding principles and major tasks for China’s economic and social development” for the coming five year period. The first five-year plan was instituted by Mao Zedong in 1953, and was modeled after the five-year plans of the Soviet Union (focusing on a top-down approach that the Communist party uses to endeavor to manage both the economy and the society). While the subsequent speech serves as a call to arms for the Chinese people, it is, in effect, a high level business plan for the economy and it provides important perspective into areas of focus and degree of engagement. In our view the sheer depth/breadth of the plan illustrates the opportunities / challenges that China faces.

We cite verbatim comments from the speech… In the [previous] five years, China’s GDP increased by an average annual rate of 8.3%...the mission of quadrupling the per capita GNP of 1980 has been overfulfilled…The output of major industrial and agricultural products now stands in the front ranks of the world’s economies, and commodity shortages were by and large eliminated. Progress was made in industrial restructuring…Good results were achieved in eliminating outmoded industrial production capacity, reducing excess production capacity and upgrading technology in key enterprises. Information technology and other new high-tech industries grew rapidly…Economic restructuring was extensively carried forward, and a socialist market economy was preliminarily established…Significant advances were made in the establishment of a modern corporate structure in large and medium-sized state-owned enterprises. Most key state enterprises became corporations, and a considerable number of them were listed on stock markets inside and outside China. There was a marked reduction of losses and increase in profits in enterprises…The market system continued to improve, and the supply of capital, technology and labor expanded rapidly…The system of finance and taxation continued to improve…More than US$289.4B in foreign funds were put to use during the past five years…

People’s living standards continued to improve, and generally people began to lead a relatively comfortable life…The objectives set in the seven-year plan to help 80MM people get out of poverty were basically

http://www.amazon.com/exec/obidos/tg/detail/-/B00005RRID/002-0762079-1361601?v=glance

http://www.fas.harvard.edu/~asiactr/haq/200004/0004a007.htm

http://www.china.org.cn/english/8722.htm



attained…The development of science, technology and education was accelerated, and other social undertakings progressed in a comprehensive way…Successive results were achieved in building a clean and honest government and in the struggle against corruption…Social stability and economic development were secured in Hong Kong and Macao…In the face of various social problems, we have always made economic development the central task and adopted effective measures to promote a sustained, rapid and sound development of the national economy…

While fully affirming our achievements, we are clearly aware that there are still numerous problems in our economic and social life. The principal problems are as follows: inappropriate industrial structure and non-coordinated development of local economies; low overall quality of the national economy and low competitiveness in the international market; imperfections in the socialist market economy and conspicuous systematic factors hampering the development of productive forces; a comparatively backward state of science, technology and education, and relatively weak innovative ability in science and technology; a shortage of important resources such as water and petroleum and the deterioration of the ecological environment in some regions; growing employment pressure, slow income increase of farmers and some urban residents, and an increasing income gap; considerable disorder in some areas of the market economy; frequent occurrences of grave accidents; serious corruption, extravagance and waste, formalism and bureaucratism; and poor public order in some localities. The causes for these problems are rather complicated, but they are not unrelated to shortcomings and errors in our work. We must pay great attention to them and take further steps to solve them...

In the next five years, efforts should be intensified to adjust the patterns of economic development between different industries, between different regions, and between urban and rural areas, with emphasis on the industrial structure…we have to give priority to the development of science, technology and education, further implement the strategy of developing China through science and education, invigorate science and technology, train more skilled personnel, and better integrate science, technology and education in the economy…lay a solid foundation for doubling the 2000 GDP by 2010…and achieve marked progress in improving spiritual civilization, democracy and the legal system…We need to lend support to important high-tech projects, such as high-speed, wide-

band information networks, key integrated circuits and new-type carrier rockets in order to strengthen China’s new and high-tech industries…We also need to develop the software industry, strengthen the development of the information infrastructure, and apply information technology extensively throughout society, so that industrialization and the information revolution go hand in hand…

We must give priority to raising the people’s living standards…Carrying out the strategy for western-region development to accelerate the development of the central and western regions is a major step taken to achieve the strategic goals of the third stage of the country’s modernization drive…In developing education, we should meet the needs of modernization, the world and the future, and concentrate on improving quality-oriented education to ensure that students improve in terms of their moral qualities, intellectual ability, physical fitness and aesthetic appreciation…

Accelerate the establishment and improvement of a modern corporate structure…The state must hold a controlling stake in strategic enterprises that concern the national economy and national security…We must persist in cracking down on criminal activities such as producing and marketing fake and shoddy goods, tax evasion, tax fraud, obtaining foreign currency through deception, and smuggling…We need to focus our efforts on the development of markets for production factors, especially capital, foster work ethics that stress honesty and trustworthiness, and accelerate the establishment and improvement of a nationwide credit system…we will continue to implement a proactive fiscal policy to increase investment and stimulate consumption. We need to conduct financial affairs according to the law, strengthen tax collection and management, and improve supervision of government financial affairs…We need to carry out a comprehensive reform of the wholly state-owned commercial banks in light of modern banking principles…

We should lose no time in preparing for China’s entry into the World Trade Organization and fulfilling our tasks in the transitional period. We need to take effective measures to change the methods of government administration and enhance the competitiveness of Chinese enterprises. We need to deepen the reforms in order to establish a system of foreign trade and economic cooperation compatible with international norms and suitable to domestic conditions…We need to encourage foreign investors,



especially transnational corporations, to invest in high-tech industries and infrastructure, and encourage them to set up research and development centers in China and to participate in the restructuring and renovation of state-owned enterprises.

We need to ensure that basic living allowances for laid-off workers from state-owned enterprises and basic pensions for retirees are paid in full and on time. At the same time, we need to accelerate the formation of a social security system that is independent of enterprises or institutions and supported by funds from diversified sources, and that provides standardized safeguards and society-wide services…We must work hard to sustain the low birth rate and improve prenatal and postnatal care…We need to protect and make proper use of valuable resources such as fresh water, farmland and energy in accordance with the law…

Annual salaries and stock options may be initiated on a trial basis for leading executives and key technical professionals in state-controlled companies listed on the stock market…Efforts should be made to improve housing and transportation conditions for both urban and rural residents…We also need to pay due attention to prevention and control of environmental pollution in rural areas, especially chemical pollution in agricultural production…We need to administer the country in accordance with moral principles as well as the law…An early settlement of the Taiwan issue and the accomplishment of national reunification are the shared aspirations of the entire Chinese nation and an enormous task we are now facing.

4) Summary of the Tenth Five-Year Plan (2001-2005) — Ministry of Information Industry (see link). This document, created by the Ministry of Information Industry of the Chinese Government, and published in 2000, focuses on plans for the telecommunications industry and the IT/electronics industry.

We cite verbatim from the report… Informatization is the key in promoting industrial advancement, industrialization and modernization…It is the very first time for the Central Committee of the Communist Party of China to put informatization in such a high strategic position. This is a great strategic decision made by our Central Committee which stands at the forefront of this era…The Information industry serves as

the basic, pioneering, supporting and strategic industry of the national economy…In 2005, the electronics and IT products will account for 30% of the total volume of exports…In 2005, the Information industry will become the leading industry among all other industries in the economy, and emerge as the largest industry in China…

The Telecommunications network is the infrastructure of the national economy…The telecommunication industry has built up a network that is close to the international standard. The scale of the fixed telephone and cellular networks is the second largest in the world…We have become the world’s main manufacturing country for color TV, LCD, color tubes, program-controlled switchboard, cellular phones, display devices and monitors…The Information industry percentage of national GDP increased from 2% in the Eighth Five-Year period to 4% in the Ninth Five-Year period…

The output and the sales volume of major electronic products increased rapidly. In 2000, the output volumes of the main products are as followed: Color TV — 37MM sets; computers — 9MM sets; local program-controlled switchboards — 47MM lines; digital mobile switchboards — 36MM sets; digital mobile phones — 51MM sets; display devices and monitors — 45MM sets; LCD — 11MM sets; integrated circuits — 5B pieces; electronic components — 250B; and color tubes — 43MM…Exports of electronic products achieved a trade surplus in four years accounting for 50% of products exported…Sales volumes of program-controlled switches, color TV, telephones and some other products were the biggest in the world…Domestic produced microcomputers have reached international standard. New products were launched at the same time as in the international market. There were technological breakthroughs in producing high performance computers and high-speed routers. Important achievement was also made in software. The roll out of the COSIX Chinese operating system was acknowledged as first-rate software in the world. The military electronic industry also developed a lot of key technologies that were needed in national defense construction…

Several big telecommunications firms were set up. They are: China Telecom, China Mobile, China Unicom, China Netcom, China Railcom, China Satellite and Jitong…The telecommunications network actively utilized locally manufactured equipment and software, which in turn established a market for domestic industries. The creativity and production of the manufacturing industry

http://www.trp.hku.hk/infofile/china/2002/10-5-yr-plan.pdf



has created favorable conditions for the rapid development and technological advancement for the telecommunication industry…The government has offered financial and tax privileges for the manufacturing and software industries, providing them with the basic support for development. This strong support from all levels of local government has provided a good environment for the growth of the information industry…

Although we have profound development in the Information Industry, when compared to other developed countries, there is still a large discrepancy: low economic efficiency, comparatively backward key technology and structural contradiction. The main problems are: 1) use of information resources is still lagging behind the development in communication network infrastructure; 2) delayed construction of a legal and regulating system, existing rules and regulations are inadequate in facilitating the development of the industry — a market mechanism of fee-charging services has not yet fully formed; 3) structure and the organization of the industry need to be improved; 4) gap exists in productivity and operation efficiency between local organizations and other global organizations; 5) insufficient channels in financing the industry and a lack of research and development funds; 6) lack of innovation, mechanisms for research and development in enterprises and a shortage of human resources — among the electronic information products, there was a small amount of products that had their own brand names or property rights…there was a deficit in management level executives, technology specialists and high level, integrating experts and 7) software, integrated circuit and components industries are the bottleneck that curbed the development of the IT manufacturing industries…

The tenth five-year period will be a critical time for the development of the information industry, it is important to plan and realize the goals for leap-frogging the development of the information industry with a good start in the new century. With the advantages of capital, technology and branding, developed countries have concentrated on system integration and the sales and development of high-tech products. The production of products with relatively low technology content has been moved to developing countries. Due to the speed at which technologies are developed and the scale of market competition, the risk involved in technological innovation becomes higher and requires greater input of R&D funding and human resources. Cooperation between

countries and large corporations in R&D is now more common. Before, competition was based on resources and products, but now the focus of competition changes to technology, branding, capital and market share. A large proportion of electronic products enjoy economies of scale. With the advance in technologies, the scale of production will increase and the barrier to entry will become higher, and it will be difficult to become competitive without huge investment input…Information technologies are viewed as one of the most important resources in a modern society…

Distinctions between different technologies and products will be blurred. Digitalization and multi-media will lead to convergence of TV, computer and communications equipment. Digitalization, broadband development, intelligent networks, personalization will be the major trends in the development of the information industry…To a certain extent, the US and Japan achieved their leading position in the IT manufacturing industry because they were able to grasp and monopolize the core technologies as well as the design of integrated circuit and key components…

By 2005, the scale of the information industry will be double that of year 2000 and will account for more than 7% of GDP. It will become a strategic industry that drives the growth of the economy and a pillar industry that speeds up the restructuring and strengthens the competitiveness of the economy…China will become one of the leading countries in the manufacture and production of information technologies…IT will be widely applied in the society and the penetration of computer and networks will be raised…[Goals for 2005 include] total wireless network capacity — 360MM subscribers; 200MM Internet subscribers (15% penetration); 500MM telephone subscribers (40%+ penetration); 240-280MM fixed telephone line subscribers (18% penetration); 260-290MM mobile subscribers (21% penetration); coverage of radio, TV networks and cable TV will reach 150MM…Production volume: integrated circuits — 20B pieces; electronic components — 500B pieces (of which 80% are chips); microcomputers — 18MM sets; cellular phones — 100MM sets; optical fiber — 20MM km; color TVs — 40MM; laser disks — 20MM; color tubes — 45MM; sales volume of network equipment — 37B yuan; sales volume of software — 250B yuan…

Further promote technological innovation so that 60% of the growth in the industry can be attributed to innovation…60% of IT products should be home-



grown…With the government online project, government departments can produce, send and receive documents online. The public can access information from government departments through the Internet…promote computer education in secondary and primary schools…promote B2B and B2C eCommerce and develop electronic payment systems...

Optical fiber is still the main focus of infrastructure development during the tenth five-year period…Develop locally name-branded server, high-speed router, network exchanges, PDAs, network security products and network control or management systems to accommodate the demand from Internet development. Achieve scale production of microcomputers, computer related products like CPUs, motherboards, printers and other key components…Develop Chinese operating systems, platforms, database management systems and Chinese network management systems…

Shift the emphasis to directly obtaining finance from local and overseas financial markets…Establish property rights, legal entity management structures and restructure company law. Except for business related to national security, vital public services and important backbone industries, other industries will become share holding companies to diversify investment sources…Establish a comprehensive mechanism to develop, employ and assist entrepreneurs. Create a favorable environment for entrepreneurs to contribute to the business, establish incentive schemes and constraints for the entrepreneurs and senior mangers…Encourage the inclusion of capital and technologies in the rationing of revenue, introduce bonus and share options to the remuneration of company directors, provide an attractive environment to attract human resources…

By 2010, China will become an information society, raising the breadth and the depth of using information resources and the development in information services will accelerate and meet the demand from the public. The information industry will be the most important industry in the national economy, achieving a large scale and technologically advanced national information infrastructure…From 2006 to 2010, the average annual growth rate is expected to reach 10-15% for the IT manufacturing industry and software industry. By 2010, the scale of production and the level of production technologies will be comparable to those in the United States and Japan and at the forefront of the world

economy…IT knowledge and skills will be greatly improved, information technologies will be widely applied and informatization will have remarkable achievements.

Eric Wen highlights the section of the plan that focuses on the postal system… 1) Build a "Three Flow, Four Segment", Comprehensive Business Infrastructure Following the needs of the market, when guaranteeing the development of basic postal services, develop logistics and electronic information businesses represented by e-post. The scope of traditional postal service shall expand to trade, delivery, warehousing, community service (four segment). Leveraging the service network of the postal network, the physical delivery network and the computer network (three flow) to develop, apply new businesses ideas. Gradually form a comprehensive business framework consisting of physical delivery, electronic information, e-sales and marketing and e-financial service businesses. Provide multifunctional, 360 degree postal service to the society. 2) Optimize physical delivery network, Improve productivity With the roll out of centralized postal district system, centralizing around improving the automation of national tier 1 and 2 central postal bureaus, especially those in provincial capital cities, following the need of standardizing shipping container and formats, earnestly equip the offices with advanced sorting and transporting machineries. Improve the technology content of the central postal bureaus. By the end of tenth five-year (2005), more than 50% of all postal items must be in standard containers. 3) Further perfecting the computer network of postal service Expand the size and application area of current computer network, strengthen networking and security, ensure smooth operation of the network, improve the level of sophistication in using computer networks. Realize the shift of emphasis to develop network functions and improve level of sophistication. Transition to a model of open operation and sharing of network resources. Leveraging basic infrastructure buildout, fasten the pace of building a e-post platform. 4) Strengthen customer service network



Strengthen the customer service network at the terminal end. Strengthen the service infrastructure. Strengthen network node functionality and service ability, improve technical sophistication. In conjunction with the need to develop eCommerce, realize the coordination of postal delivery and physical item delivery. In nationwide, adjust the distribution of branches and network nodes, optimize node structure and service function. In cities with greater demand, build full service customer service centers. Adopting CTI (Computer Telecom Integration) and Call center technology to build a e-service platform, realizing telephone and Internet input channels from the customer. 5) OECD: China in the World Economy (see link). This 813 page book, published in 2003, by the Organisation for Economic Co-operation and Development (OECD), summarizes the status of China’s economy and ‘develops the analysis of the policies that will have to be adjusted in order to meet the challenges of further trade and investment liberalization.’ We include highlights from the book… To reap the full benefits of further integration in the world economy, the Chinese economy must undergo fundamental adjustments. A substantial reallocation resources among economic sectors and a major restructuring of the business sector will be needed to correct widespread inefficiencies…created by this historical transition.

…[Since] 1978, [China] has been one of the great economic success stories of the post-war era. China has become the world’s seventh largest economy and second largest recipient of foreign direct investment.…The accession of China to the World Trade Organisation (WTO) marks an important milestone along the reform path China has been following for more than twenty years, rather than anew direction. . . . This willingness reflects the fact that opening to international markets promotes market discipline, access to technology, and other qualities that have been important goals of domestic economic reforms.

Two related structural changes have provided much of the impetus to China’s industrial development during the reform period. The first is the shift from a wholly state-owned industrial sector at the beginning of the reform period toward one increasingly dominated by “non-state” enterprises. . . . The second structural change is the progressive opening of the Chinese economy to foreign trade and investment.

The biggest problem impairing industry performance is widespread inefficiency in enterprise operations. . . . [Unlike] Eastern Europe, China’s industry is characterized by widespread suboptimal scale in production facilities, fragmentation and duplication. There are 200 separate producers of automobiles, most of which complete only a few thousand units per year. Much of the plant and equipment is outmoded. Economies of scope are also poorly exploited, as illustrated by the nearly 8 000 independent cement firms in China compared to 110 in the United States, 51 in Russia, 58 in Brazil, and 106 in India. . . .

Inadequate technology and limited capacity to innovate are particular weaknesses of much of Chinese industry. Technology standards for a large portion of domestic firms are below international standards. China devotes proportionately fewer resources, and produces less scientific outputs such as patents, than OECD countries, as well as other large developing countries such as India. . . . The poorly skilled and insufficiently profit-motivated management that characterizes much of domestic business has neglected technology.

The external discipline provided by the financial system has also been a major weakness. Years of government-mandated lending together with weak contract enforcement and bankruptcy regimes created a distorted credit culture in which banks have had limited incentives — and even less ability — to maintain strict lending standards and enforce loan contracts. . . . These weaknesses in the financial system are partly a reflection of the fact that China is still a developing country. . . . Beginning in the mid-1990s, the pace of financial reform has accelerated sharply in an effort to address the system’s weaknesses. The banking law enacted in 1996 led to a significant tightening of bank lending standards by improving internal controls and strengthening accountability by holding bank loan officers and their management responsible for new problem loans. . . . In a proximate sense, the ongoing problems of financial institutions reflect the poor condition of their enterprise customers. A severe vicious circle has developed. Poor enterprise performance contributes to bank non-performing loans and lowers bank profits by eliminating much of their core market. . . .

China’s growth during the 1990s has been accompanied by growing inequality among its regions. Incomes and living standards have risen in nearly all areas, but growth

http://www.oecd.org/document/43/0,2340,en_2649_34673_2075243_1_1_1_1,00.html



has been most rapid in the coastal provinces, followed by provinces in the central region, and least rapid in the western regions. Geographic disparities in income have been rising steadily since the late 1980s. . . .

The divergences in growth rates and increasing gaps in living standards among China’s regions, and between urban and rural areas, are fundamentally reflections of their poor integration. Transportation and communication infrastructure within China’s interior provinces, and that linking the interior with the coast, is generally much less developed than in the coastal provinces. . . .

China’s economy is clearly operating below its productive potential. Human, capital, land, and other resources are under-employed, misallocated among economic sectors, and inefficiently used. Achieving better resource utilisation is the most basic challenge China faces in seeking to meet its development objectives. . . . China’s other major environmental problems are extensive air and water pollution. Nearly one-third of the country suffers from acid rain, urban air pollution is quite severe in larger cities, and there are growing pressures on solid waste disposal facilities. . . .

China’s impressive industrial rise has been marked, however, by a number of striking contradictions. Despite the country’s rapid integration into international markets, domestic markets remain highly segmented and fragmented. . . . Although some highly efficient and internationally competitive Chinese firms have emerged, most Chinese firms remain relatively small, under-capitalised and poorly managed.

The iron and steel industry is one of the most important industrial sectors of China, accounting for 6.5 percent of value-added and 5.5 percent of employment in manufacturing. In 1996, China became the world’s largest crude steel producer. Since then, the growth in steel production has been maintained and in 2000 a crude steel output of 127.3 million tonnes was recorded — representing 15 percent of total world steel production. . . .

China now ranks 10th in world production of all types of motor vehicles. The Chinese auto industry has a production capacity of 2.5 million motor vehicles but operates at about 70 percent capacity. China also produces 3.2 million agricultural vehicles and 11.2 million motorcycles per year. . . .

The development gap between distribution in China and in OECD countries is profound. The distribution sector is in its infancy in China. No better example illustrates this than the following: if a company has two warehouses in two locations and goods are moved from one to another, then the local tax bureau must treat the transfer as a sale and tax it accordingly. . . .

In China, the participants in the retail sector vary from big department stores to mom-&-pop shops, from eCommerce through the Internet to free market bazaars and even peddlers. Among the variety of retail formats, department stores, bazaars and mom-and-pop shops are the most popular and together have the dominant market share in retail trade. . . . The department store is a well-established and popular format in China, introduced during the era of central planning to serve as the main point of distribution for manufactured consumer goods. . . . In 1999, there were about 88 000 bazaars (free markets) spread throughout urban and rural areas and engaging in the consumer goods trade. There are about 15.4 million mom-and-pop shops throughout the country. In one sense, mom-and-pop shops could be regarded as the principal retail format in the Chinese retail sector, since they account for almost 88 percent of all retailing outlets and represent more than 30 percent of retail market share, as well as providing 75 percent of working opportunities in retail trade in China. . . . New retail formats like chain stores, supermarkets, hypermarkets, discount stores and even electronic commerce (e-stores) have been introduced into the Chinese retailing market.

China’s economic performance is, however, undermined by severe regulatory problems. First, regulatory risks are high . . . Second, transactions costs are high due to an overly-complex, multi-layered, often arbitrary and interventionist regulatory environment that is vulnerable to corruption. Third, in many sectors, China suffers from substantial internal and external regulatory barriers to entry and competition. Fourth, there is substantial underregulation. . . . Fifth, checks and balances, such as an effective judiciary to ensure application of the rule of law and efficient dispute resolution procedures between the state and market entities, are weak. . .. Sixth, infrastructure bottlenecks, partly due to the lack of market-oriented regulatory regimes, raise production costs throughout the economy. These problems will not be overcome quickly, and legal and regulatory inefficiencies and risks will be higher in China than in OECD countries for the foreseeable future.



Overview of Representative Global Internet Companies

We highlight 49 companies…

In an effort to illustrate the status of representative Chinese Internet companies, we highlight eight public and twenty private companies. The companies we profile run the gamut of online services, from portals to gaming sites to bookstores. We will provide more detail on the market players, and related competitive dynamics, in subsequent reports. In addition, we highlight four Taiwanese/Singaporean, four Japanese, nine Korean, four American and two European companies as we believe they provide perspective on regional market trends. The companies are ordered by market capitalization, where available, then alphabetically.



Exhibit 57

Selected Global Public Internet Companies (All figures in US $) % Price Change

4/9/04 Diluted Mkt Cap.Company Ticker Price Shares ($MM) 2001 2002 2003 2004 YTDChina Sina SINA $41 58 $2,380 (49%) 311% 419% 22% $50 $9 NetEase NTES 57 33 1,850 (79) 1,675 222 53 72 17 Sohu SOHU 26 42 1,100 (49) 433 367 (13) 43 12 Chinadotcom CHINA 9 98 903 (33) (6) 185 14 15 4 Tom Online TOMO 14 49 682 -- -- -- -- 17 11 Ctrip CTRP 29 15 432 -- -- -- (16) 43 24Japan Yahoo! Japan 4689.T 12,369 4 44,763 (47) 60 331 84 13,593 2,303 Softbank 9984.T 53 351 16,645 (53) (29) 168 72 67 10 Rakuten 4755.Q 8,186 1 8,813 (12) 51 478 86 8,422 1,163 Trend Micro 4704.T 40 133 5,306 -- -- -- -- 42 12Korea NCsoft 036570.KS 69 19 1,302 181 (27) 155 24 76 19 NHN 035420.KS 80 15 1,201 -- -- 209 37 91 28 Daum 035720.KS 42 15 619 116 6 68 (7) 68 32 Webzen WZEN 9 49 432 -- -- -- (15) 14 8US eBay EBAY 76 662 50,290 103 1 91 18 77 43 Yahoo! YHOO 56 687 38,589 (41) (8) 175 25 56 24 Interactive IACI 33 632 20,934 41 (16) 48 (2) 43 26 Amazon AMZN 48 418 20,112 (30) 75 179 (9) 61 24Europe Wanadoo NAD.PA 10 -- -- (39) (11) 83 27 11 6 T-Online TOIGn.DE 12 -- -- (20) (42) 133 (8) 15 7

Nasdaq COMP 2,052.88 -- -- (21) (32) 50 2 2,154 1,354

FUNDAMENTALSRevenue Operating Income Operating EPS F03A F03E

Company C03A C04E C03A C04E C03A C04E Gross Marg. Oper. Marg.China Sina* $114 $189 $41 $73 $0.76 $1.20 70% 36% NetEase* 66 103 39 66 1.18 1.81 84 60 Sohu* 80 121 32 52 0.79 1.24 69 40 Chinadotcom* 89 237 (0) 47 0.15 0.33 46 (0) Tom Online 77 -- 20 -- 0.24 -- 43 26 Ctrip* 21 35 7 14 0.06 0.74 82 34Japan Yahoo! Japan 721 1,148 401 743 129.69 244.62 93 56 Softbank -- -- -- -- -- -- -- -- Rakuten 171 194 45 46 (487.22) 25.94 91 26 Trend Micro 454 518 143 200 0.66 0.89 93 32Korea NCsoft 140 200 46 81 1.41 3.53 88 33 NHN 144 198 56 76 3.21 4.56 64 39 Daum 123 176 34 57 1.49 2.42 59 27 Webzen 50 61 28 34 0.33 -- 88 58US eBay 2,165 3,000 695 983 0.75 1.04 81 32 Yahoo! 1,473 2,298 296 504 0.37 0.53 86 20 Interactive* 6,328 6,884 866 561 0.81 0.93 45 14 Amazon 5,264 6,568 361 488 0.61 0.93 24 7Europe Wanadoo 3,229 -- (89) -- 0.40 -- 53 (3) T-Online 2,284 -- (103) -- 0.32 -- 59 19

S&P 500 -- -- -- -- 55.01 -- -- --

VALUATION C03-C06 C03E P/E Ratios EPS P/E to Mkt Cap to Rev Ent. Value to EBITDA

Company C03A C04E CAGR (%) Growth C03E C04E C03E C04EChina Sina* 54x 34x -- -- 21x 13x 32x -- NetEase* 48 31 -- -- 28 18 32 -- Sohu* 33 21 -- -- 14 9 27 -- Chinadotcom* 61 28 -- -- 10 4 82 -- Tom Online* 58 -- -- -- 9 -- 33 -- Ctrip* 516 39 -- -- 21 12 60 --Japan Yahoo! Japan 95 51 40% 3.9x 62 39 103 57x Softbank -- -- -- -- -- -- -- -- Rakuten -- 253 -- -- 52 45 145 142 Trend Micro 60 45 18 2.9 12 10 29 22Korea NCsoft 49 19 -- -- 9 7 21 13 NHN 25 17 30 57.3 8 -- -- -- Daum 28 17 52 44.6 5 -- -- -- Webzen 26 -- -- -- -- -- -- --US eBay 101 73 34 3.0 23 17 61 44 Yahoo! 153 106 48 3.2 26 17 83 46 Amazon 78 52 49 1.6 4 3 47 37 Interactive 41 36 -- -- 3 3 13 15Europe Wanadoo 26 -- -- -- -- -- 20 -- T-Online 38 -- 17 177.7 6 5 20 21

S&P 500 -- -- 12 -- -- -- -- --

52-Week Range

Source: Company Reports, Morgan Stanley Research. *I/B/E/S Estimates. **Based on 4/9/04 Conversion Rates: 1 EUR = 1.2070 USD, 1 USD = 1141.85 KRW, 1 USD = 105.91 JPY.



Company Overviews — China



Exhibit 58

China — Representative Internet Companies Company • Location • Focus • Public/Private (owner) • Market Capitalization

Highlights

Sina • China • Portal • Public (SINA) • $2,380MM

• $38MM revenue (+197% Y/Y), $16MM operating income (+1451% Y/Y) in CQ4:03 • 34% of revenue derived from advertising, 60% from SMS, 6% gaming • 40% operating margin in CQ4:03 • Formed JV with Yahoo! in 1/04 for online trading • Entering travel via FortuneTrip acquisition (12/03)

NetEase • China • Portal • Public (NTES) • $1,850MM

• $19MM revenue (+44% Y/Y), $12MM operating income in CQ3:03 • 18% of revenues from advertising, 39% from gaming • 61% operating margin in CQ4:03 • Best performing online game (Westward Journey) is developed in-house

Sohu • China • Portal • Public (SOHU) • $1,100MM

• $25MM revenue (+133% Y/Y), $11MM operating income (+22% Y/Y) in CQ4:03 • 39% of revenue derived from advertising • 45% operating margin • Acquired Gaming Web site (17173.com) and Real Estate Web site (Focus.cn) in

11/03 chinadotcom • China • Enterprise Software

Outsourcing • Public (CHINA) • $903MM

• $29MM revenue (+87% Y/Y), $500K operating income in CQ4:03 • 1000+ customer-site installations, 600+ enterprise customers through CDC

Software • 5MM+ paid subscriptions through CDC Mobile Unit

Tom Online • China • Wireless Internet • Public (TOMO) • $682MM

• $77MM Revenue (+157% Y/Y) and $20MM Operating Income in C2003 • Revenue mix: wireless services 72%, advertising 8%, commercial enterprise

solutions 18%, Internet access cards 2%, in C2003 • $23MM in Cash and Equivalents as of C2003

Ctrip • China • Travel • Public (CTRP) • $432MM

• $8MM revenue (+116% Y/Y) and $3MM operating income for CQ4:03 • Booked 882K hotel nights, up 18% Y/Y in CQ4:03 • Room network of 1,700+ China hotels, 750 abroad • As of CQ4:03, 84% revenue from hotels, 11% travel, 3% packaged tours

Linktone • China • MMS/SMS/Gaming • Public (LTON) • $282MM

• Pure-play in wireless value-added services sector with 2003 revenue of $17MM • Strength in product breadth, carrier relationship and sales/marketing coverage helps

standing in an increasingly crowded market • Gross margin of 62% in C2003

Huicong/Zhongsou • China • Search • Public (owned by HC Int’l) • $125MM

• Revenue of $2MM (+356% Y/Y) in 2002 • Provides search services to Sina, Sohu, 3721 and chinadotcom, displaced Baidu in

2H03 • 10MM+ searches processed daily

3721 • China • Search • Private (Yahoo! HK

relationship)

• 450K+ Chinese Companies registered for Keyword Service as of 2/04 • Reaches 90%+ Chinese Internet users per company reports as of 2/04 • Serves 50MM+ keyword resolutions/day company reports as of 2/04 • Yahoo! paid $120MM in 11/03 for its relationship with 3721

Source: Company Reports, Morgan Stanley Research, Market Capitalization Data as of 4/12/04.



Exhibit 59

China — Representative Internet Companies Company • Location • Focus • Public/Private (owner) • Market Capitalization

Highlights

21CN • China • Entertainment portal • Private (held by China

Telecom Guangdong)

• Focusing on becoming the leading broadband entertainment portal in China • Largest MP3 song collection in China. Charges $3.62-$6.04/month for Video-On-

Demand • Leading Web mail provider

51job • China • Recruitment • Private • –

• 170K+ clients though 16 offices in HK and China • 5MM+ registered job seekers, and 1MM+ resumes sent to recruiters/week • Funded by Doll Capital, a Venture Capital firm based in California

Alibaba • China • eCommerce (B2B) • Private • –

• Received $82MM in financing from Softbank and other existing investors on 2/04 • C2003 guidance of $12MM in free cash flow • Web Properties have 3MM+ registered members • Estimated $3B worth of transactions/year

BabyCare • China • Pre/Post-Natal Supplies and

Classes • Private • –

• Provides pregnancy and child-rearing services and products to Chinese parents • Operates parenting site, Yaolan.com, with 550K+ members • Average basket size of $250/month per customer on Yaolan

Baidu • China • Search • Private • –

• Processes 30MM+ Chinese text searches/day, indexes 300MM+ web pages • 80% of C2003 revenue from sponsored search, 10% from licensing search software

to enterprises, 10% from licensing to portals • Management claimed to be profitable in C2003

Chinaloop • China • Marketing • Private (owned by

Consodata) • –

• Database of 7MM+ consumer profiles in China • Cost for renting 1K names/addresses is $181, minimum order is $604 • 50% subsidiary of ConsoData, a European marketing firm

Dangdang • China • eCommerce (books) • Private • –

• C2003 revenue of $9MM (+100% Y/Y), with 25% Gross Margin • 210K+ titles in bookstore, 800K+ unique visitors, 4K+ orders/day • Tiger Tech Fund acquired 15% of Dangdang stock for $7.5MM in 12/03

eBay EachNet • China • eCommerce • Private (relationship with

eBay)

• Added 1MM subscribers in CQ4:03, total of 4.3MM+ users • In 8/03, had $8MM+ GMS • eBay paid $180MM for its relationship with EachNet, in two separate transactions of

$150MM in 7/03 and $30MM in 3/02

eLong • China • Travel • Private • –

• Provides travel services to Yahoo!, Sohu, and Sina • 10MM+ cardholders • Tiger Technology and Blue Ridge Capital invested $15MM in late 2003

Source: Company Reports, Morgan Stanley Research, Market Capitalization as of 4/12/04.



Exhibit 60

China — Representative Internet Companies

Company • Location • Focus • Public/Private (owner) • Market Capitalization

Highlights

joyo.com • China • eCommerce (retail) • Private • –

• Revenue increased 70% Y/Y in C2003 • Receives 10K+ orders for approximately $121K/day • Tiger Technology Fund acquired 20% of joyo.com stock for $6.2MM in 10/03

KongZhong.com • China • MMS/SMS/Gaming • Private • –

• China Mobile's #1 MMS, Mobile Game, and WAP Service Provider in 2003 • Became profitable 1/03 • Charges $0.12-0.24/message, 15% of revenue goes to China Mobile

Ninth City • China • Gaming • Private • –

• Operates an online community with the Web site the9.com • 5-year, $500K upfront license 20% royalty agreement w/Webzen to publish MU (a

leading Korean game) in China • Reported to have set up a JV with Vivendi Games to publish Warcraft in China

PRCEDU • China • Education • Private • –

• Partnerships with 10+ Universities • 100+ online courses available • Chairman was a founder of UTStarcom

Shanda Networking • China • Gaming • Private • –

• C2003 revenue of $72MM (+84% Y/Y) and net income of $28MM (+66% Y/Y) • As of C2003, 236MM registered users, 1.2MM peak concurrent users • #1 Market Share (30%+) in Chinese online gaming per 4/2003 IDC Report

SouFun • China • Real Estate Information • Private

• Largest real estate information portal in China by visitor volume. • 7MM registered users as of May 2003. ~13MM daily page views • Engaged in mortgage front end service and B2C and C2C platform for second hand

homes Taobao • China • eCommerce • Private • –

• Internet trading site catering to Chinese domestic consumer • 500K+ registered users and 12MM+ page views/day according to company reports

as of 4/04 • Offers free listings for sellers • Funded by a $12MM investment from Alibaba in 7/03

Tencent • China • Instant Messaging • Private (owned by Naspers) • –

• 22MM+ registered subscriptions for IM service • 66MM+ active unique user ID numbers • 760MM+ messages/day




Stock Performance of Internet-related Companies — China Exhibit 61

SINA Daily Stock Performance

00 01 02 03

5

10

1520

40

60

27

2

Volume in Millions (max/avg)

Source: FactSet, 4/13/00-4/9/04. Exhibit 62

NTES Daily Stock Performance

01 02 03

5

10

1520

40

6080

19789

845

Volume in Thousands (max/avg)


SOHU Daily Stock Performance

01 02 03

2

4

6810

20

304050

17

1


Source: FactSet, 7/12/00-4/9/04.

Exhibit 64

HC International (8292.HK) Daily Stock Price

Jan Feb Mar

0.16

0.20

0.24

0.28

0.32

0.36

1

30Volume in Millions (max/avg)

Source: FactSet, 12/17/03 - 4/11/04.

Exhibit 65

CTRP Daily Stock Performance

Dec Jan Feb Mar

24

28

32

36

40

44

5602

286



CHINA Daily Stock Performance

00 01 02 03

5

10

15

20

40

60

80

53

2



LTON Daily Stock Performance

3/5 3/12 3/19 3/26 4/2 4/9

10

12

14

16

18

20

6879

894



TOMO Daily Stock Performance

3/12 3/19 3/26 4/2 4/9

11

12

13

14

15

16

17

9285

896





Sina (SINA) Portal www.sina.com China

Company Description Sina is a Chinese online media company and information service provider. Sina took in $38MM of revenue in CQ4:03. The company reports three main sources of revenue: online advertising (34% of CQ4:03 revenue, up 75% Y/Y, up 13% Q/Q), wireless messaging services (60% of CQ4:03 revenue, up 554% Y/Y, up 27% Q/Q), and other services, including search and email, (6% of CQ4:03 revenue, up 6% Y/Y, up 22% Q/Q). Business Strengths 1. Leading Content Reputation and Brand — In CQ4:03, Sina generated more ad revenue ($13MM) than Sohu ($9MM), NetEase ($3MM),

and Tom ($2MM in F2003) indicating market strength with advertisers and users. Further, management indicated that it was seeing a noticeable uptick in the size and duration of contracts with its advertising partners, with roughly 50% of its revenue from multinational and 50% from domestic companies.

2. Significant Operating Leverage — In CQ4:03, gross margin of 72% was up 200 basis points Q/Q and 7 percentage points Y/Y and operating margin rose to 40% (the seventh straight quarter of 400+ basis point Q/Q growth) — these trends and data points point to the organic strength of the company’s business model.

3. Broad-Based Messaging Momentum — At $25MM in CQ4:03, Sina has the highest wireless revenue tally of the major portals, compared to Tom Online at $18MM, Sohu at $14MM, NetEase at $8MM in the same period. The company also saw 17% Q/Q growth in paying messaging subscribers, to 11MM in CQ4:03, with growth across all segments of messaging, including next-generation WAP/IVR services.

4. MeMeStar Acquisition — Sina strengthened its wireless messaging franchise with the CQ1:03 $24MM purchase of MeMeStar, a value-added wireless messaging service provider. The acquisition added 2MM+ — nearly 20% of Sina’s current total — paying subscribers, and helped to transform Sina’s wireless business model from a mixture of subscription and usage-based services to a predominantly subscription-based model.

Business Challenges 1. Lineage II Launch — Through its joint venture with NCsoft, (“NC Sina”) Sina plans to launch the Chinese beta version of “Lineage II” in

CQ2:04. Given the strength of Lineage I, it may be difficult to replicate the same success in Lineage II. 2. Mobile Carrier Dependence — In CQ4:03, $22MM (or 60%) of revenue was from wireless messaging, most of which is mobile SMS. If

China Unicom and China Mobile alter their pricing agreements with the company, then Sina’s revenue and gross margins (currently at 72%) for wireless services may be adversely affected. Sina currently splits messaging revenue 85%/15% through revenue-sharing agreements with China Mobile and China Unicom.

3. Crowded Market — NetEase and Sohu are significant competitors in the Chinese portal space, while Tom, Tencent, and others compete in the wireless messaging space.

4. Regulatory Risks — The numerous and often vague PRC government restrictions on content subject the company to potential civil and criminal liability, temporary Web-site blockage, and gaming-content censorship.

5. Opaque Ownership — Sina is incorporated in the Cayman Islands for tax purposes, and operates its Internet-related businesses in China through several companies that are owned principally or completely by PRC employees or PRC employees of its subsidiaries.

Focus Areas 1. Yahoo! Sina JV — Sina and Yahoo! announced plans on 1/13/04 to launch a co-branded online trading joint venture by mid C2004. The

JV will compete directly with the eBay EachNet and Alibaba and Taobao. 2. Crillion Acquisition — With the 3/04 purchase of Crillion, Sina added 2MM+ wireless value-added subscribers. Crillion provides job

referrals to job-seekers via SMS. The deal was valued at 6-8x 2004 earnings with a minimum consideration of $18MM, consisting of 60% cash and 40% stock. The maximum consideration will be capped at $125MM, according to company management as of 4/04.

3. 2.5G Transition — With the rollout of MMS/WAP/IVR, it is key for Sina to lead its peers in user subscriptions and messaging volume. Messaging accounted for $25MM and 60% of Sina’s revenue in CQ4:03.

4. Online Gaming — SINA’s joint venture with NCsoft to produce a Chinese-language version of the Korean hit game, “Lineage,” has not yet produced any meaningful revenue. The economics of online gaming fit in with our Internet investment themes: a handful of industry leaders will likely gain share. But this is complicated by the fact that gaming is an unpredictable hit-driven business.

5. Sina-Plenus Partnership — In 2/04, Sina announced a partnership with Plenus, a Korean entertainment company that offers casual online games and community services through NetMarble (page 123). Sina pays $2MM in upfront royalty, with a running royalty of 10% of the net revenue of the licensed game portal in China. The partnership may significantly expand Sina’s online gaming footprint in China.

6. Fortune Trip Acquisition — With the 11/03 acquisition of Fortune Trip, SINA has entered the online travel market in China. Fortune Trip is an online hotel booking company in China, with about 1,000 hotels in its hotel networks. The revenue impact of Fortune Trip may be a swing factor in SINA’s top-line growth through the transition.



NetEase.com (NTES) Portal www.netease.com China

Company Description: NetEase is an Internet and gaming portal in China, with 167MM+ registered users and $20MM in revenue as of CQ4:03. The company derives revenue from online advertising (16% of CQ4:03 revenue, up 124% Y/Y, up 3% Q/Q), wireless messaging services (40% of CQ4:03 revenue, up 13% Y/Y, up 8% Q/Q), and online gaming (44% of CQ4:03 revenue, up 223% Y/Y, up 32% Q/Q). Business Strengths 1. Leading Online Gaming Franchise — Online gaming continues to be a compelling opportunity for NetEase — in CQ4:03 revenue from

the division increased 222% Y/Y, and 32% Q/Q to $9MM, driven by the company’s flagship game, Westward Journey Online Version 2.0 (WJV2). The company continues to lead Sina and Sohu in gaming, and the initial success of the 1/04 launched Westward Journey Fantasy (61K+ peak concurrent users after one month, compared to 224K for the established WJV2), indicates that the company’s gaming position may be sustainable.

2. Strong Internet Momentum in China — With 80MM Internet users (up 36% Y/Y) in 2003, China ranked #2 behind the 180MM users (up 14% Y/Y) in the US. Upward trends in Internet usage and uses could be a positive for NetEase’s advertising business.

3. MMS/SMS messaging popularity — China has more mobile phone users (269MM in 2003) than any country in the world and will likely have more Internet and PC users in 10 years than any country in the world. The data could signify improvements in messaging revenue for NetEase. Its PoPo Instant Messaging service allows users to send SMS messages directly from PC to mobile, mobile to PC, and PC to PC; it could be a key beneficiary of this trend (although company reports as of 4/04 indicate that PoPo SMS may become free of charge again).

4. Strong Operating Leverage — 84% gross margins (up from 77% in CQ4:02) and 61% operating margin (up from 47% in CQ4:02) in CQ4:03 show that the company has been capable of ramping sales while controlling costs effectively.

5. Diversified Revenue Stream — In CQ4:03, SMS services were 40% of revenue, gaming was 44%, and advertising was 16%. 6. Most Popular Game is In-House — Unlike Sina and Sohu, NetEase’s most popular online game, Westward Journey, was developed in-

house, saving the company revenue-sharing costs with videogame developers. 7. Management Strength — William Ding, Chief Architect and Founder of NetEase, pioneered a number of services for Chinese Internet

users including free Web-based email and free Web hosting. Ted Sun, acting CEO, has taken the company from its inception through possible concerns about NASDAQ delisting to its C2002-2003 return to profitability.

Business Challenges 1. Accounting Concerns — NetEase faced the possibility of delisting in 2001 after failing to submit an audited annual report in 2000. In 3/04,

concerns about NetEase’s failure to report resurfaced, as the SEC served the company a Wells Notice over the company’s restatement of 2000 results.

2. Demographics — Due to the company’s focus on gaming, NetEase user demographics are weighted towards a younger audience. As a result, management has indicated that it has had challenges building advertising relationships with bigger marketers (such as automotive and insurance companies) that target older segments of the population.

3. SMS/Mobile Carrier Restrictions/Fees — NetEase was affected more than other portals when China Mobile and China Unicom stopped allowing aggressive content downloads, such as gambling, to be billed to a SMS account in CQ3:03. Additional fee-reduction or restrictions by Mobile Carriers in SMS segments could negatively affect NetEase’s revenue stream.

4. Slowing Advertising Growth — With 3% Q/Q growth in advertising in CQ4:03, NetEase lags Sina and Sohu as a relative marketing destination.

Focus Areas 1. Instant Messaging Ramp/Monetization — Management indicated that it expects 350K+ paying users of its instant messenger service,

PoPo, starting 2/04. If the company is successfully able to convert its current free users into fee-paying customers, the company could materially improve revenue growth.

2. Government Regulations — In CQ3:03, the company’s SMS revenue fell 21% Q/Q due to government restrictions on aggressive content. Though the company saw some recovery in CQ4:03 (up 13% Y/Y, up 8% Q/Q), government intervention in regulating Internet content remains an important issue.

3. Broadband Ramp — Following our investment themes, easier and faster Internet access should drive incremental spending and usage, particularly in online gaming.



Sohu.com (SOHU) Portal www.sohu.com China

Company Description SOHU is a leading Chinese Internet portal. Its portal consists of Chinese-language Web navigation and search capabilities (including China’s first search engine — the “Search Fox”), content channels, Web-based communications, alumni club and community services, and a platform for eCommerce, subscription and wireless value-added services. In CQ4:03, Sohu booked $25MM in revenue. The company derives revenue from Internet advertising (39% of CQ4:03 revenue, up 120% Y/Y, up 8% Q/Q), E-subscriptions, i.e. mainly wireless messaging services (58% of CQ4:03 revenue, up 196% Y/Y, up 12% Q/Q), and eCommerce (3% of CQ4:03 revenue, down 20% Y/Y, up 35% Q/Q). Online game revenue is included in E-subscriptions and was less than 2% of total revenues. Business Strengths 1. Diversified Revenue Stream — In CQ4:03, 39% of revenue came from advertising (down from 40% in CQ3:03), with the remaining 61%

from consumer business lines; wireless messaging, ecommerce and online games. 2. Consistent Execution — 14 straight quarters of double-digit revenue growth. In CQ4:03, SOHU posted an 11% Q/Q (133% Y/Y)

improvement in revenue, from $22MM to $25MM. 3. Operating Leverage — As an online business, Sohu is highly scalable; this allows the company to generate high gross (72%) and

operating (45%) margins. 4. Paid/Search Listing Performance —47K+ companies, as of 9/03, subscribe for paid-search and listing in Sohu, through its Search Fox

front-end. Continued momentum in SFO is a positive, in our view. 5. Exclusive Content Partners — For example, with NBA Houston Rockets star Yao Ming as spokesman, the company could continue to be

a strong draw for young audiences. Further, joint marketing efforts with Disney, AC Milan, and the NBA speak to the company’s commitment to expanding its brand awareness.

6. Favorable Mobile Phone Dynamics — China has more mobile phone users (269MM, up 25% Y/Y in 2003) than any country in the world, and will likely have more PC and Internet users in ten years. The market opportunity for wireless value-added services is large, and, so far, SOHU has benefited from the market growth.

7. Community Monetization — Through its $31MM acquisition in 9/00 of ChinaRen.com, Sohu added a complementary user base of urban youth and sticky services, including its alumni club offering, a community-based site which helps the company cross-sell its offerings.

Business Challenges 1. Mobile Carrier Dependence — In CQ4:03, $14MM (or 58%) of revenue was from e-subscriptions — most of which are mobile SMS. If

China Unicom and China Mobile alter their pricing agreements with the company, then SOHU’s revenue may be adversely affected. Currently Sohu expects 67-69% gross margins on its upcoming MMS business— mobile operators may see these margins as room to increase their side of the revenue-sharing agreement.

2. Management Change — .Sohu appointed a new CFO, Carol Yu, to replace Derek Palaschuk effective 3/8/04. 3. Competitive Differentiation — As one of China’s three largest portals (along with Sina and NetEase), Sohu must continue to distinguish

itself as a valuable Web property. It has been doing so, in part, by means of diversifying moves into online gaming (via 17173.com) and online real estate (through focus.cn).

Focus Areas 1. 2.5G Product Launches — Performance of WAP and MMS services may materially affect e-subscription revenues. 2. Continuing Brand Momentum — More/deeper relationships with traditional and non-traditional media companies could translate into

incremental market-share gains. 3. 17173.com/Focus.cn Acquisition Integration — The CQ4:03 acquisitions of gaming Web site 17173.com for $21MM and real-estate

Web site Focus.cn for $16MM, may also open up a potential growth channel for online advertising revenues, given that the sites have been traditionally strong draws for advertisers, according to company reports as of 4/04.



chinadotcom (CHINA) Enterprise Software www.corp.china.com China

Key Markets Addressed Enterprise Software/Outsourcing Management Team Chairman: Raymond Ch'ien Vice Chairman, CEO: Peter Yip CFO: Daniel Widdicombe Key Investors Asia Pacific Online Limited Jayhawk Capital Management Jayhawk China Fund Cayman Capital International, Inc. Founded 1995

Business Description chinadotcom provides software services and outsourcing, technology, marketing and media services and content for companies and end users throughout China and the Asia-Pacific region, the United States and the United Kingdom. Products and Services The company’s technology services include the development of enterprise resource planning software for mid-market manufacturers. chinadotcom’s outsourcing services offer program development services to the company’s customers using programmers based in India and China. chinadotcom’s marketing services consist of targeted advertising campaigns involving the company’s proprietary customer databases. The company’s mobile application services consist of Web-based SMS services to consumers in China. Financial Snapshot CQ4:03 results reflect the business model transition that chinadotcom is undergoing. chinadotcom generated revenue of $29MM, up 86% Y/Y and 20% Q/Q. Operating income came in at $500K, up from an operating loss of $3.5MM Y/Y. chinadotcom ended 2003 with $56MM in cash on the books, up from $33MM at YE 2002. Software and licensing revenues of $19MM represented 66% of total revenue and grew 196% Y/Y, 44% Q/Q. Advertising revenues of $4MM declined 55% Y/Y and 23% Q/Q, reflecting the exit of its network advertising business in Korea. Mobile application revenues of $6MM declined 1% Q/Q. In CQ4:03, while chinadotcom grew paid subscribers to 5.5MM from 5.1MM in CQ3, ARPU decreased to $1.06 from $1.17 in CQ3 (vs. $1.15 in CQ2). Recent News On December 1, 2003, chinadotcom announced that it had entered into a definitive agreement to acquire Pivotal by way of either an all-cash or a cash-and-stock transaction. Pivotal provides CRM software and implementation services for mid-sized enterprises, and has 1,600+ clients. The deal was closed in 2/04 and will be included in financial results beginning 3/04, according to company reports. Under the terms of the agreement, Pivotal shareholders may elect to receive, for each Pivotal share, either: $2.00 in cash; or $2.14 comprised of $1.00 cash plus $1.14 of common shares of chinadotcom. The company is also in the process of acquiring Ross, an Atlanta-based enterprise software company focused on the food and beverage, life sciences, chemicals, metals and natural products industries, with 1,000+ customers. According to company reports as of 4/04, chinadotcom plans to close the deal by the end of 1H:04.



Tom Online (TOMO) Wireless Internet www.tom.com China

Key Markets Addressed Wireless Internet, Internet Advertising Management Team CEO: Wang Lei Lei CFO: Peter Schloss COO: Xu Zhiming Key Investors Tom.com Founded 2001

Business Description

Tom Online is an Internet portal based in China. The company was recently spun off from its parent, Tom.com in its IPO.

Products and Services

The company provides wireless value-added services, online advertising, commercial enterprise solutions, and Internet access cards.

Wireless value-added services consist of SMS, MMS, WAP, and IVR products — delivered through Tom Online’s portal to mobile users. Tom Online provides wireless data services in China through China Mobile’s Monternet platform and China Unicom’s UNI-info platform.

Financial Snapshot

In C2003, Tom Online booked $77MM in revenue, up 156% Y/Y, and had $23MM in Cash and Equivalents, up 235% Y/Y. For C2003, Tom Online derived 73% of revenue from wireless value-added services, 8% of revenue from Internet advertising, and 18% of revenue from commercial enterprise solutions. Internet access cards constituted the remaining 2%.

As a whole in C2003, wireless services represented $54MM in revenue, up 435% Y/Y, with a 51% gross margin. In CQ4:03, the company had 9MM SMS subscriptions, and 73MM SMS downloads. SMS accounted for 91% of wireless value-added services revenue in C2003. (Please see page 30 for revenue share and tariff information).

Internet advertising represented $6MM in revenue, up 38% Y/Y, with a gross margin of 26% in C2003. The company recorded 148MM daily page views during CQ4:03.

Commercial enterprise solutions consists of services for Internet-related computer hardware and software needs of Tom Online’s clients, and represented $14MM in revenue, up 23% Y/Y, with a 15% gross margin in C2003.

Recent News

The company’s IPO was on 3/10/04.



Ctrip (CTRP) Online Travel www.ctrip.com China

Key Markets Addressed Online Travel Management Team CEO and Chairman: James Liang

Previously head of Oracle ERP Consulting in China.

President & CFO: Neil Shen Previously Director at Deutsche Bank Hong Kong.

EVP: Min Fan Previously CEO of Shanghai Travel Service Company

Key Investors Carlyle Asia Venture Partners I IDG Technology Venture Investment Tiger Technology Private Investment Partners S.I. Technology Venture Capital Founded 1999

Business Description Ctrip is a China-based online travel company that enables travelers to book hotels, airline tickets and packaged tours.


Ctrip provides hotel reservations, air-ticket booking and packaged-tour reservations for business and leisure travelers in China through its Web site.

Ctrip’s operating model differs from its Western counterparts such as Travelocity and Expedia in that it also does substantial marketing and customer service offline. The company distributes free booking cards in airports and operates an 800+ person-strong call center, through which 70% of its business is transacted, according to company reports. Ctrip employs 1,600 people in China, leveraging China’s low labor cost.

Financial Snapshot

In CQ4:03, Ctrip booked 882K hotel room nights, up 18% Q/Q, and 243K airline tickets, up 33% Q/Q. Revenue was $8MM, up 116% Y/Y and 22% Q/Q.

For 2003, Ctrip derived 84% of revenue from hotel reservations, 11% from air ticketing and 1% from packaged tours. The company plans to grow its packaged tour business in 2004, according to company filings. In CQ4:03, packaged tour revenue grew 91% Q/Q. Air ticketing revenue grew 27% Q/Q, and hotel bookings grew 19% Q/Q.

As of 3/04, Ctrip had 2,400+ hotels in its network, and derived 95% of its hotel revenue from 3, 4, and 5-star hotels, according to company filings.

Recent News

According to company reports as of 4/04, management expects C2004 revenue composition to be approximately 80% from hotel reservations, about 15% from air ticketing, and the remaining 3% from packaged tours.



Linktone (LTON) Wireless Internet www.linktone.com China

Key Markets Addressed Wireless Value-Added Services Management Team CEO: Raymond Lei Yang COO: Michael Guangxin Li CFO: Mark Begert CTO: Xin Ye Key Investors Acer Technology Ventures Cresciendo Investment (Temasek Holdings) Mitsubishi Corporation Index Corporation Founded 1999

Business Description Linktone is an entertainment-oriented wireless value-added service provider in China. The company provides ringtones, icons and screen savers, animated cartoon strips, horoscopes and jokes to China's mobile phone users.


Linktone offers 5K+ ringtones, 10K+ icons and screen savers and 8K+ MMS and WAP images to its users. The company has content partner relationships with Sony Music, STAR TV (Newscorp), Index (a Japanese game developer), Turner Broadcasting/Cartoon Network and maintains a 65-member in-house product development team. Linktone was one of the original 12 provider partners that worked closely with China Mobile in launching its Monternet platform in November, 2000. By the end of 2003, Linktone had 87 sales personnel on the ground working in 24 provinces with local branches of China Mobile and Unicom. Due to close collaboration with China Mobile, Linktone was selected as one of the six value added providers featured in Monternet's M-zone.

Linktone plans to continue leveraging its competitive strength in product breadth, carrier relationship and sales/marketing coverage. It also plans to reach higher ARPU by migrating to 2.5G services, penetrating less developed markets and acquiring market share in wireless value add or related markets.

Financial Snapshot

As of December 2003, the company had an active user base of 5.6 million, up from 3.2 million at the end of June, according to the company’s IPO prospectus. For 2003, Linktone had gross revenue of $17MM, up 285% Y/Y, and an operating profit of $4MM.

Linktone derives revenue from revenue-sharing agreements with mobile operators for content downloaded from its site. In its prospectus, Linktone revealed it took 85-88% of the gross revenue, with the remainder paid to the operator as service fee, less a network fee per message. In 2003, Linktone had a gross margin of 62%.

Recent News Linktone’s IPO was on 3/4/04. Linktone signed partnerships with Chinese handset manufacturers Bird and EastCom to embed direct links to Linktone services in the vendors’ handsets, according to company reports as of 3/04.



Huicong/Zhongsou (8292.HK) Search Engine www.huicong.com China

Key Markets Addressed Paid Search Management Team Founded 1992

Business Description Huicong/Zhongsou operates an industry database (www. hc360.com) encompassing 42 industry verticals and publishes both online and offline. In addition, Huicong/Zhongsou offers its own search engine under its Zhongsou subsidiary.


Huicong/Zhongsou’s industry database includes news clips, B2B exchange, industry research and business education. Database information is published annually into an industry directory called “Chinese Industry Information Encyclopedia.”

Huicong/Zhongsou offers its unique search engine which emphasizes on search speed through Zhongsou. As of 2/04, Huicong/Zhongsou covers 200MM+ Chinese-language Web pages and has incorporated topic categorization, content analysis and China-region recognition into its engine, according to the company. Huicong/Zhongsou is a member of the China Search Alliance, a consortium of 200+ Chinese portals. The Alliance, supported by the government-backed China Information Center, was formed to consolidate Chinese search market

Financial Snapshot

Huicong reported C2003 revenue of $38.9 million, up 16% from C2002. Net income was $4 million.



21CN (Privately Held) Portal www.21CN.com China

Key Markets Addressed Broadband Entertainment/eCommerce Management Team CEO: De Lu Deputy CFO: Jill Jiang Key Investors Guangdong Telecom (Owner) Founded: 1999

Business Description 21CN is an Internet portal based in China, with five categories of services — Entertainment, News, Fashion and Life Style, eCommerce and community (BBS and email).


21CN’s flagship Entertainment Central features global entertainment news, MP3 download, Internet radio and video-on-demand (VOD). 21CN’s VOD service uses China Telecom’s NetGalaxy (Hulian-Xinkong) broadband platform. Users pay $3.62-$6.04 per month for unlimited viewing of 21CN’s repertoire of global movies. As of 4/04, 21CN has opened VOD service in 24 provinces in China. The company also boasts the largest MP3 music download site in Asia and charges ~$3.62 per month.

According to company reports as of 4/04, 21CN has 40MM+ registered users, 85MM+ daily pageviews, and 24MM+ email users (free and paid users).

Financial Snapshot

According to company reports, 21CN has been profitable since CQ4:02 and has been generating about $1MM profit per quarter ever since. The company has 300+ employees, according to company reports as of 4/04.



3721 (Yahoo!) Search Engine www.3721.com China

Key Markets Addressed Chinese Language/Keyword Search Management Team CEO: Zhou Hongyi COO: Karen Q. Liu Key Investors Yahoo! Holdings (Hong Kong) Ltd Founded 1998

Business Description Inter China Network Software Co. Ltd. (a.k.a. 3721), provides Chinese-language Keyword services.


3721’s Chinese Keyword service (CKW) enables Internet users to navigate the Web and search for relevant online information using offline names and familiar identities in the Chinese language. A Chinese-speaker can type the characters for “bike” in the search engine and return relevant Chinese results and Web sites. CKW service also enables businesses to extend their offline brand identities directly online by making it easy for their customers to find them on the Web using familiar names, rather than difficult-to-remember English domain names.

As of 2/04, CKW was serving over 50MM+ keyword resolutions/day and was reaching over 90% of Chinese Internet users through the company’s use of the Microsoft Internet Explorer, which allows Chinese-language queries to be entered right into the browser’s address bar.

Financial Snapshot

As of 2/04, 450K+ Chinese companies had registered for the Chinese Keyword Service. 3721 charges an annual subscription fee from businesses for supporting the linking service between their offline name and their online URL. To register only a company’s name, apart from trademarks or industry names, a company would pay RMB500/year to 3721.

Recent News

On 11/22/2003, Yahoo! Holdings (Hong Kong) Limited agreed to pay up to approximately $120MM in cash over two years, subject to certain conditions, under the terms of its partnership with 3721.



51job (Privately Held) Recruitment www.51job.com China

Key Markets Addressed Recruitment Management Team CEO: Rick Yan

Previously head of China Practice for Bain & Co. Key Investors Doll Capital Management Founded 1998

Business Description 51job is a human-resource solution provider in China. The company offers several services in the areas of Recruitment Solutions, Training and Assessment, and HR Tools and Outsourcing.


51job operates www.51job.com, an online recruitment Web site in China. Per press reports as of 12/03, the Web site has 5MM+ registered job seekers, generates 7MM+ average daily page views, and sends through 1MM+ resumes to corporate recruiters each week.

According to company reports as of 4/04, 51job has print recruitment advertising in addition to online advertising.

Per company reports as of 12/03, 51job serves 170K+ clients through 18 offices in Hong Kong and Mainland China, including the cities of Beijing, Shanghai, Guangzhou, Shenzhen, Wuhan, Xian, Hangzhou, Chengdu, Kunming, Nanjing, Jinan, Dalian, Shenyang, Qingdao, Chongqing, Harbin and Changsha.



Alibaba (Privately Held) Online Trading www.alibaba.com China

Key Markets Addressed Procurement/Sourcing Management Team CEO and Chairman: Jack Ma

Previously headed the information department of China International Electronic Commerce Center

Chief People Officer: Savio Kwan Previously Managing Director for China operations of BTR, plc.

CTO: John Wu Previously Chief Architect of Yahoo!’s directory search engine

CFO: Joe Tsai Previously VP of Investor AB, directing Asian VC investments

Key Investors SOFTBANK Goldman Sachs Japan Asia Investment Company Transpac Capital Fidelity Capital Venture TDF Investor AB of Sweden Granite Global Ventures Founded 1999 See page 52 for screenshot and listings information.

Business Description Alibaba is a business-to-business oriented marketplace for global trade and is a provider of online marketing services for importers and exporters, largely SMEs. Products and Services Alibaba operates three inter-linked Web sites: Alibaba International, for English-language sourcing from China; Alibaba China, for Intra-China Sourcing; and Alibaba Japan, for Sino-Japan sourcing. Alibaba's Web sites allow users to browse company information and trade leads by 27 industry categories and 900 product sub-categories, ranging from textiles to electronics. Members can post trade leads of buy and sell offers in each category, but only suppliers are charged for listing. Financial Snapshot Alibaba’s Web properties have 3MM registered members and 390K+ professional buyers, according to company reports as of 3/04. According to management as of 4/04, 90% of China’s SMEs that use the Internet to trade rely on Alibaba, as of 2/04. Alibaba estimates that there are 10MM+ SMEs in China, according to company reports as of 3/04. Also, 120+ of the Fortune 500 are Alibaba clients, according to press reports dated 1/04. An estimated $3B worth of transactions originates on Alibaba’s Web site each year according to company reports as of 2/04. According to press reports as of 2/04, management expected $12MM in free cash flow in C2003. According to press reports as of 2/04, C2003 revenue increased 234% Y/Y to a level three times C2002. Alibaba has 1,300 employees, according to company reports as of 3/04. The company also started Taobao (profiled on page 95) with a $12MM investment in 7/03. Recent News According to company reports as of 4/04, the company had 270K+ users of Alitalk, its instant messaging service. According to press reports as of 2/04, Alibaba was in talks with Tencent regarding possible cooperation in enterprise instant messaging. According to company reports as of 4/04, Alibaba has launched a site search engine, which gives more weight to more trustworthy leads (where trustworthiness is determined by Alibaba’s Trust Rating for a given supplier). In 2/04, Alibaba closed an $82MM round of financing. The round was also led by Softbank, with Fidelity Investments, and Venture TDF Technology Group returning as investors. Granite Global Ventures joined the round as a new investor.



Baidu (Privately Held) Search Engine www.baidu.com China

Key Markets Addressed Chinese-language Internet Search Management Team CEO: Robin Li Chief Strategy Officer: Eric Xu Founded 1999

Business Description Baidu provides search engine services and pay-per-click ad placement through its Web site, baidu.com.


Baidu offers Web page, news, mp3, image and local search through its Web site.

Using software that can deliver Chinese-language content over low-bandwidth networks, Baidu can differentiate between two- and three-character Chinese names. According to company reports as of 4/04, the company plans to offer wireless search related products and services.

Financial Snapshot

Baidu processes an average of 30MM text searches a day in Chinese, most of which are Baidu-branded, according to management as of 4/04. According to management, 80% of revenue in 2003 was derived from sponsored search, 10% was derived from licensing search technology to enterprises, and 10% was derived from licensing search technology to portals. The company expected to turn a profit in C2003.

Baidu indexes 300MM+ Chinese Web pages, and increases this index by several hundred thousand a day, per company reports as of 4/04.

Recent News

In 2H:03, Baidu accused its competitor, 3721.com of inhibiting users of the 3721 service from also accessing Baidu's online search suite. Baidu's initial request for RMB1MM ($121,000) in compensation and public apology was rejected by the Chinese court, but it was granted RMB5000 ($620) on 12/24/2003.



BabyCare (Privately Held) Parenting www.yaolan.com China

Key Markets Addressed Parenting/Nutritional Products/Educational Toys Management Team CEO: Matt Estes CFO: Carelton Ruthling, Ph. D. VP Ops: LiJi Yang VP Sales: Samantha Kong Key Investors Templeton Private Equity Fund Bank of America Chengwei Ventures Orchid Asia Holdings Pacific Group Founded 1999

Business Description BabyCare provides nutritional products, educational toys and training services to China’s parenting and baby care market.


BabyCare provides pregnancy and child-rearing services and products to Chinese parents. The products are sold through direct marketing at BabyCare service centers, in addition to the company’s online channel, at yaolan.com. Yaolan.com has 700K+ registered members, according to company reports as of 4/04.

BabyCare is located in 11 cities in China and has 6K+ sales people in a direct marketing sales organization. The company plans to expand to 18 cities by YE2004, and 90 cities by 2008, according to management reports as of 4/04.

Financial Snapshot

BabyCare earned $9MM in revenue (+70% Y/Y) in C2003. Management expects the 70% Y/Y revenue growth in C2004, according to company reports as of 12/03.

Recent News

The company announced a partnership in 9/03 to sell educational toys from US-based Discovery Toys through BabyCare. Management expects that sales of Discovery Toys may constitute 10% of revenue by YE2004, according to company reports as of 4/04.



ChinaLOOP (Privately Held) Internet Marketing www.chinaloop.com China

Key Markets Addressed Internet Marketing Management Team CEO: Gabrielle Chou Founded 1999

Business Description ChinaLOOP is a data-marketing group that provides products and services to support direct marketing and CRM in China.


ChinaLOOP operates a 7MM member opt-in consumer database, which includes information about the purchasing patterns of the members. The company rents this database as one of its services. ChinaLOOP also offers data management services for clients’ customer and marketing prospect data files.

The company also creates direct-marketing solutions for clients wishing to target the Chinese consumer.

Recent News At the end of 2002, Consodata decided to exercise its put option and sell its majority stake held in ChinaLOOP Holdings, according to company filings.



Dangdang (Privately Held) Online Commerce www.dangdang.com China

Key Markets Addressed Internet Retail Management Team Co-CEO: Peggy Yu Co-CEO: Guoqing Li Key Investors Tiger Technology Fund Softbank Founded 1999

Business Description Dangdang is a leading Internet retail company based in China.


The company sells books, CDs, and DVDs over the Internet in China. Unlike traditional ecommerce retailers in the US, the company has adapted to local logistics by employing a bicycle shipping fleet to navigate dense cities, and by allowing Cash On Delivery (COD) and money orders for payment.

Recent News

Tiger Technology Fund acquired 15% of Dangdang stock for $8MM in 12/03.

In 3/04, the company launched an eCommerce department, expanding from books into general merchandise, according to press reports from the same month.



eBay EachNet Online Trading www.eachnet.com China

Key Markets Addressed Chinese Consumer and Business Internet Trading Management Team CEO: Bo Shao Key Investors eBay Founded 1999 See page 52 for screenshot and listing information.

Business Description eBay EachNet provides an online marketplace for trading of goods and services for both individual and business customers in China.

Products and Services Like eBay, eBay EachNet offers a platform for trading consumer goods, such as cell phones, computers, cosmetics, jewelry, clothing and collectibles. eBay EachNet has worked with Chinese portal partners in the past and operated a co-branded trading Web site with NetEase from 2000 to 2002. It had a co-branded trading agreement with Sina which ended in CQ1:04. As of 4/04, eBay EachNet operates a trading site in conjunction with Tom Online. To improve trustworthiness amongst traders, eBay EachNet requires its sellers to submit PRC identity cards for verification. Financial Snapshot

As of CQ4:03, eBay EachNet had 4MM+ (up 231% Y/Y) confirmed registered users who trade on its Web site. eBay EachNet has been adding 1MM+ users/month, per company reports as of 4/04.

The company has 120K+ online stores on its Web site, per press reports as of 3/04. According to an iResearch survey, eBay EachNet had 52% reach in 12/03. Reach is defined as the percentage of Internet users who visit a given site in a month.

Recent News

During CQ3:03, eBay completed the acquisition of the remaining outstanding capital stock and options of EachNet. The total purchase price was $145MM, comprised of approximately $143MM in cash and $2MM in acquisition-related expenses. Under the terms of the transaction, $105MM of the cash amount was paid at closing, and the remaining $38MM is to be paid on 3/31/04. Prior to CQ3:03, eBay owned approximately 34% of the outstanding common stock of EachNet.



eLong (Privately Held) Online Travel www.eLong.com China

Key Markets Addressed Internet Travel Management Team Chairman: Tang Yue Key Investors Tiger Technology Fund Blue Ridge Capital Founded 1999

Business Description eLong is an online lifestyle portal based in China. The company has more than 1,000 employees and operates three business divisions: online travel, media services and entertainment services. In addition to its leading online travel business, eLong also owns a leading online community (Xici) and a social network site.

According to eLong’s Web site, entertainment services is most like Sidewalk.com in the US.


In its travel business eLong offers reservation services covering hotels in 200+ cities and 2,000+ hotels in China, as well as flight booking service in 40+ cities in China. Monthly hotel room bookings exceed 150K.

Holders of the eLong Mileage Card can enjoy discounts at more than 4,000 restaurant, entertainment and shopping outfits.

Recent News

The Tiger Technology Fund and Blue Ridge Capital jointly invested $15MM in eLong in late 2003, according to company reports.



joyo.com (Privately Held) eCommerce (Retail) www.joyo.com China

Key Markets Addressed Retail eCommerce Management Team Chairman: Lei, Jun President: Lin, Shuixing Executive VP: Chen, Nian Biz Dev, VP: Chen, Xiaohong Key Investors Kingsoft - 50% Legend - 20% Tiger Technology Fund - 20% Founded 2000

Business Description joyo.com is a retail eCommerce Web site in China, specializing in books, audio, video and other related media.


joyo.com has a similar business model to Amazon.com with an initial focus of becoming the primary eCommerce discount retailer for books and media-related products with a strong focus on logistics / distribution.

According to press reports, joyo.com had 3.65MM registered users as of November 2003, one-third of whom are active. Online transactions/day reached 12K in 2003. joyo.com is considered to have an impressive distribution system, providing delivery in two provinces and six cities.

Recent News In 3/04, joyo.com announced a reorganization plan. In 10/03, joyo.com received approximately $6MM from Tiger Technology Fund.



KongZhong.com (Privately Held) MMS / SMS / Online Gaming www.kongzhong.com China

Key Markets Addressed MMS and Mobile Phone Game Service Provider Management Team CEO: Zhou Yunfan Founded 2002

Business Description KongZhong.com is a Web site specializing in providing services to mobile phones, such as MMS and games.


On KongZhong.com’s SMS service, messages up to 70 Chinese characters can be sent to phones, including news, weather, jokes, ringtones and games. For MMS, messages including pictures up to 30K can be sent. With WAP service, users can access an Internet-like site through their mobile phone for news, games and other features. KongZhong.com also provides Java box service, which is downloadable software for stock trading, chatting and other interactive applications.

KongZhong.com also provides the #1 mobile phone game for 2003, “Bai Bao Xiang.” KongZhong.com was China Mobile’s #1 MMS, Mobile Game and WAP service provider in 2003.

Financial Snapshot

KongZhong.com charges $0.12–0.24/message, of which 15% goes to China Mobile.



The9 (Privately Held) Online Gaming www.the9.com China

Key Markets Addressed Online Gaming Management Team Chairman: Zhu Jun Founder: Qin Jie Key Investors Morningside (~ 30% as of 2/04) Founded 1999

Business Description The9 is a Shanghai-based Internet gaming portal that operates MU, a game developed by Webzen.


The9’s MU was the #2 game in China, according to gamer surveys conducted in 2/04 by ePlay online, an online game magazine in China. As of 1/04, MU had 300K+ peak concurrent users in mainland China. In addition to its game, The9 also operates an acclaimed gamer community.

Financial Snapshot

According to press reports dated 11/03, the company has: 25MM+ total subscribers and 400+ employees. The company expected $30MM of revenue for C2003. The9 has committed 30–40 people to develop games in-house, according to management.

Recent News

In 2/04, an official of the company announced the9 is the official operator of MMORPG - The World of Warcraft in China.



PRCEDU (Privately Held) Online Education www.prcedu.com China

Key Markets Addressed Online Education Management Team Chairman: Charles Xue Founder of UTStarcom CEO: Julia Huang CTO: Shawn Ding Founded 2000

Company Description PRCEDU provides online education solutions to educational institutions, enterprises and consumers.


The company’s solutions include courseware development tools and services, promotion and enrollment services, virtual campus design and development, network communications platforms and a nationwide learning management system (LMS). For educational institutions, the company provides the platform, while the university provides the content. For non-educational institutions, PRCEDU provides the platform and content.

PRCEDU has a library of 100+ independently developed courses, and partnerships with 10+ colleges and universities. The company offers 4 degree programs, 9 professional programs, as well as non-degree certificate programs.

The company also cooperates with Intel to experimentally provide network education for educational institutions or enterprises. PRCEDU’s educational partners include several major Chinese universities: China People’s University, Southern Yangtze University, and the East China University of Science & Technology.



Shanda Networking (Privately Held) Online Gaming www.shanda.com.cn China

Key Markets Addressed Entertainment, Video Games Management Team Chairman, CEO and Co-Founder: Tianqiao Chen Director, SVP and Co-Founder: Danian Chen Director and Co-Founder: Qianqian Lao President: Jun Tang SVP: Haibin Qu VP and CFO: Shujun Li VP and CTO: Qunzhao Tan Key Investors Skyline Media Limited (Tianqiao Chen, Danian Chen and Qianqian Luo) Softbank Asia Infrastructure Fund Founded 1999

Business Description Shanda Networking is a Chinese online game operator. According to IDC estimates, Shanda Networking had the #1 market share (31%) in the Chinese online gaming market (versus #2 Waei International Digital Entertainment at 17%) for C2002.


Shanda Networking's leading program is the South Korean multi-player fantasy game Legend of Mir II, launched in November 2001. In October 2003, the company introduced World of Legend, its first in-house developed title. The company plans to launch four MMORPGs and two casual games in C2004. Titles for C2003 include Legend of Mir II, World of Legend, BNB, Tactical Commanders and Fortress II. In CQ1:04, the company released its second in-house developed title The Sign.

As of December 2003, Shanda Networking had 236MM non-unique registered users on its online game platform for all released games. For C2003, peak concurrent users reached 1.2MM, and average concurrent users reached 683K. In CQ1:04, peak concurrent users reached 1.4MM, and average concurrent users reached 932K.

As of March 31, 2004, the company had 931 full-time employees, 183 of whom are in Game Development and 93 of whom are in Product Management.

Financial Snapshot

In C2003, the company generated $72MM in revenue, up 84% Y/Y. Net income increased 66% Y/Y to $28MM. The company has $72MM in cash and equivalents on its balance sheet. Legend of Mir II accounted for almost all revenue in the first nine months of C2003 and 69% of revenue in CQ4:03; World of Legend accounted for 26% in CQ4:03.

Recent News

In 4/04, the company filed its F1 for potential ADR listing on the NASDAQ.

In 2/04, the company hired Tang Jun, former head of Microsoft China, to become active president, replacing Chen Tianqiao (who will continue to serve as Chairman and CEO).



SouFun (Privately Held) Online Real Estate www.soufun.com China

Key Markets Addressed Real estate information, community and assisted-transaction Management Team CEO: Vincent Mo Key Investors IDG Goldman Sachs Founded 1999

Business Description SouFun is a real estate portal based in China.


Through the company’s Web site, SouFun.com, would-be renters can search rental listings, and brokers and real estate agents can post available openings. The majority of Chinese developments are urban condominiums, thus giving SouFun a strong B2C flavor. SouFun has started to engage in assisted transactions such as online mortgage, insurance and viewing referrals. For secondhand homes, SouFun provides an auction service. As of May 2003, SouFun claims to have 7MM registered users and have 27MM daily page views.

Recent News

SouFun entered into an agreement with Yahoo! Hong Kong to open a housing property channel on the Yahoo! Hong Kong Web site in 3/04.

SouFun had previously operated a cobranded real-estate channel with Sohu in 2000.



Taobao (Privately Held) Online Trading www.taobao.com China

Key Markets Addressed Personal and Small Business Trading Management Team Chairman & CEO: Jack Ma COO: Sun Tong Yu Key Investors Alibaba Founded 2003 See page 52 for screenshot and listings information.

Business Description Taobao is an Internet trading site catering to the Chinese domestic consumer.


Taobao.com built an online trading platform, based on the Alibaba site, to cater to consumer and SME (small and medium sized business) trading. Taobao offers both variable- and fixed-price listings, as well as feedback ratings for its sellers.

Taobao has 500K+ registered users and 12MM+ page views/day, according to press reports as of 3/04.

Financial Snapshot

Alibaba started Taobao with a $12MM investment in July 2003. The investment should be enough to fund Taobao’s operations for three years, according to press reports.

The company competes against eBay EachNet. However, it currently charges no commission or trading fees per transaction unlike eBay EachNet. Our initial digs through Taobao’s site found 987K listings (+18% M/M over our 2/17/04 listings dig), as of 3/17/04.



Tencent (Privately Held) Instant Messaging www.tencent.com China

Key Markets Addressed Personal and Enterprise Instant Messaging, Online Gaming Management Team CEO: Pony Ma CTO: Tony Zhang CIO: Daniel Xu COO: Jason Zeng CFO: Patrick Tsang CAO: Charles Chen Key Investors Naspers, Ltd. (Parent and 50% Owner) Founded 1998

Business Description Tencent develops instant messaging services for the consumer, mobile and enterprise markets in China.


Tencent has four categories of services: real-time communication services, online entertainment services, QQ merchandising, and QQ portal services.

Real-time communication services consist of basic instant messaging (IM), mobile IM, QQ membership/premium IM, and RTX — Tencent’s enterprise IM solution. Online entertainment services consist of Massively-Multiplayer Online Games (MMOG), the QQ game portal, QQ Show (“Avatars”), and dating services. QQ merchandising consists of products sold through QQ’s network of 150 “Q-Gen” store affiliates. QQ portal services include www.tencent.com and www.qq.com to support the above mentioned services.

Tencent’s main product is "QQ", part of the “real-time communication services” category and China’s most popular instant messaging service, with 22+MM registered subscriptions. QQ provides an Internet-based service where users can communicate between PCs and mobile phones via IM for RMB5/month. Tencent also recently launched an Enterprise IM solution.

Financial Snapshot

As of 9/30/03, Tencent had 66MM+ active unique User ID Numbers (UINs), an average of 760MM+ messages sent/day, and 3.9MM peak simultaneous users.

As of 9/03, Tencent employed 550 people, of which 50% are software developers and engineers.



Company Overviews — Taiwan/Singapore



Exhibit 69

Taiwan/Singapore — Representative Internet Companies Company • Location • Focus • Public/Private (owner) • Market Capitalization

Highlights

Chinese Gamer • Taiwan • Gaming • Public (3083.TWO) • $167MM

• Revenue of $2MM in 12/03 month (+48% Y/Y), $22MM for C2003 (+9% Y/Y) • 3/10 top games in Taiwan, with an average of 53K+ concurrent users • 300+ servers over Taiwan, HK, Singapore, Malaysia, US, Thailand

Gamania • Taiwan • Gaming • Public (6180.TWO) • $123MM

• Revenue of $15MM (-26% Y/Y), operating income of $2MM (-72% Y/Y) in CQ3:03 • Estimated 1.8% share of Chinese Gaming Market • 51% Stake in Taiwanese Version of Lineage II with NCsoft

Waei • Taiwan • Gaming • Public (3086.TWO) • $43MM

• Revenue of $1MM in 12/03 month (-20% Y/Y), $18MM for C2003, (+9% Y/Y) • Flagship game StoneAge ranks in Top 5 in China, Taiwan and HK • Shutting down Singaporean online gaming subscriptions in 2/2004

ZUJI • Singapore • Travel • Private (owned by Sabre

Holdings) • –

• 33K+ hotels and 300+ airlines across Asia-Pacific • Acquired Nextour, Korean online travel site, in 3/04 to improve Korean presence • Partnered with Yahoo! Taiwan to offer online travel




Stock Performance of Internet-related Companies — Taiwan/Singapore Exhibit 70

Gamania (6180.TWO) Daily Stock Performance

6/02 9/02 12/02 3/03 6/03 9/03 12/03 3/04

20

30

40

50

60

708090100

10

2



Waei (3086.TWO) Daily Stock Performance

3/29 3/30 3/31 4/1 4/2 4/5 4/6 4/7 4/8 4/9

33

34

35

36

37

38

39

40

41

42

3669

924



Exhibit 72

Chinese Gamer (3083.TWO) Daily Stock Performance

Dec Jan Feb Mar

90

95

100

105

110

115

120

1876

481





Chinese Gamer (3083.TWO) Online Gaming www.chinesegamer.net Taiwan

Key Markets Addressed Online Gaming Management Team Chairman: Chin-Po Wang CEO: Chia-Ping Chen CTO: Shyue-Sen Leu CFO: Yu-Min Liu CIO: Chung-Chou Wu Founded 2000

Business Description Chinese Gamer is a Taiwan-based gaming company with services in Taiwan, Hong Kong, China and Japan.


Chinese Gamer currently supports the following games:

• Sango Online — MMORPG based on classical Chinese novel, “The Romance of the Three Kingdoms”

• Jing Yong Online — Based on 14 serial novels by Jing Yong

• Three Kingdoms Online — Based on the same story as Sango Online, this is a group RPG

• TS Online — Also based on “The Romance of the Three Kingdoms,” this game is an online version of a 90’s offline game and is published for a younger demographic and those fans of “cute”-style RPGs

• Dragon’s Tales Online — First 3-D online game for Chinese Gamer, based on Chinese classical novels and martial arts stories

• Love Box Online — Game designed for female gamers where players can dress up their characters, decorate rooms and chat with friends

Financial Snapshot

Chinese Gamer has not reported complete consolidated C2003 financials. Revenue for C2003 was $21MM.

For CH1:03, Chinese Gamer reported revenue of $11MM, operating income of $6MM (54% operating margin) and $9MM in net income. The company had $25MM in cash and short-term investments on its balance sheet.

Recent News

In 12/03, Chinese Gamer was recognized as the top company in the Deloitte Touche Tohmatsu Asia Pacific Technology Fast 500 program, a survey of “fast-growing” technology companies.

In 12/03, Chinese Gamer went public at $3/share.



Gamania (6180.TWO) Online Gaming www.gamania.com Taiwan

Key Markets Addressed Online Gaming Management Team CEO: Albert Liu CFO: Joseph Chen Founded 1995

Business Description Gamania is an online gaming operator in Asia, providing games such as Lineage in Taiwan, and partnering with NCsoft to provide Lineage II.


Gamania has attracted almost 10 million users to its online gaming platform with a network available in Taiwan, Japan, China and Korea. Gamania provides a range of gaming alternatives from MMORPGs to card games to “cute”-style RPGs.

Gamania estimates that it achieved 49% market share in Taiwan in 2002, on the strength of Lineage. In 2003, Gamania formed a joint venture with NCsoft to operate Lineage II. In beta version, Lineage II has attracted subscribers at a very high rate; the game should come online in March 2004.

Gamania uses its proprietary GASH system to collect payments for online games.

Financial Snapshot

Gamania achieved $58MM in revenue in C2003, but is not yet profitable. C2003 net loss was approximately $8MM. Over the first two months of C2004, Gamania revenue is up 20% Y/Y.

Recent News

In 3/04, Gamania announced an investment in Taiwan Index Corporation, which has two business lines, mobile phone ringtones and online games. The company has launched three online games, “Seal Online,” “N-age” and “Cronus.” Gamania agreed to purchase 16.25MM common shares (65% of shares outstanding) for $0.36/share, or approximately $6MM.



Waei (3086.TWO) Online Gaming www.wayi.com.tw Taiwan

Key Markets Addressed Online Gaming Management Team CEO: Robert Huang Founded 1993

Business Description Originally founded as a PC game developer and importer, Waei introduced its first online game in 2000 with “The Pugilists.” Waei is one of the earliest Taiwanese gamers to enter the Chinese market, setting up independent subsidiaries in Beijing in September 2000 and in Sichuan in January 2001.


Waei currently operates 6 games in China and 6 games in Taiwan. StoneAge is Waei’s flagship game, produced in Japan and launched in 2000 in Taiwan. In 2001, Waei brought the game to mainland China, where total registered users numbered 220,000 as of latest reports. Since then, the company has released different versions and additions to the original game. In Taiwan Waei claimed to have 4 million registered users and 70,000 average concurrent users as of 4Q03. In China, StoneAge has been consistently ranked among top five online games. According to IDC, Waei had the second largest online game market share in China in 2002.

Financial Snapshot

Waei posted revenue of US$32.7 million and EPS of US$0.10, according to the company Web site.



ZUJI (Privately Held) Online Travel www.zuji.com Singapore

Key Markets Addressed Online Travel Management Team CEO: Scott Blume CFO: Kok Kit Wong Key Investors ZUJI is a joint venture of 15 airlines operating in Asia-Pacific and Travelocity.com (owned by Sabre Holdings). The airlines are All Nippon Airways, Cathay Pacific Airways, China Airlines, EVA Airways, Garuda Indonesia, Hong Kong Dragon Airlines, Japan Airlines, Malaysia Airlines, Northwest Airlines, Philippine Airlines, Qantas Airways, Royal Brunei Airlines, SilkAir, Singapore Airlines and United Airlines. Founded 2002

Business Description ZUJI is an online travel company based in Singapore that enables travelers to book hotels, airline tickets and packaged tours.


The company offers access to 33K+ hotels and 300+ airlines, according to company reports as of 4/04. ZUJI operates five regional Web sites in Singapore, Hong Kong, Taiwan, Australia and Korea (under the brand name “Nextour”).

ZUJI powers the travel channel of seven Web sites, including Yahoo! (Australia, Hong Kong, Singapore), MSN (Singapore, Korea), ninemsn (Australia), AsiaOne (Singapore), Taiwan Top Tours (Taiwan), Naver.com (Korea), and Korean Air (Korea), according to company reports as of 4/04.

Recent News

With its 3/04 acquisition of Nextour, an online travel company in Korea, ZUJI expanded its member base to 1MM+, according to company reports. According to company reports as of 4/04, ZUJI’s target countries for future expansion include New Zealand, India, China and other South East Asia markets.



Company Overviews — Japan



Exhibit 73

Japan — Representative Internet Companies Company • Location • Focus • Public/Private (owner) • Market Capitalization

Highlights

Yahoo! Japan • Japan • Portal • Public (4689.T) • $44,763MM

• Revenue $191MM (+55% Y/Y) and Oper. Income $106MM (+63%) in CQ4:03 • Revenue Mix: 27% Ad, 15% BB, 30% Auction, 14% Premium, 8% E-shopping, 4%

Listings, 2% Business Solutions, 1% Media in CQ4:03 • #1 Japanese Web Property (#1 in search/auctions/e-commerce/broadband access

billing) with 75%+ reach Softbank • Japan • Holding Company • Public (9984.T) • $16,645MM

• A holding company that manages a network of established and emerging companies (including both Softbank operating businesses and investments), focused on Internet/broadband software infrastructure services, including 251 subsidiaries and 115 affiliates as of June 30, 2003.

• Largest IT/software distributer in Japan • Owns largest end-to-end nationwide IP broadband network service in Japan —-

about 4MM bundled VoIP/access subscribers as of March 2004 • 60%+ Market Share in Broadband ISP space

Rakuten • Japan • Online Mall • Public (4755.Q) • $8,813MM

• Revenue of $58MM, and $18MM Op. Income in CQ4:03 • Growth via aggressive acquisition strategy: Acquisitions include Infoseek, Lycos

Japan portals, community sites, online travel site MyTripNet, online broker DLJ Direct SFG

Trend Micro • Japan • Internet Security Software • Public (4704.T) • $5,306

• Revenue of $128MM and $50MM operating income in CQ4:03 • Leading global provider of Internet -enabled antivirus software/services, with track

record of innovation for services surrounding the network, leadership in enterprise gateway/server-based solutions and in Japan/Asian markets




Stock Performance of Internet-related Companies — Japan Exhibit 74

Yahoo! Japan (4689.T) Daily Stock Performance

98 99 00 01 02 03

100000

200000300000400000500000

100000015000002000000

324

7



Softbank (9984.T) Daily Stock Performance

95 96 97 98 99 00 01 02 03

5000

100001500020000

400006000080000

35

3



Exhibit 76

Rakuten (4755.Q) Daily Stock Performance

00 01 02 03

100000

200000

300000

4000005000006000007000008000009000001000000

38

4



Trend Micro (4704.T) Daily Stock Performance

99 00 01 02 03

2000

4000

6000

80001000012000140001600018000

9263

677


Source: FactSet, 10/21/98-4/9/04.



Yahoo! Japan (4689.T) (covered by Yoshiko Motoyama) Portal www.yahoo.co.jp Japan

Company Description Yahoo! Japan, a joint venture between Softbank (42%) and Yahoo! Inc (34%), is a new-media company that offers a comprehensive branded network of Japanese-language communications, directory-search, commerce, and content services. The site is one of the most recognized brands associated with the Internet in Japan and is far-and-away the leading site in terms of traffic, advertising, household and business user reach. Key Markets Addressed Online Advertising/Marketing/Directory Listings Services, Internet Auctions and a host of other e-commerce services, Broadband portal services (including marketing and billing) Investment Thesis Yahoo! Japan, the leading Internet contents/communications/commerce platform in Japan, is increasingly developing the combined strengths of a Yahoo! + eBay + AOL + Amazon software-platform business model, forming a monopoly-like presence in multiple underpenetrated markets in Japan — from advertising, Internet auctions/commerce to broadband services, with the aim of gaining “wallet share” of the active Internet user base. We believe the company is in the early stages of penetrating these markets, and is well-positioned to dominate the segments and monetize users across multiple service areas. The company’s relentless focus on non-capital-intensive software/service businesses leads to high margins and high operating-cash-flow generation. We believe longer-term investors of Yahoo! Japan shares are set to benefit from the following: 1. the company’s rapid transition from an ad-driven to a more stable ARPU-driven subscription-based business model (from multiple tiers of

consumers and merchant subscribers), with ownership of multiple-tiers of access-agnostic payment relationships with the end user, 2. increased monetization of traffic and addition of various high-margin fee services at minimal incremental expenses; 3. …helped by improved Internet access environment in Japan (i.e., lower access costs, increased Japanese Internet users/ usage, implying

higher future ad/service revenues), household penetration of flat-rate/always-on-access low at about 30%. 4. ongoing Japanese recession, “structural” problems and reforms, leading to heightened usage of Web-based services such as auctions,

directories, job search and cheaper data service costs, 5. leverage from any potential surprises in improvement in the economy, given relatively low percentage of cyclically-sensitive revenues, and 6. exceptionally high margin/capital-efficiency potential, owing to unique leverage from a number of key intangible assets Investment Positives 1. Yahoo! Japan = “Yahoo! + eBay + AOL+ Amazon+ Expedia, etc” position in the Japanese market with 80%+ Japan Internet

audience reach: Growing monopoly-like online positioning in various underpenetrated markets in Japan — ranging from advertising, Internet auctions, e-commerce to broadband services. (Internet home+work penetration of about 40% in Japan vs. about 60% in the US; broadband penetration of about 25% in Japan versus 70%+ in South Korea.)

2. Reduction in competition in core businesses, with many of the businesses mutually reinforcing 3. Faster-than-expected transition toward a more stable, ARPU-driven subscription-based fee model from an ad-driven model.

Corollary: Strengthened ownership of the customer via direct billing relationships. Still low monetization on per user basis versus US leading companies, implying further upside potential.

4. Growing diversification of fee sources, multiple layers of subscription fees and increasing proportion of new high-margin transaction or traffic-based fees (advertising/marketing services, premium contents/commerce, auctions, broadband-access reselling and other related service fees, business services, etc.)

5 Improving earnings quality and strong organic growth. YJ’s earnings are becoming more recurring and fee-based. 6. Increasing pricing power across multiple large web-enabled markets (e.g., advertising, auctions, search, e-commerce services, etc) 7. Strong operating/financial track record: Accelerating ARPU and profit growth in spite of a continuously adverse environment (ongoing

poor economy and high costs of business/access until recently), means stronger operating leverage/ROE in slightly better times.. 8. Leverage US Yahoo! brand, positioning and experience — leading to exceptionally high capital efficiency: low costs of customer

acquisition, business expansion and development, etc. Substantially reduced operating/execution risks by learning from US Yahoo!. 9. Unique position as global media platform — As one of the preeminent global Web brands with the largest number of global unique

Internet audience and strong global ad agency relationships, the Yahoo! group companies have a unique opportunity as a global advertising/commerce platform — especially for Japanese advertisers lacking such exposure/opportunity and vice versa.

10. Beneficiary from Japan structural inefficiencies/deregulation — e.g., YJ benefits from Japan’s structurally inefficient market segments/absence of reseller markets by offering efficient services/solutions to businesses/consumers in the form of various communications/commerce services such as ads, auctions and directories. Importantly, YJ benefits from exclusively selling cheap broadband/VoIP services offering due to many layers of access deregulation in Japan.

11. Infrastructure neutrality — “Yahoo! Anywhere Strategy” (compatibility with a range of devices/channels) leads to flexibility in monetization of customers — and this understood well by management/owners.



Investment Concerns 1. Unknown execution-related risks — the need to manage several fast-growing business lines on a lean operating structure 2. Unknown reputation/regulatory risks: Given that YJ is increasingly handling personal and payment-related information it needs to

execute flawlessly. We also carefully monitor regulation impacting cost of access in Japan and those pertaining to copyrights and liability issues.

3. Concentrated ownership structure/relatively low liquidity: 42% ownership by Softbank, 34% ownership by Yahoo! Inc. (US), leaves limited free float.

4. Cyclical/advertising exposure (about 30% of net sales as of F4Q03): impact of continued weakness in the economy, albeit pricing structure is improving from YJ’s standpoint.

Stock Catalysts 1. Better-than-expected financial results amid a continually weak economy: i.e., strong/accelerating momentum, such as increasing

revenues and profits per unique user and per employee, improvement in quality of earnings (stable and recurring) 2. Strong non-financial metrics: strong subscriber growth, traffic growth, auctions metrics, etc. 3. Strategic initiatives/competitive developments that would heighten Yahoo! ARPU growth and evidence of execution 4. Growing share of Internet auctions and other fee businesses as a percentage of total revenues and evidence of management focus on

strengthening these businesses 5. Improvement in capital structure to the benefit of shareholders (better liquidity) 6. Stabilization in fundamentals at parent companies: Softbank and Yahoo! Inc..



Softbank (9984.T) (covered by Yoshiko Motoyama) Internet Holding Company www.softbank.co.jp Japan

Company Description Softbank is a holding company that manages a network of established and emerging companies (including both Softbank operating businesses and investments), focused on Internet/broadband software infrastructure services, including 172 subsidiaries and 106 affiliates of December 31,2003. Key Markets Addressed Distribution of IT/software and publishing in Japan. Internet services markets, including IP-based broadband access. Key Positives 1. One of the broadest pure-play (subsequently high risk, high beta) options for investing in the Internet/ broadband in Japan — The

list of pure-play Internet investments is very short in Japan. A collection of 281 operating subsidiaries including Yahoo! Japan and 114 affiliates focused on the Internet (from infrastructure, applications, commerce to services), Softbank provides the broadest exposure to the fast-growing Japanese broadband sector. Note that other players in Japan carry core businesses that are not entirely related to Internet/software (either historically or today) or have legacy businesses that compete with their core businesses, and are thus denied fullest advantage of exploiting the new medium. Another benefit we see is that Softbank’s complete focus on pure-IP/de facto global computing technology standards, combined with its distribution strength, lends itself to special operating/ efficiency advantages.

2. Large target market opportunity — We estimate Japan’s broadband household penetration is still below 30% of 48 million households. This compares with over 70% in South Korea, which has similar demographics but less favorable regulatory conditions for new entrants. We believe Japan’s broadband market could reach 25—30 million+ subscribers in the next 3—5 years (or over 60% of the 48 million households in Japan). Given the structurally high cost of communications services in Japan owing to the distorting effect of years of regulation, we think this benchmark is likely to prove conservative longer term. Broadband adoption in Japan should be bolstered by the fact broadband represents the first cost-effective non-metered, flat-rate access service in the country (“all you can use for one price”) — a contrast with the situation abroad, where flat-rate programs were widely available and already the norm in narrowband. We think Softbank is well positioned to capitalize on this situation, given the standard inclusion of killer apps (like IP phones or discounted/free-phones) in the broadband package and its continuous effort to lower barriers for customer adoption and optimize pricing via focus on global de facto standard technologies: This should help lead to a stronger economic incentive for end users to adopt broadband — as we have consistently seen with the fast growth rate of Softbank BB’s “Yahoo! BB”- branded access service.

3. Valuable infrastructure and building scale quickly — A contrast with many other broadband greenfields, Softbank’s broadband unit has reached scale very quickly. Its core broadband infrastructure unit Softbank BB, established in May 2000, has built the nation’s largest IP gigabit ethernet backbone infrastructure that spans over 80%+ of Japanese households (soon to go to over 90%). In less than 24 months since commercialization, the service already has signed up over 3 million subscribers (over 2.6 million+ paying subscribers plus thousands of enterprises), a level that already covers its ongoing fixed network costs. We think that Softbank now has a highly scalable infrastructure needed to deliver on its software/core applications and e-commerce platforms (including its historical core businesses), and to realize operating synergies between operating companies and investments.

4. Ownership of strongest distribution network in Japan — Softbank’s distinctive competitive advantage is its distribution power — both as the largest IT/software wholesale distribution company in Japan (70-80% market share in software distribution in Japan) and as the owner of Yahoo! Japan, which has unparalleled reach over Japanese Internet audiences (80%+), as the Yahoo!+ eBay+ AOL+ Amazon of Japan and more. We believe this is important as it allows Softbank’s access service to reach scale quickly, improve cross-selling ability, and gain access to the most active user base on an exclusive basis. (YJ’s unique user base was 57 million as of 7/31/03, and YJ does not market/ bill any other access service to date.) Indeed, we believe the strong Web-based relationship with the end user is the missing element facing all other Internet companies in Japan, explaining the large gap in non-access user/vendor-monetization ability.

5. Improving earnings quality — Softbank is in the throes of transformation from an investment holding company to an operating company: As its core Japanese broadband business evolves, Softbank’s business structure should increasingly be based on predictable annuity-like revenue streams from multiple services/ customer segments, a change from its former one-off business characteristics.

6. Reducing debt and improving fundamentals in non-broadband infrastructure business — Over the past couple of years, the company has steadily pared down its debt load, while concentrating resources and focus on the Japanese broadband market — a reversal from the former aggressive, acquisition-driven strategy that spanned across geographies. We believe this should lead to focused management attention and greater capital efficiency. Additionally, its non-broadband subsidiaries are self-financing and profitable, while core broadband business is likely to reach EBITDA positive in F2004 on our estimates.

7. Beneficiary of access deregulation and capitalizing on technology/media/technology convergence — Most companies in Japan that are tackling broadband have all entered the business prior to access deregulation (i.e., when costs were high). Many carry expensive legacy infrastructure that cannot be dislodged, cannibalized and/ or harmonized with new technology infrastructure so easily. Softbank is unique in that it is the only large player that entered the broadband business (May 2001), once cost of the business had declined significantly; as a result, it was able to build a more efficient single network designed for both data and voice from the beginning. This, together with its core assets, should position it well to deploy innovative interactive services ahead of peers, in our view. Now, the barriers to entry are rising.

8. Strong strategic partnerships across the technology landscape — Softbank has built strong relationships with the global technology powerhouses including Microsoft, Cisco, Oracle, H-P, Yahoo! and other emerging technology players. This came about as a result of its



decades-old software/ IT distribution business and a history of venture capital investments. We believe this helps distinguish the company from more locally-entrenched carriers and power companies, whose histories of involvement in broadband/ Internet technologies are shorter and computing/technology-industry partnerships less extensive. Additionally, we note that over the past couple of years, the group has benefited from an inflow of entrepreneurial, experienced staff from various prestigious Japanese companies (telecom, banks, trading ) — a result of the nationwide reorganizations of various industries in Japan.

9. Thought leaders in IT — The firm’s experienced management team, its global reach and its rapid decision-making ability set it apart from sector peers, in our view. CEO Masayoshi Son has been one of the Internet’s leading visionaries (one of the early investors of Yahoo! group companies globally) and has also hired a team with extensive business development and local legacy business environment knowledge /skills over the past years. Additionally, it has hired away some valuable industry personalities, including the former president of Microsoft Japan and some noted personalities from Cisco. We believe the combination, along with the strong entrepreneurial culture of the group, has allowed the company to execute its leadership position in the Japanese broadband sector to date.

10. Diversified benefits — The company’s early lead in all phases of the Internet — infrastructure, applications, services, commerce in Japan — is a product of its diversified investment approach and decades of experience as the largest distributor in the PC/network computing business in Japan. While not all of Softbank’s investments have generated a positive ROI (like many emerging technology investments), the company’s few successful investments have more than compensated for its failures, and gives the company breadth of option value and a source of strategic differentiation vis-à-vis peers.

Key Risks 1. Unproven business model in a market/ business with no history/comps — Softbank is creating new markets and industries in a

changing industry structure. The lack of comps on a national and global basis, combined with the “rolled up” nature of its core broadband infrastructure business, leads to difficulties in financial forecasting of core operating businesses.

2. Execution risks — One of the biggest risks facing Softbank surrounds its ability to effectively execute its multi-layered business plan in a highly competitive market. Softbank has a lot of moving parts, including emerging businesses associated with broadband that we expect to report EBITDA losses near term. While we think profitability is now in easier reach due to its scalability advantages, the ultimate profitability horizon remains difficult to predict. Additionally, we recognize the challenges associated with pulling together the disparate and fast-moving aspects of Softbank’s business plan.

3. A related risk is dependence on key executives for strategic guidance and operations — CEO Masayoshi Son is the driving force of the company’s business direction/ momentum, business-partnership depth and wranglings with regulatory authorities. While the company has hired a strong team of staff from various industry segments, the lack of a clear succession plan could pose a risk longer term.

4. Dependence on current regulatory environment in Japan — Softbank’s competitive edge — its low-fixed-cost, end-to-end pure-IP network infrastructure — rests on several regulatory assumptions: nationwide unbundling of network elements, including the local loop and dark fiber, and liberalization of collocation and customer premise equipment, etc. These issues, combined, allow new entrants to install and provision access (particularly DSL) at a much lower cost, with minimal interference from the incumbent than seen in other markets. Any sudden, drastic and simultaneous changes in all these underlying regulatory elements and leasing term contracts would have adverse effects on its business strategy. Offsets against this risk include the following: 1) political prioritization of the creation of next-generation broadband networks via competition; 2) difficulty of re-regulating once unbundled, amid competing political and micro pressures; 3) strength of political/ economic domestic and international lobbying against re-regulation. Because Softbank BB’s network is less tied to legacy infrastructure and end-to-end IP in its original design (a classic case of disintermediation), any adverse reversal in the above regulatory conditions is likely to first harm other entrants who had entered prior to dark-fiber unbundling, thus constraining drastic regulatory changes, in our view.

5. Developing assets could be a drain on earnings — Softbank has funded considerable operating losses within its core Japanese broadband business (run by the Softbank BB arm). While the level of investment spending is guided to slow, these businesses may not develop into major profit centers near term, owing to prioritization of investment for long-term sustainable growth, and thus continue to be a drag on overall earnings growth. We believe, however, that Softbank BB has high strategic value as a “promotional hub” for its core operating units and as a means of capturing end-to-end control of the value chain while the development phase of the industry is young.

6. Dependence on funding and capital markets — Softbank carried net debt of about ¥141 billion, as of the end-December 2003 (net debt-to-equity is about 56%). We think that the company is much less reliant on liquidity events than in the past, given its large $3 billion+ unrestricted cash on hand, self-funding non-broadband operations, completion of the bulk of broadband-related investment spending (set to slow), and its core broadband business is close to generating positive free cash flow (probably in F2004 on monthly basis. Softbank’s coverage of unrestricted public securities to debt is currently about 4 times pretax). However, if the credit environment tightens and liquidity window closes, growth and reinvestment opportunities might be constrained.

7. Highly competitive markets may prove challenging — In the broadband business, Softbank is competing head-to-head against the incumbent and other established carriers, which we believe are willing to spend to subsidize growth, even at non-economic terms. This could affect the industry’s profit structure and, subsequently, its profitability and the length of its competitive advantage period.

8. Complicated corporate structure and limited operating disclosure — Softbank takes on a holding company structure, comprised of 172 subsidiaries and 106 affiliates as of December 31, 2003 (a three-step structure of pure holding company, operating holding companies and operating companies). While this is intended to create an environment of self-governing entrepreneurship with focused attention paid at each business unit, the complex web of structures has inhibited corporate transparency, financial modeling and investor understanding of the company. This could lead to share price volatility as new investors need time to understand Softbank’s structure and the nature of its businesses.

9. Valuation challenge — For the reasons cited above, we think Softbank could continue to be subject to a complexity and uncertainty discount, which may take some time to ease. Softbank’s core broadband infrastructure business has amassed the largest broadband subscriber network in the country in a very short amount of time and the group has in the past successfully divested some of its assets;



nevertheless, we believe the limited visibility into the timing of free cash flow turning positive in its core broadband business has tried the patience of the investor community. Following the sharp decline in the stock since the peak of the bubble in 2000, we believe the company now needs to rebuild its credibility with investors. As such, we think the stock price could continue to be sensitive to fluctuations in the value of the company’s public assets — particularly Yahoo! Japan, which accounted for about 80% of its public asset value as of 2/12/04. For Softbank’s discount to NAV to narrow materially, we think the company must provide tangible evidence of positive free cash flow in its core operating business and a healthier balance sheet.

Stock Catalysts 1. Evidence of strong underlying fundamentals and execution at its core broadband unit — Rising ARPUs and low churn, coupled with

growing subscriber numbers and increasing customer-acquisition efficiency could drive upside. 2. Evidence of financial stabilization to positive operating leverage — In particular, we look for increasing profits of non-broadband

holdings. 3. Improved debt ratings 4. Strengthening Capital Markets environment 5. Favorable news flow on deregulation and government’s commitment to expanding broadband penetration 6. Turmoil at competition 7. Growth in value of publicly listed holdings



Rakuten (4755.Q) (covered by Yoshiko Motoyama) Online Retail www.rakuten.co.jp Japan

Company Description Rakuten is a consolidated Internet company focusing on e-commerce and new media in Japan. In the core e-commerce business, the company aggregates merchants (particularly small to medium sized businesses and hotels) conducting an online mall/trading platform business. In addition to its mall services, the company operates the Infoseek Japan and Lycos Japan portal businesses, which it acquired in years 2000 and 2002, respectively In end-2003, the company acquired an online travel site MyTripNet and online brokerage company DLJDirect, broadening its service portfolio to include retail online financial services. Key Markets Addressed Retail e-commerce (online shopping mall, travel), Internet advertising/marketing services, online brokerage services Key Positives 1. Offering an annuity-like, multiple-source revenue model that provides relative earnings stability and predictability. 2. Exposure to several large markets, which are expected to migrate from offline to online over time, ranging from online advertising,

commerce to brokerage services. 3. Steadily expanding product/services portfolio — The company has grown over the past couple of years helped by numerous

acquisitions: 2 portals (Infoseek, Lycos Japan), several community sites, online travel, online brokerage and several other new media properties.

4. Lead in serving small to medium-sized merchants in Japan — Rakuten led in capturing the small merchants ahead of other industry giants such as Amazon or Yahoo! Japan.

Key Risks 1. Moving into lower-margin/higher-volatility segments that are not necessarily adjacent to core business (such as online brokerage, TV,

etc), and subject to more competition. The company’s recent spate of acquisitions have made its earnings less predictable and exposes it to equity market-volatility risk, in our opinion.

2. Complex financial statements from numerous acquisitions.. 3. Where is the scalability? Operating profit per employee has not really grown, unlike other major Internet companies around the world. 4. Need to prove synergies from acquisitions — Rakuten has yet to demonstrate meaningful synergies from past acquisitions. It also

needs to correct the relatively slower organic growth rates vis-à-vis industry leaders. 5. Increase in competition in core business — Rakuten will start facing greater competition starting C2004 with Yahoo! Japan’s decision to

enter several of its core markets (B2C e-commerce/mall, online travel, etc) with vertical industry giants. 6. Uncertain “Lock” on Buyer — Multiple brands, multiple user IDs, and limited ownership of payment relationship with end users make it

difficult to retain store tenant interest. 7. Valuation — Rakuten’s high relative and absolute valuation, using a variety of valuation methodologies including residual income and

multiples, are risks to consider. Stock Catalysts 1. Ability to digest acquisitions, and demonstrate synergies — Rakuten’s challenge over the next 12-18 months will be to digest its past

acquisitions and generate synergies in the world’s first case of a general e-commerce company combining with an online broker, DLJ Direct SFG.

2. Demonstrated strong organic growth (as opposed to non-proforma acquisition-driven growth), scalability in the financial model and strengthening end-user metrics



Trend Micro (4704.T) (covered by Yoshiko Motoyama) Internet Security Software/ Services www.trendmicro.com Japan

Company Description Based in Tokyo and operating in 18 countries, Trend Micro is one of the leading focused developers/providers of network antivirus/content-filtering software and services, particularly for corporations. Currently, it has leading market shares in the fastest growing server/gateway segments of the antivirus software markets and has a dominant position in Asian/Japan markets. It has strong strategic alliances with names such as Check Point Software, Cisco Systems, Nokia Hewlett-Packard, IBM, EMC, Microsoft, etc. Key Markets Addressed Internet security software/ services, with a focus on network-based antivirus and content-filtering solutions (as opposed to desktop based), particularly for enterprises and in Japan and Asia. Key Positives 1. Exposure to one of the most resilient areas in enterprise software field. Trend faces relatively solid growth prospects from the

increasing need by companies and consumers to protect their online/ IT assets from recurring viral/worm threats. Online security continues to be at the top of the list of “must haves” for corporations, despite the trend for overall tighter IT budgets. This is because of the rapidly evolving, polymorphic nature of network-borne threats and companies’ growing dependence on activities conducted online. IDC predicts antivirus/content-security software market to grow from $1.4 billion in 2000 to about $5.8 billion by 2006. (Target market increasing with evolution of content-filtering/security market)

2. Strong market shares in underpenetrated, early-stage markets. While the antivirus market is maturing on the traditional desktop protection business, the defense mechanisms against new blended threats that attack through multiple vectors via the network are still very immature — and this is an area the company has consistently focused on and innovated early. Its disproportionately high exposure to Japan and the Asian markets including China, where network diffusion is lower than other developed markets, also implies high growth opportunities ahead (this should be helped by large number of Chinese-speaking staff and management in the company).

3. Fattening pipeline of new products/ services/partnerships in 2004~, coupled with an improving enterprise IT spending environment globally. Trend Micro is increasing its rollout of a series of its next-generation software/ services, following 2+ years of R&D and channel expansion. We expect to see positive operating leverage, driving higher margins in 2004~, helped by a recovery in corporate IT spending, increasing value of networks and strengthening demand for solutions against complex cyber threats..

4. Strong organic growth rate; Focus and differentiation. Trend Micro focuses on its core competencies, resulting in high organic growth and high capital efficiency, with growth little distorted by numerous acquisitions so typical in the industry. It also takes a differentiated approach to the business/ development of solutions, expanding presence and reach via multiple best-of-breed partnerships (Cisco, Check Point Software, etc). This helps the company avoid conflict of interests, commoditization pressures and ensures flexibility.

5. Track record of innovation. Trend Micro has a consistent and early track record of innovating services that work over the Internet versus the desktop terminals, a factor which has often differentiated itself from rivals.

8. Global player. Trend’s revenue streams are diversified (Japan 40%, Europe 25%, N.America 20% of sales, etc.), and the global business structure better enables the company to effectively respond to cyber threats on a 7/24/365 basis.

9. Capital discipline and increasing payout to shareholders. Management has frequently walked away from dilutive/ expensive deals, to focus on core competencies and efficient expansion via partnerships, while paying out excess cash to shareholders (20% payout of consolidated earnings and share buybacks).

Key Negatives 1. Uncertainty associated with success/ failure of new solutions against new types of cyber threats. Polymorphic attacks on the

network (such as Nimda, Code Red) rendered traditional perimeter protection tools inadequate. An effective defense against these threats, therefore, requires more complex solutions, not achievable by simple installation of software product — i.e., those that entail more partnering with strategic vendors, deploying a suite of defensive tools, actively monitoring threat activity, and continuously adjusting defenses to respond to evolving threats. It remains to be seen whether the fruits of the company’s last 2-3 year of R&D and partnerships will pay off, in the form of superior execution.

2. Competitive risks. The antivirus industry has largely consolidated around three core global players— Symantec, Network Associates and Trend (the former two players with a dominant presence on the desktop versus Trend’s gateway/ e-mail server dominance). As the desktop product pricing continues to commoditize, there is risk that the other competitors will increasingly focus on Trend’s core areas in non-desktop and enterprise solutions. Recently, the industry has also seen some news flow about Microsoft’s renewed interest in the antivirus space, although we suspect little action to emerge before 2006 and that its efforts are likely to focus on the desktop, where Trend’s competitors dominate. (Symantec and Network Associates have 80%+ market share in the desktop on our estimates). Antitrust and conflict of interest could also contain MSFT’s scope, in our view.

3. Sensitivity to enterprise spending and the economy. Trend derives over 80% of its sales from corporate customers, and thus could remain sensitive to tightness in corporate budgets and the economy.

Ongoing catalysts are growing incidents in complex worm outbreaks, stronger-than-expected demand for antivirus solutions worldwide (particularly from Asia-Pacific, consumers/SMEs) and improved visibility on new-product launch and competitive edge, expansion in corporate budgets and the economy. Diffusion of the network in the Asian/Japanese economies, with corresponding increasing use of the network by locally-based corporations and consumers, are also important fundamental catalysts.



Company Overviews — Korea



Exhibit 78

Korea — Representative Internet Companies Company • Location • Focus • Public/Private (owner) • Market Capitalization

Highlights

NCsoft • Korea • Gaming • Public (036570.KS) • $1,296MM

• Revenue of $32MM (-6% Y/Y), operating income of $11MM in CQ3:03 • Producer of Korean Online Gaming Hits: Lineage I and II • Expanding to Taiwan and Japan in CQ1:04

NHN • Korea • Portal/Gaming • Public (035420.KS) • $1,201MM

• Revenue of $39MM (+84% Y/Y), operating income of $12MM (+54% Y/Y) in CQ4:03

• Revenue mix: 47% Web board games, 26% keyword search, 19% advertising in CQ4:03

• Plans to extend overseas to China and Japan in 2004

Daum • Korea • Portal • Public (035720.KS) • $619MM

• Revenue of $121MM (+86% Y/Y), operating income of $33MM (+155% Y/Y) in CQ3:03

• Revenue mix: 53% from advertising, 25% from shopping, 22% from transactional services in CQ3:03

• Launching OpenMarket (online auction) in 2004 Webzen • Korea • Gaming • Public (WZEN) • $432MM

• Revenue of $36MM (+118% Y/Y), operating income of $22MM (+115% Y/Y) for CQ1-3:03

• All revenue is derived from Mu (a leading Korean shooter): 67K+ Korean and 300K+ Chinese subscribers

• Fourth-largest online game operator in Korea with 8% market share Bugs Music • Korea • Music • Private • –

• According to press reports as of 10/03, Bugs Music had 14MM+ users • According to press reports as of 10/03, S. Korean court ordered Bugs Music to

stop serving 10M songs without paying royalties

NetMarble • Korea • Gaming • Public (owned by Plenus) • –

• As of CQ3:03, company had 28% market share in Korea • Revenue mix: 46% gaming, 35% content, 14% advertising, 5% eCommerce • 21MM subscribers, ARPU of $13, 171K concurrent users

Nexon • Korea • Gaming • Private • –

• Estimated $34MM+ of revenue in C2003 • 400+ employees, adding 100 as business improves • Entering offline table board game through lubicon.com

Sayclub • Korea • Portal • Public (owned by NeoWiz) • –

• $30MM revenue expected in C2003 from Sayclub Avatar sales • In CQ3:03 Sayclub had 630K fee-paying customers • CQ1:04 - will focus on JukeOn music download and homepage service




Stock Performance of Internet-related Companies — Korea Exhibit 79 NCsoft (036570.KS) Daily Stock Performance

01 02 03

20000

30000

40000

50000

60000700008000090000

4755

361



Daum (035720.KS) Daily Stock Performance

00 01 02 03

20000

40000

6000080000100000

200000

300000

4291

725


Source: FactSet, 11/11/99-4/9/04.

Exhibit 81

WZEN Daily Stock Performance

Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

64000

80000

96000

112000

128000

144000

160000

530

126



NHN (035420.KS) Daily Stock Performance

12/02 3/03 6/03 9/03 12/03 3/04

20000

30000

40000

50000

60000700008000090000100000110000

2971

646


Source: FactSet, 10/29/02-4/9/04.



NCsoft (036570.KS) (covered by Shawn Kim) Online Gaming www.ncsoft.com Korea

Investment Thesis NCsoft is the world’s leading software company for online games. It dominates the Korean market. Its blockbuster hit “Lineage” launched in 9/98 commands the highest number of peak-time concurrent users (at 152K+, as of 12/03) in the world today. NCsoft has ownership of unique and compelling content, which is the differentiating factor in determining the key to success in the online gaming industry. The online game unit makes up almost all of the company’s revenue and has been profitable since 1999. Our 2004E EPS is KRW 4,221, reflecting our greater confidence in the growth outlook for Lineage II. Key Positives 1. Strong expertise in server management — NCsoft is a global leader in server management technology required for complex online

gaming and stable uninterrupted game play. The company is one of very few online gaming companies worldwide that have managed 150K+ concurrent users.

2. Formidable development talent pool — We believe the key differentiator of NCsoft is product quality, which comes from ownership of development teams with the ability to create and sustain powerful franchises. This is critical to capture long-term growth.

3. Powerful franchise and strong presence in Korea and key Asian markets — NCsoft dominates both Korea and Taiwan markets and has strong positions in Hong Kong, Japan and China.

4. Financial strength — NCsoft’s strong balance sheet and access to capital will be a critical differentiating factor and make it best placed to participate in a likely forthcoming industry consolidation.

Key Risks 1. Lineage II Penetration Overseas — 2004 earnings forecast of EPS KRW 4,211 and beyond depends on upside in key overseas markets

(Taiwan, Japan, and China). 2. New Game Releases — Potential Success of City of Heroes and Guild Wars in the US in 2004 could materially impact revenues. Given

recent failures with non-Lineage titles, we remain cautious on the outlook for future releases. 3. Competition — Other players and new technologies could copy and/or try to compete in more profitable high-end markets. 4. Growth Dependence on Lineage — Growth prospects are highly dependent on one franchise, Lineage, and future success in other new

products is unpredictable and ‘hit-driven’, which creates a high level of risk. 5. Profitability — We believe it is unwise to incorporate future earnings from new games into share prices. This is because medium- and

long-term earnings cannot be projected accurately, as they are determined by ‘hit’ products, which are impossible to predict. Stock Catalysts 1. Upward Earnings Revisions — The next leg of stock appreciation for NCsoft could be driven by increases in EPS targets. 2. Royalties from Overseas Operations — We believe the company can leverage its brand and expertise in online gaming to win share in

other markets and raise returns from overseas. 3. Momentum and monthly trends — NCsoft stock generally trades on revenue/profitability expectations and normally tracks monthly sales

and quarterly earnings trends closely. The product tends to receive frequent media coverage and earnings tend to fluctuate significantly depending on whether the company has a hit product.



NHN Corp. (035420.KS) Portal www.naver.com Korea

Company Description NHN Corp. is an Internet portal that was founded in April 2002 with a merger between Naver.com and Hangame.com. Its key revenue segments are keyword searches, Web board games and online advertisements. In CQ4:03, Web board game revenue made up 47% of its total revenue, keyword searches provided 26% and online ads provided 19%. Business Strengths 1. A leader in a fast growing keyword search market — NHN’s subsidiary, Naver.com, boasts the highest search pageviews in Korea with

about 2.5 million/month vs. second highest search engine’s (Daum) 1.3 million. 2. Well diversified revenue base — Online game revenue is less susceptible to fluctuations, and hence leads to more stable earnings. 3. Leading Position in Duration and Revisiting Days — According to a Feb 2004 study of Internet Traffic by KoreanClick, NHN’s portal

Naver is a leader in duration and revisiting days. Duration indicates a visitor’s staying time and revisiting days are an indicator of the loyalty of visitors.

4. High margin and strong cash generation — NHN maintains the highest operating (30%) and net (31%) margins and generates the highest ROE (29%) among the Korean Internet portals.

Business Challenges 1. Regulatory risks — The KMRB (Korea Media Rating Board) is likely to impose strict restrictions on cyber cash payment rules on gambling

games and illegal adult content. This may affect NHN’s Web board game business. 2. Difficulty in sustaining margins and returns — NHN operates in a highly competitive environment. The cost of maintaining leadership is

likely to rise in the future — potentially affecting margins and returns. 3. Saturating Internet penetration — With subscriber growth slowing, Internet portals including NHN have to identify new growth areas. Focus Areas 1. Expansion into Japan and China — The company expects NHN Japan to grow as broadband penetration increases. Alliances with

PCCW and Gehua in China are also potential sources of growth. Recently the company acquired China’s leading casual game portal Ourgame.com.

2. Developing New Service Channels — Developing new services such as wireless Internet may help the company diversify its revenue base.



Daum Communications (035720.KS) Portal www.daum.net Korea

Company Description Daum Communication is the leading Internet portal in Korea with more than 25 million members. It has three major revenue segments — Online ads (53%), E-commmerce (25%) and transaction services (22%) including premium email and revenue sharing on content fees. Business Strengths 1. Brand Strength/Leading Position in Key Traffic Metrics — According to a 12/03 study of Internet Traffic by KoreanClick, Daum leads

competing Korean Portals NHN and Yahoo! Korea in Monthly Unique Visitors (Daum ~ 22MM, NHN ~ 21.5MM, Yahoo!Korea ~ 19MM ), and Reach Rate (Daum ~ 93%, NHN ~ 89%, Yahoo!Korea ~ 78%).

2. Beneficiary of fast growing online advertising market — Total online advertising market revenue grew 38% to $210MM in 2003. Daum has the largest online advertisement revenue among the Internet portals.

3. Keyword Ad Search Growth — This increase, however, may not automatically lead to higher margins, given Daum’s dependence on Google and Overture to provide the search and advertisement placement capabilities.

Business Challenges 1. Open Market launch — In 2004, Daum plans to launch its Internet auction service, Open Market, pitting the company against eBay’s

Market-leading (70% share of domestic market) subsidiary, Internet Auction. Daum plans to gain share by charging lower commissions than Internet Auction—this may lead to further margin erosion.

2. Performance of Daum Direct Line (DDL) Insurance — DDL may be a drag on earnings growth, if the Korean Online Insurance market does not grow according to expectations.

3. Continued Margin Weakness — Operating margin has been trending downward to 25% in CQ4:03, from a high of 30% in CQ1:03, representing the third straight quarter of operating margin contraction. With expansion into unproven business lines (DDL and Open Market), Daum’s margins may fall further.

4. Competitive Environment — Daum continues to face strong competition from the key Korean portal sites, NHN and Yahoo!Korea. 5. Dependence on Cyclical Advertising Spending — In CQ4:03, 51% of revenue (down from 53% in CQ3) was derived from Online

Advertising, though this percentage could be lessened with the introduction of DDL and OpenMarket. Focus Areas 1. Diversification Efforts — In addition to its investments in online insurance and Internet auctions, Daum has stakes in online recruiting,

gaming, music (“Oi Music” and “Fluxus”) and travel (“Tour Express”) companies. In the near-term, these investments may mute earnings growth, but could potentially improve the breadth of Daum’s business portfolio down the road.

2. Operating Margin Improvement — An Internet business should be able to achieve improving margins with increased revenues. Subdued/flat Operating Margin growth may suggest that Daum is not executing to its online opportunities.

3. Wireless Internet Service — As witnessed from the dynamics in the Chinese Internet market, wireless revenue can be a large component of revenue and growth for portal Web sites. If Korean wireless service providers partner with portals like Daum, there could be substantial upside.



Webzen (WZEN) Online Gaming www.webzen.co.kr Korea

Key Markets Addressed Online Gaming Management Team CEO: Nam-Ju Kim CFO: Won-Seon Kim Co-CTO: Ki-Yong Cho Co-CTO: Kil-Saup Song Key Investors Gartmore Investment Management Delta Partners Javelin Capital Founded 2000

Business Description Webzen is a developer and distributor of online games in Korea and China.


Webzen derives all of its revenue through MMORPG: Mu.

Financial Snapshot

Webzen has a five-year agreement with 9Webzen, commenced 2/2003, under which Webzen received a $500K upfront licensing fee, continues to receive a 20% royalty fee, and receives equity method gains from its 49% stake.

Webzen has a licensing partnership with Insrea Game Corp, through which they license Mu to Taiwan. Webzen has initiated two more licensing agreements in Japan, with Gameon, and in Thailand, with New Era Online.

Mu has had 85K+ peak concurrent users in Korea and 300K+ in China. However, 86% of revenue is from Korea, while 14% is from China. This stems from the fact that Webzen licenses Mu to a Chinese JV: 9Webzen. 9Webzen is 49% owned by Webzen, and 51% owned by Shanghai Jiucheng (The 9). Chinese Webzen revenue is derived from the sale of prepaid cards that allow MU players in China to access the MU game servers at an Internet café outlet or at home.

Recent News

According to press reports as of 2/04, the company plans to enter the US market as early as 2H04.



Bugs Music (Privately Held) Online Music www.bugsmusic.co.kr Korea

Key Markets Addressed Online Media/Music Management Team President: Park Sung-Hoon Founded 2000

Business Description Bugs Music offers a free online Korean music service via streaming media.


Bugs Music members cannot download songs, but can only listen to them by logging into the site. As of 10/03, Bugs Music user base was approximately 14MM. The company derives its revenues from online advertisers.

Recent News

In October 2003, a group of local and foreign music labels won a lawsuit in the Seoul District Court against Bugs Music, alleging property rights infringement. The court ordered Bugs Music to stop providing around 10K songs (about half of Bugs Music’s library) online without paying royalties to the copyright holders.



Nate (Privately Held) Wireless Content www.nate.com Korea

Key Markets Addressed Korean Wireless Content Management Team CEO: Hyun Oh Yoo Key Investors SK Communications (Owner) Founded 2002


Nate is a wireless portal service offered by South Korea Telecom (SK Telecom).


Nate is a wireless data service that allows subscribers using SK Telecom’s CDMA network to send and receive content by connecting to the Internet through mobile devices.

Nate also provides an instant-messaging service, “Nate-ON”, which allows registered users to message one another through enabled devices.

Financial Snapshot

Standard rates for Nate range from $0.006 to $0.013 for ten seconds of airtime. If a subscriber elects to pay on a per-use basis, the fees are $0.0055/packet.

As of April 2003, 15MM or 83% of subscribers owned WAP-enabled phones, including approximately 12MM or 66%, which are capable of accessing SK Telecom’s CDMA 1xRTT network. In 4/03, approximately 15MM users visited the site at least once.

Recent News

SK Telecom (90% owner of SK Communications) is also looking to market the Nate platform as a turnkey solution in overseas markets. SK Telecom has licensed the platform to Pelephone Communications in Israel, Openwave in the US, and Asia Pacific Broadband Wireless Communications in Taiwan.

In 2002, Nate merged with Lycos Korea and accounted for USD $20MM of SK Telecom’s revenue, according to Morgan Stanley estimates.



NetMarble (Privately Held) Online Gaming www.netmarble.com Korea

Key Markets Addressed Korean Online Gaming Management Team CEO: Michael Kim Key Investors Plenus (Parent) Founded 2000


NetMarble is an online gaming service provider, based in Korea. NetMarble completed a merger with Plenus, a South Korean gaming company, in 9/2003.


NetMarble is an online gaming portal, which provides a variety of web board games, arcade games and sports games.

Financial Snapshot

As of CQ2:03, NetMarble had 38% market share in the Korean online gaming portal market, with 19MM subscribers. In CQ2:03, NetMarble had, on average, 8 MM monthly unique visitors, 314K monthly unique buyers, an ARPU of $11, and 220K concurrent users, according to company filings.

In CQ2:03, NetMarble generated $16MM in revenue. The company derived 43% of revenue from gaming, 31% from content, 16% from advertising, and 10% from eCommerce and others, according to company filings.

Recent News

In 1H:04, NetMarble plans to launch online game publishing and a search portal. Geographically, the company plans to expand in Japan (CQ1:04) and in China (CQ3:04).

CJ Entertainment Co. and CJ Corp, affiliates of the CJ Group, acquired 19% stake in Plenus Inc. for 80 billion KRW, on April 8, 2004.



Nexon (Privately Held) Online Gaming www.nexon.com Korea

Key Markets Addressed Korean Online Gaming Management Team CEO: Seo Won-il


Nexon is an online gaming portal in Korea, with 15MM subscribers and approximately 20 online games, according to press reports as of 3/04.


In addition to traditional online RPGs, including Kingdom of the Winds, the company offers casual online games, such as chess, and assorted Web board games through its portal. The company also offers games intended for children, such as Maypole Story and Crazy Arcade, according to press reports as of 2/04.

The company also operates in Japan through Nexon Japan. The division has 23 employees, and is looking to bring on 30 more, according to press reports as of 1/04.

Recent News

According to press reports as of 3/04, Nexon is planning to offer music-themed online games, and sell offline payment cards for online use.

Press reports as of 12/03 claim that the company has two multiplayer role-playing games and two casual games in development.



Sayclub (Privately Held) Portal www.sayclub.com Korea

Key Markets Addressed Community Oriented Web Services Management Team CEO and President: NeoWiz CTO: Sung-Kyu Oh Director: Sung H. Park CFO: Kwan Young Song COO: Gwan Ho Choi Key Investors NeoWiz (Parent) Founded 2000

Business Description Sayclub is a community-themed Web site in South Korea.


The company sells Online Avatars (or virtual identities), to Internet users. Online Avatars are used as a representation of oneself in a SayClub chat room.

Financial Snapshot

In 2004, Neowiz’s revenue almost doubled to $71 million from $36 million. Profitability also improved with operating margin improving to 31% from 20%.

40% of the company’s revenue came from SayClub and 52% came from Pmang (the gaming portal of NeoWiz).

Recent News

From CQ1:04 and beyond, Sayclub will focus more on homepage sales and the JukeOn music download service, in an effort to diversify revenue away from Avatars, according to press reports. In the first three days of beta testing in October 2003, JukeOn registered 3MM downloads of its software. However, while Bugs Music (a free online streaming music service with 20MM members) continues to operate, the market prospects for paid music content remain murky.

NeoWiz relaunched Sayclub’s gaming portal, SayGame, as pmang.com in CQ1:04.



Company Overviews — US



Stock Performance of Internet-related Companies — US Exhibit 83

YHOO Daily Stock Performance

96 97 98 99 00 01 02 03

20

406080100

200300

204

13



AMZN Daily Stock Performance

97 98 99 00 01 02 03

10

20

3040

80

120

102

11



Exhibit 85

EBAY Daily Stock Performance

99 00 01 02 03

10

20

30405060708090

122

13



IACI Daily Stock Performance

93 94 95 96 97 98 99 00 01 02 03

2

4

6810

20

304050

57

2


Source: FactSet, 12/16/03-4/9/04.



eBay (EBAY) Internet eCommerce www.ebay.com US

Morgan Stanley & Co Incorporation ("Morgan Stanley") is currently acting as financial advisor to eBay Inc. ("eBay") in its announced proposed tender offer of Internet Auction Co., Ltd. ("Internet Auction"). This report and the information provided herein is not intended to (i) provide voting advice, (ii) serve as an endorsement of the proposed transaction, or (iii) result in the procurement, withholding or revocation of a proxy or any other action by a security holder. eBay has agreed to pay fees to Morgan Stanley for its financial services including transaction fees that are contingent upon the consummation of the proposed transaction. This report was prepared solely upon information generally available to the public. No representation is made that it is accurate or complete. This report is not a recommendation or an offer to buy or sell the securities mentioned. Notwithstanding that Morgan Stanley is acting for eBay , this report is not issued with the authority of eBay. Please refer to the notes at the end of the report. Investment Thesis We believe that eBay is still in the early innings of a big secular growth cycle that it is leading — one could call it E2E (everyone to everyone) trading. eBay should be able to continue to impact a growing number of markets, improving efficiency. As a leading player pursuing the SFO (Search/Find/Obtain) opportunity, as the company expands its global trading platform, we believe eBay could support powerful self-reinforcing revenue and margin growth for many years. Key Positives 1. Very large market opportunity and a very extensible business model — $1.9 trillion addressable market worldwide in C2003, possibly

growing to $3.0+ trillion with the addition of new categories, including Business & Industrial, Wholesale, product financing, and specialty services.

2. Relatively low penetration of Internet users should signify upside — With 41 million active users in CQ4 and an estimated 750+ million global Internet users, this low penetration level should rise given eBay’s leading position in most major international markets.

3. Becoming more mainstream with brand strength — Growth in Clothing & Practicals and Automotive has led to less reliance on Collectibles. As a result of becoming more mainstream, eBay has begun to experience typical retail seasonality.

4. Great business model with diversified revenue stream and high margins — eBay has no inventory, high gross margins, viral customer acquisition, and low capital requirements; the company hit $267 million in CQ4:03 operating cash flow (up 46% Y/Y).

5. Continued growth from high levels — eBay’s CQ4 net revenue was up 57% Y/Y and its US online transaction revenue grew 38% Y/Y in CQ4. International transaction revenue grew 96% Y/Y to $211MM.

6. Strong metric growth — Record levels in CQ4 for active users (41 million, up 49% Y/Y), online listings (292 million, up 49% Y/Y), and gross merchandise sales (GMS) ($7.1 billion, up 53% Y/Y); these metrics have shown consistent, strong growth.

7. Continued momentum in velocity, ASPs — Fixed price (28% of CQ4 GMS) shortens auction length and Practicals growth raises ASPs. 8. Ability to raise prices (potentially without need) — Historically, fee increases for eBay have not led to market-share loss. Furthermore,

we believe that eBay’s pricing still reflects significant value compared to offline classified pricing. 9. Ability to improve and enhance its service — Launch of eBay Stores (already over 154,000 paying stores as of CQ4 post the September

2001 official launch) enhances options for buyers and provides a new merchandising solution for sellers. Also, eBay’s distinctive customer feedback loop encourages comments and criticisms from users that help build a better community.

10. eBay EachNet Prospects — eBay EachNet added 1MM new subscribers during CQ4:03, to reach 4.3MM registered users. We believe that China will have the largest Internet population in the world within 2-5 years, and that eBay EachNet may be the means to address this growing populace’s consumer needs. That said, we note that with the upcoming combined Sina-Yahoo! launch of a Chinese online auction site, eBay will face competitive risk.

Key Risks 1. Competitive environment — With large user bases, Amazon.com, Yahoo!, AOL Time Warner, MSN, and Google remain threats. 2. Limited control over customer service — This is the downside to no inventory risk, though customer satisfaction levels appear strong.

PayPal integration should help mitigate this risk somewhat. 3. Technology development/execution — The technology infrastructure is improving, but user interface (including payments and searches)

remains lacking; PayPal integration should help here. 4. Execution against aggressive targets — eBay continues to progress toward its core $3+ billion net revenue target (excluding payments)

and $1+ billion cash flow estimate for C2005. 5. Merger integration and international expansion — There are risks in integrating and expanding the businesses of past international

acquisitions (Internet Auction, iBazar, NeoCom) as well as potential future acquisitions. 6. Conversion rates — As unit growth remains strong, we will watch closely for signs of falling conversion rates, which could manifest itself in

slower revenue growth (relative to unit growth). CQ4 rates appeared steady though. 7. Patent infringement lawsuit — eBay could potentially face incremental litigation related to patents



Stock Catalysts 1. Continued international momentum — International accounted for 38% of total net revenue in CQ4:03, up from 30% in CQ4:02.

Importantly, eBay is the leading auction site in a majority of its international markets, and is the overall leading ecommerce site in six of those countries (China, Brazil, U.K., Korea, Canada, Germany). eBay’s rapid expansion of global presence is unique in business, in our view.

2. Broadening breadth of products and services and buyers and sellers — IBM is now among the largest sellers on eBay; other notable new sellers are Hitachi, Casio, Motorola, Intel, Yamaha, Sprint, OfficeMax, Harman/Kardon, and Kenwood.

3. Ongoing ramps in practicals business — We estimate the Clothing & Practicals business is currently four times that of the collectibles’ addressable opportunity and growing faster. As Practicals categories grow and fixed price sales gain share over auctions, eBay is increasingly positioning itself as a primary retail destination.

4. Operating margin expansion — Ongoing margin expansion — up 200 bps Y/Y to 34% in CQ4:03, but expected to expand to 35% by 2005 — should be compelling for investors.



Yahoo! (YHOO) Internet Portal www.yahoo.com US

Investment Thesis Yahoo! is a leading technology-enabled service provider, and its network is a leader in interactive media and commerce. Internet user, uses, and usage growth (IU3) continues at a strong pace — stronger internationally than within the US — and Yahoo!, with 263 million visitors worldwide (excluding approximately 34% owned Yahoo! Japan) as of CQ4 (approximately 30–40% outside the US), should be well positioned to continue to tap into and develop the revenue streams that accompany this growth.

Key Positives 1. Large and growing market opportunity — We expect worldwide growth in Internet usage to continue at 15%+ Y/Y for at least the next

few years, with international growth outpacing US growth. 2. Leading Web portal with very powerful momentum in key metrics — Yahoo! had 263 million unique users in December, up 23% Y/Y

and 7% Q/Q, and 2.1B avg. daily page views, up 32% Y/Y and 4% Q/Q. 3. High-margin business model — In a tough CQ4 market environment, Yahoo!’s gross margin was 87%. In CQ4, Yahoo! reached an OCF

(including stock-based compensation) margin of 31% and an operating margin of 18%. By C2005E, we believe these could reach 37% and 27%, respectively.

4. Strong international positioning — The company has 25 international properties and is a top three player in 20 countries. 5. Brand strength — In December 2002, Young & Rubicam named Yahoo! the strongest brand among Internet companies. 6. User loyalty — As of December 2003, Yahoo! had 133MM active registered users (up 32% Y/Y and 8% Q/Q). According to comScore,

Yahoo! is the No. 1 global site in reach and unique visitors (as of February 2004) and recent user experience improvements have helped. 7. Large opportunity for advertising (including pay for performance search and classifieds) — The long-term market opportunity for

Internet advertising remains attractive, we believe. The monthly average revenue per user was $0.67 in CQ4 (up 46% Y/Y), and this should continue to rise with the company estimating a doubling of revenue per user within 2–4 years. Additionally, the integration of Inktomi, Overture and Yahoo!’s recently launched enhanced search offering should provide a boost to Yahoo!’s Marketing Services business.

8. Potential for premium services — A large and loyal global audience bodes well for better monetization. Data points from areas like personals are compelling to us (fee-paying customers rose 123% Y/Y and 17% Q/Q) to 4.9MM in CQ4:03.

9. Broadband (access) opportunities could prove compelling — Early data on Yahoo!’s relationship with SBC appear positive (DSL launched 9/02). Per the company, SBC Yahoo! DSL is the fastest growing broadband service in the country. Yahoo!’s BYOA (Yahoo! Plus) product could provide a nice boost. In addition, we are enthusiastic about potential opportunities related to Yahoo!’s user acceptance of its online music (LAUNCH) efforts — note that the company recently supported an impressive 140MM streaming sessions (primarily music videos) in a month - up 350%+ Y/Y.

Key Risks 1. Competitive environment — Strong competition exists from the likes of Time Warner and Microsoft in the portal space and eBay,

Amazon.com, Microsoft and Time Warner in the growing commerce area. In addition, Google and Microsoft are contenders in search. 2. Lack of vertical category dominance — While Yahoo!’s portal is a key user/usage leader, often its categories/channels are led by other

companies. 3. International execution — Maintaining a consistent quality of customer experience and competitive position is key. Stock Catalysts: 1. Revenue growth acceleration — We expect a strong CQ1:04, which could set the company up for upside through C2004E for both

revenue and Operating Income before D&A. Positive surprises should help drive the stock, we believe, as many investors are still in “show me” mode.

2. Major client wins among larger, traditional marketers — Signs that Yahoo! is continuing to ramp deals with strong traditional brands should help validate Internet advertising and strengthen Yahoo!’s revenue.

3. Strong traction with the SBC and BT broadband service and additional access partnership announcements. 4. Ongoing traction in consumer premium subscription services — Signs of ongoing successful revenue diversification via recurring

subscription fees, should help inspire broader confidence. We expect Yahoo! to grow premium subscribers by 40%+ through C2004E. 5. Continued growth in Yahoo! users, uses, and usage — We believe that continued growth in users, uses, and usage is critical for the

company to keep the position of No. 1 global portal and not lose share to AOL and Microsoft. 6. Development of Internet advertising and eCommerce markets overseas — This bodes well for Yahoo!’s international properties.



InterActive Corp. (IACI) Internet Operating Company www.iac.com US

Company Description Founded in 1986, InterActiveCorp (formerly USA Interactive) is an Internet eCommerce and diversified media company. The company has six lines of businesses: Travel (including Expedia, hotels.com, and Hotwire.com), Electronic Retailing (including the Home Shopping Network), Ticketing (including Ticketmaster.com), Personals (including match.com and udate.com), Local Services (including Citysearch and evite), and Financial Services (including LendingTree, getsmart, and RealEstate.com). In CQ4:03, Interactive supported $1,805MM in revenue, up 36% Y/Y and 12% Q/Q, and $292MM in operating income before amortization (OIBA). Business Strengths 1. Category Leader in a Majority of its Diversified Business Lines — The company has #1 market share in online travel through Expedia,

#2 in TV/electronic retailing through HSN, #1 in online ticketing through Ticketmaster, a leader in online personals through match.com and #2 in online mortgages through LendingTree.

2. Growth in Online Commerce and Travel — As online channels continue to gain share, at the margin, from their offline counterparts, IACI could be a beneficiary, with its diverse stable of online media, financial services, commerce and travel assets. Further, IACI estimates that nearly 50% (and stable) of the ticketing business has moved online and about 15% (and rising) of its US-based HSN business has moved online.

3. Growth in online transactions — In CQ4:03, Travel revenue rose 41% Y/Y to $677MM (with 111% OIBA growth to $150MM); Electronic Retailing rose 14% to $647MM (with 35% OIBA growth to $74MM); Online Ticketing rose 11% to $183MM (with 47% OIBA growth to $35MM); while Online Personals rose 29% to $48MM (albeit with a 20% OIBA decline to $8MM). Local services (including CitySearch) grew 1,674% to $148MM (while OIBA increased from a $8MM loss to a $55MM gain Y/Y).

4. International Opportunity — As of CQ4:03, IACI derived roughly 15% of its travel revenue from international sources. The company is relatively strong in the UK, but has plenty of room to capitalize on markets outside the US.

5. Management Strength — Spearheaded by Chairman and CEO Barry Diller, management has proven adept at deal making and obtaining eCommerce assets. The key go forward challenge is to move IACI from an investment-oriented company to an operating-oriented company.

6. Significant Free Cash Flow Generation — For the full year 2003, the company grew free cash flow by 93% Y/Y, from $574MM in 2002 to $1,106MM in 2003.

7. Balance Sheet Strength/Potential for Acquisitions — $3B+ in cash and equivalents as well as potential debt capacity as of CQ4:03. Business Challenges 1. Asset Integration — IACI’s aggressive acquisition strategy has created challenges in integrating the products, services, and technologies

of all of its subsidiaries. 2. Competition — While IACI has established market leadership in online travel and ticketing, the dynamics of the online market are still

evolving. Other key players include eBay, Amazon.com, Yahoo!, Microsoft, and AOL, and Google. 3. Partner Cannibalization — Many hotels that Hotels.com and Expedia have relationships with have begun aggressive price promotion on

their Web sites, effectively undercutting IACI’s prices. Further price reductions by hotels or travel carriers could reduce Hotels.com and Expedia’s bargaining power with the hotels.

Focus Areas 1. Realizing increased synergies between assets — IACI is just beginning to foster collaboration between its subsidiary companies. Closer

cooperation between subsidiaries could improve operating efficiency, in our view. 2. Acquisitions: IACI has been active on the acquisition front, and could make additional investments and acquisitions, though the local and

global competitive landscape has gotten much more challenging.



Amazon.com (AMZN) Internet Retail www.amazon.com US

Investment Thesis Global online retail sales are expected to grow nicely in coming years, and Amazon.com, with 39MM active customers, and one of the strongest eCommerce brands, should be well positioned to benefit from this growth. With limited expected capital investment required, the challenge for the company is to drive unit growth across the platform, realizing economies of scale and the inherent leverage of the “virtual” technology-oriented business model. Demonstrating this leverage, Amazon.com grew CQ4 revenue 36% Y/Y (and units 33% Y/Y) while operating expenses grew only 17% Y/Y and headcount decreased modestly. Key Positives 1. Large and growing market opportunity — With 39MM active customers, and 750MM+ worldwide Internet users, the market opportunity

remains large and untapped, especially as broadband usage ramps. 2. Leadership spot in direct (and indirect) online retailing — Accounted for an estimated 6-7% of US online retail (excluding travel) in

C2002, while Y/Y organic unit growth was an estimated 33%. Impressive growth of third-party sales (24% of units in CQ4, up 300 bps from 21%) adds key dimension to product offering and profitability model - we expect high-margin third-party sales contribution to continue to rise.

3. Powerful technology platform — Has created the leading eCommerce platform: integrated, feature-rich, content-rich, easy-to-use, extensible (for product selection…and to external partners/vendors), scalable and secure. We expect ongoing improvements based on focus and the $200MM+ spent annually in technology-related purchases (including R&D, servers, and software). The platform serves as a powerful tool to market new products to customer base…in addition to offering a compelling service option to sellers. We continue to maintain that early commitment to technology - including search, Web services and XML - will to allow Amazon.com to continue to grow deep partner relationships and related operating profits as eCommerce continues to ramp.

4. Operating profitability momentum is compelling — We expect Amazon’s operating margins to continue to expand, from 7% in 2003 to approximately 17% in 2010E, given the scale inherent in the model, and the fact that Amazon trades the cost of real estate for the declining costs of technology. However, we note that the company will continue to be impacted by seasonality that is not dissimilar from traditional retailers. Additionally, the company delivered $346MM of free cash flow ($0.83 per share) in 2003 and we expect it to grow at a roughly 13-18% CAGR from 2003 through 2010.

5. North American Profitability — Accelerating operating profitability from under 5% in 2001 to nearly 10% in CQ3:03 for North America should bode well for future momentum of earlier-stage segments, such as International.

6. Ongoing diversification of revenue — Media accounted for 74% of CQ4 revenue, down from 76% Y/Y in CQ4:02. Initial success in new categories like Apparel and Sports bode well for continued diversification - could expect, on average, debut of one or two new categories per Q. International continues to gain ground on North America revenue, growing to 41% of total revenue in CQ4:03 from 27% of total revenue in CQ1:02.

7. Impressive inventory management — Annualized inventory turns (using TTM average inventory) in CQ4 were 4% of revenue, at 18 (down 5% Y/Y). The company indicated that it was taking advantage of buying opportunities from vendors to optimize 2004 in-stock levels.

8. Relentless focus on customer experience — With focus on: 1) selection; 2) convenience; and 3) price. With additional focus on ease-of use; convenience and product availability/delivery.

9. Brand strength and customer service (with a focus on convenience and price) are especially strong — Brand value ranked No. 76 (in 2001) worldwide by Interbrand, ahead of Burger King and Shell Oil. Amazon.com ranked No. 1 in the American Customer Satisfaction Index conducted by the University of Michigan Business School and ahead of companies like Barnes & Noble and Wal-Mart. In terms of customer service, we believe that with Amazon.com’s intimate knowledge of its customer’s searching/purchasing patterns, the company has become a leading innovator in personalization and in shaping the online SFO (Search/Find/Obtain) experience— we continue to maintain that this is an underappreciated asset.

10. Ongoing Debt Reduction — In CQ4:03, the company repaid $200MM of its US Dollar 4.75% convertible issue, and plans to repay $150MM more of the same issue in 2/2004. Continued debt reduction reduces the interest expense drag on free cash flow and limits potential shareholder dilution.



Key Risks 1. Declining gross margin may weigh on profitability — The company’s 21.9% Gross Margin in CQ4 was the lowest since 1999. At the

same time, Amazon posted its highest-ever operating margins in the NA (10%) and International (5%) segments. Management indicated this reflected the company focus of lowering consumer prices, even if it means taking away dollars from, say, marketing. We are concerned that future sales growth may be driven more and more by price differentiation, which in turn may dampen profits in the long-run.

2. Free Shipping and low-price focus could prove costly — Amazon.com’s free Super Saver Shipping offer (free shipping on orders over $25) has been successful in driving unit growth and appears to have increased the frequency of customer purchases, while negatively impacting margins. With improved operational efficiency, this impact can be mitigated, but could still prove a damper on profitability growth. That said, revenue growth has significantly outpaced opex growth in recent years and Q/Q opex has been relatively stable for quite some time. And, fulfillment costs (at 8% of CQ4 revenue, down from 9% in CQ4:02) have continued to decline on a relative basis.

3. Seasonality will continue to impact Q/Q growth — CQ4:03 accounted for 37% of C2003 revenue, while CQ4:02 was 36% of C2002 revenue.

4. Big competitors continue to come at Amazon.com from unique vantage points — Among leading competitors, we would highlight eBay, Yahoo!, MSN, Interactive Corp and Google. As eBay has continued to push its fixed-price initiatives and Amazon.com has moved aggressively into used sales via Marketplace, the companies increasingly compete more directly. Offline retailers (e.g. Wal-Mart) also remain a threat.

5. Interest expense remains a drag on cash flow — Annual cash interest expense of over $104MM, reduced 20% Y/Y sets the positive-free-cash-flow bar that much higher.

6. Internet taxation — Given current state government budget shortfalls, there is a renewed push for Congressional legislation regarding taxation of Internet sales. If broader taxation were enacted/enforced, this would increase the total cost to consumers for Internet purchases vis-à-vis offline retail. However, a tax law change is likely to take at least 1-2 years and we aren’t terribly concerned about potential impact.

Stock Catalysts 1. Demonstration of continued improvement in operating cash flow — The platform is built and fixed costs are largely stable; going

forward, the company needs to continue to drive more units through the platform to demonstrate on-going scalability and cash flow growth. 2. Successful moves into more “virtual” businesses — Amazon.com Marketplace growth is a positive trend. In addition, we look for

ongoing growth in SKU count to leverage fixed-cost base. The success of the Apparel store (launched in 11/02) and Sports (launched in 09/03) are positive signs of the extensibility of the platform.

3. Increased appreciation for Amazon’s relative market positioning — We continue to maintain that many folks still underestimate the market opportunities.



Company Overviews — Europe



Stock Performance of Internet-related Companies — Europe Exhibit 87

T-Online (TOIGn.DE) Daily Stock Performance

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Exhibit 88

Wanadoo (NAD.PA) Daily Stock Performance

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T-Online (TOIGn.DE) (covered by Javier Marin) Internet Portal www.t-online.com Germany

Investment Thesis T-Online is Germany's leading ISP with 13.1m subscribers at end 2003 and operates the leading German-language Internet portal. The company's principal activities include Internet access services, Internet advertising and eCommerce Key Positives 1. Very large market share in Germany in both narrowband and broadband — Also present in France, Spain, Austria and Switzerland,

where it holds no 2 or 3 position. Saw broadband subs growth of 25% in Germany in 2003 while France (through Club Internet) and Spain (through Ya.com) saw growth of 80% and 110% respectively.

2. Internet penetration in Germany, Austria, France, Switzerland is between 40 and 50% while Spain is nearer the 30% mark. Broadband penetration is around the 15% mark in France and Germany but in the single digits for Spain. So there is large scope for growth, especially in broadband throughout Europe, and it is up to T-Online to grab its share of the net additions in its respective markets.

3. Portal revenues — T-Online is the leading European ISP in this area. Portal revenues represented 19% of total revenues in 2003 (vs 7% for Wanadoo and 6% for Tiscali). Signs of a rebirth in online advertising with Yahoo! forecasting the market to grow 20% in 2004 and the European market looks set to follow the same trend. Jupiter estimates that online ad revs in Germany will rise 36% p.a. in 2004-06. The recent acquisition of Scout24 Group will also boost portal revenues. Portal revs are high margin.

4. Potential for premium services — has signed a number of agreements eg. with Vivendi Universal, Sony, and Microsoft). Currently offering movie clips and sports highlights through its Topic Portal and movies to download through the video on demand feature. The site also has its own legal music downloading service.

5. Regulatory environment — currently very favourable to T-Online and Deutsche Telekom, its PTO parent. Despite EU regulations opening up the local loop, unbundling of the local loop (ULL) is still very difficult for independent ISPs. Means that competition is stifled, unlike in France where ULL is quite well advanced, relatively.

Key Risks 1. Regulatory environment in Germany can only get worse for T-Online — If/ when EU regulations are implemented as they were

intended to be, the local loop will become more accessible to independent ISPs. And if the experience of Wanadoo in France is anything to judge from, T-Online’s market share in Germany will be severely challenged as a result of the increased competition. Remains to be seen whether T-Online’s superior content and premium services could stop subscribers from churning to lower cost ISPs.

2. Market share already declining? In 2002, T-Online grabbed 80-90% of incremental ADSL subs in Germany but by 4Q03 this had fallen to just under 50%. Management said it has launched an offensive to address this from the beginning of 2004. Its long-term target market share is c.55%. However, if market share is being eroded in the currently favourable regulatory conditions, it begs the question of what will happen in a more competitive environment.

3. Use of cash — cash generative business and current cash balance is more than €4bn. Management has said it may pay a dividend in 2005 but shareholders are growing impatient for a firm strategy to be implemented, either acquisition-based or involving the return of cash.

4. VoIP and Deutsche Telekom (DT) — Broadband opportunities and the challenge to its share of the voice market represented by VoIP encouraged FT to buy back the minorities in Wanadoo. DT may face the same dilemma when VoIP gathers speed in Germany.

Stock Catalysts 1. Broadband growth — strong growth in German broadband subs in 1H04 may reassure the market that 4Q03 was merely a blip. However,

there is still the challenge of a far more competitive environment once the regulatory environment changes concerning the ULL. 2. Change in regulatory environment in Germany leading to the opening up of the ULL will be perceived as bad news for T-Online 3. Exclusive content deals would be viewed positively by the market as would T-Online development of VoIP and TV over ADSL services,

which are gathering pace across Europe



Wanadoo (NAD.PA) (covered by Javier Marin) Internet Portal www.wanadoo.com France

Key Markets Addressed Internet access, Internet Advertising, eCommerce, Directories Management Team CEO: Olivier Sichel CFO: Thierry Lemaitre COO: Yves Le Mouel Founded 1996 Morgan Stanley & Co. Limited, an affiliate of Morgan Stanley, is providing certain financial advice to Wanadoo SA ("Wanadoo"), in connection with the proposed acquisition by France Telecom SA ("France Telecom") of the Wanadoo shares that it does not currently own as announced on 23 February 2004. In accordance with its general policy, Morgan Stanley currently expresses no rating on Wanadoo. Morgan Stanley may receive fees for its financial services including transaction fees that are subject to the completion of the proposed transactions. This report and the information herein are not intended to serve as an endorsement of the proposed transactions. This report was prepared solely upon information generally available to the public. No representation is made that it is accurate and complete. This report is not a recommendation or an offer to buy or sell the securities mentioned. Please refer to the notes at the end of this report.

Company Description Wanadoo, a subsidiary of France Telecom, is one of Europe's leading Internet and directories companies with, more than 9.1 million Internet Access customers and more than 641,000 advertisers in Directories at December 31, 2003. Wanadoo is a leading Internet media services provider in France and the U.K., and the n°2 in Spain and in the Netherlands. Wanadoo acquired Freeserve in the UK and Indice Multimedia in Spain in 2001, and acquired eresMas in Spain in 2002.

Wanadoo has more than 2.4 million ADSL and cable subscribers. The company is listed on Euronext Paris and has approximately 6,700 employees.

France Telecom recently announced that it is to buy the remaining 30% of Wanadoo that it does not own, having floated Wanadoo in 2000. FT then plans to float the Directories business but retain control for the time being.

In FY2003, Wanadoo booked €2.62 bn in revenue, up 26% Y/Y, and had €2.07 bn in Cash and Equivalents, up 25% Y/Y. Wanadoo derived 65% of revenue from the Internet business (of which access represented 58%), and 35% from Directories business.

Gross margin in FY2003 was 41% for the Internet business, up 6% Y/Y with EBITDA margin of 3% vs negative 14% in 2002. For the directories business, gross margin was 75%, up 2% Y/Y, with EBITDA margin of 37%, up 4% Y/Y.

Content and services for customers include: Serenity suite (anti-virus, anti-spam, firewall), Communication suite (Instant Messenger, VoIP, PCto Phone video-conferencing); Entertainment suite (digital music, video on demand), Efficiency suite (classified, maps). For advertisers, Wanadoo offer online advertising, direct marketing, and sponsored links. Their specialist online retailer, Alapage, recorded 1,329m orders in 2003 (+26% Y/Y). Products include books, CDs, imports, cassettes, etc.)

At the end of 2003, Wanadoo had 17.2m unique portal visitors per month, 20m e-mail boxes and 275,000 advertisers on the Internet through the Directories business.



Company Models — China



Exhibit 89

SINA Historical Quarterly Income Statement ($ in thousands) 2002 2003

3/01 6/01 9/01 12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03Revenue $6,129 $5,779 $6,061 $6,769 $7,115 $8,563 $10,346 $12,870 $18,114 $25,987 $31,914 $38,270

Advertising 5429 $5,008 $5,144 $5,127 $5,001 5,833 6,491 $7,378 7,298 9,495 11,441 12,939Non-advertising $700 $771 $917 $1,642 $2,114 2,730 3,855 $5,492 10,816 16,492 20,473 25,331

Cost of Revenue 3,561 3,119 3,103 3,456 3,418 3,549 4,081 4,447 6,107 8,106 9,562 10,662Advertising 3,377 3,001 3,026 3,068 2,753 2,690 2,977 2,847 2,826 3,239 3,767 4,169Non-advertising 184 118 77 388 665 859 1,104 1,600 3,281 4,867 5,795 6,493

Gross Profit 2,568 2,660 2,958 3,313 3,697 5,014 6,265 8,423 12,007 17,881 22,352 27,608

Operating Expenses 9,853 8,208 7,145 6,687 9,036 7,183 7,065 7,088 8,726 11,099 10,772 12,210 Sales and Marketing 5,634 4,012 3,328 3,178 3,088 2,904 3,090 3,381 4,461 5,092 5,616 6,588 General and Administrative 1,855 1,969 1,895 1,926 2,520 2,541 2,391 2,389 2,265 3,219 2,980 3,428 Product Development 2,364 2,227 1,922 1,583 1,741 1,738 1,584 1,318 1,495 1,471 1,761 1,779 Write-off of Intangible Assets - - - - - - - - - 903 - - Amortization of Intangibles** 1,687 505 414 415 415Operating Income (7,285) (5,548) (4,187) (3,374) (5,339) (2,169) (800) 1,335 3,281 6,782 11,580 15,398D&A and other add back 3,538 3,172 2,992 2,811 3,055 - 656 2,170 600 753 838 415EBITDA (3,747) (2,376) (1,195) (563) (2,284) - (144) 3,505 3,881 7,535 12,418 15,813Other income (expense) 1,850 1,485 1,304 1,123 1,368 275 241 482 95 339 500 406 Other income 1,850 1,485 1,304 1,123 300 (442) (311) 482 (306) (316) (345) (288) Interest income, net - - - - 1,068 717 552 - 401 655 845 694Income Taxes - - - - - - - - - - 423 472

Net Income - Operating (5,435) (4,063) (2,883) (2,251) (3,971) (1,894) (559) 1,817 3,376 7,121 11,657 15,332

Net Income Reported (5,435) (4,063) (2,883) (2,251) (3,971) (1,894) (559) 1,817 3,376 7,121 11,657 15,332Earnings Per Share - Operating ($0.13) ($0.10) ($0.07) ($0.05) ($0.10) ($0.04) ($0.01) $0.04 $0.07 $0.15 $0.25 $0.32

Shares Outstanding 40,300 41,358 39,565 45,396 40,300 45,579 45,919 45,396 46,774 47,661 47,462 48,647

Growth RateTotal Revenue (yr-yr) -72% -76% -83% 16% 48% 71% 90% 155% 203% 208% 197%Total Revenue (seq) -6% 5% 12% 5% 20% 21% 24% 41% 43% 23% 20%

Margin Analysis (% of Total Revenue)Gross Margin 42% 46% 49% 49% 52% 59% 61% 65% 66% 69% 70% 72%Operating Expenses 161% 142% 118% 99% 127% 84% 68% 55% 48% 43% 34% 32%

Sales and Marketing 92% 69% 55% 47% 43% 34% 30% 26% 25% 20% 18% 17% General and Administrative 34% 39% 37% 38% 50% 44% 37% 32% 31% 34% 26% 26% Product Development 338% 289% 210% 96% 82% 64% 41% 24% 14% 9% 9% 7%EBITDA Margin -61% -41% -20% -8% -32% - -1% 27% 21% 29% 39% 41%Operating Margin -119% -96% -69% -50% -75% -25% -8% 10% 18% 26% 36% 40%

2001

Source: Company Reports. Exhibit 90

SINA Historical Quarterly Balance Sheet ($ in thousands) 2002

3/01 6/01 9/01 12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03Total Assets: $140,057 $133,122 $136,080 $130,432 $126,600 $121,300 $122,472 $130,479 $148,169 $152,978 $270,127 $289,897Current Assets: 122,097 115,401 102,599 100,862 100,000 99,600 101,842 104,906 103,007 113,782 229,662 244,770 Cash and cash equivalents 115,764 109,789 97,103 95,972 93,600 93,200 95,606 53,262 38,353 48,643 159,775 227,164 Account receivable, net of allowance 4,649 4,262 4,437 3,592 4,600 4,700 4,151 5,847 10,701 12,428 16,610 17,606 Prepaid expenses and other 1,684 1,350 1,059 1,298 1,800 1,700 2,085 2323 2,604 4,423 4,824 - Short Term Investments - - - - - - - 43,474 51,349 48,288 48,453 -

Long-Term Assets: 17,960 17,721 33,481 29,570 26,600 21,700 20,630 25,573 45,162 39,196 40,465 45,127Fixed assets 10,292 11,911 11,220 10,416 8,700 8,200 7,774 7,599 7,511 8,386 8,412 8,646Intangible assets, net (including Goodwill) 6,751 5,063 3,375 1,687 - - - 993 2,716 19,490 19,075 18,660Marketable Security Investments - - 17,729 17,309 - - - 16,637 - 11,220 8,125 8,878Other assets 917 747 1,157 158 17,900 13,500 12,856 344 34,935 100 4,853 8,943

Total Liabilities: 13,392 13,155 15,255 13,985 13,600 9,600 10,868 13,092 19,007 21,352 125,856 130,390Current Liabilities: 13,392 13,155 11,255 9,985 9,600 9,600 - 13,092 19,007 21,352 25,856 30,390 Accounts payable and accrued liabilities 13,392 13,155 11,255 9,985 9,600 9,600 - 13,092 19,007 21,352 25,856 - Deferred revenue - - - - - - - - 1,313 - - - Current portion of capital leases - - - - - - - - - - - -

Long-term Liabilities - - 4,000 4,000 4,000 - - - - - 100,000 100,000 Other Long-Term - - 4,000 4,000 4,000 - - - - - - - Convertible Debt - - - - - - - - - - 100,000 100,000

Stockholders' Equity: 126,665 119,967 120,825 116,447 113,000 111,700 111,604 117,387 129,162 131,626 144,271 159,507 Common stock 5,501 5,504 6,104 6,105 113,000 111,700 - 6,114 6,222 6,315 7,775 - Additional paid-in capital 221,743 220,671 223,340 223,311 - - - 223,358 227,928 229,283 234,668 - Retained Earnings (91,083) (99,301) (104,595) (109,528) - - - - - - - - Deferred Compensation - - - - - - - (554) (310) (100) (7) - Accumulated other comprehensive income (9,496) (6,907) (4,024) (3,441) - - - 3,996 1,579 (4,023) (5,842) - Accumulated Deficit - - - - - - - (114,477) (111,101) (103,980) (92,323) - Notes Receivables from Shareholders - - - - - - - (1,050) (750) (150) - - Ordinary Shares Subject to issuance - - - - - - - - 4,281 4,281 - - Deferred Cash Consideration - - - - - - - - 1,313 - - -

2001

Source: Company Reports.



Exhibit 91

NetEase Historical Quarterly Income Statement ($ in thousands) 2002 2003

3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03Revenue $2,749 $4,417 $8,542 $10,981 $13,535 $15,628 $16,787 $19,548

Advertising $477 970 1,181 $1,504 1,449 2,516 3,270 3,199Non-advertising (includes sales and value added taxes) $2,272 3,447 7,360 $9,477 12,085 13,112 13,517 16,349

Cost of Revenue 1,857 1,762 2,467 2,573 2,442 2,644 2,148 3,091Advertising 1,799 1,704 2,409 2,515 2,442 - 880 1,073Non-advertising 58 58 58 58 - - 1,268 2,017

Gross Profit 892 2,655 6,075 8,408 11,092 12,983 14,639 16,457

Operating Expenses 3,191 3,285 7,367 3,703 3,413 3,574 4,121 4,584 Sales and Marketing/G&A 2,682 2,653 2,646 3,227 2,881 3,072 3,626 3,789 Product Development 431 469 328 440 503 499 495 804 Share Compensation Cost 78 72 43 36 30 3 - (8) Asset Impairment Loss - 90 - - - - - - Class Action Settlement - - 4,350 - - - - - Operating Income (2,299) (630) (1,292) 4,706 7,679 9,409 10,519 11,873

Other income (expense) 149 635 202 208 877 249 425 530 Other income (86) 359 (6) 13 667 19 (15) 48 Interest income, net 235 276 208 195 210 231 440 482

Income Taxes - - - (289) 230 - 784 1,036

Net Income - Operating (2,150) 5 (1,090) 5,203 8,326 9,658 10,159 11,367

Net Income - Reported (2,150) 5 (1,090) 5,203 8,326 9,658 10,159 11,367

Earnings Per Share - Reported ($0.07) $0.00 ($0.04) $0.17 $0.26 $0.30 $0.30 $0.35Earnings Per Share - Operating ($0.07) $0.00 ($0.04) $0.17 $0.26 $0.30 $0.30 $0.35

Shares Outstanding 30,243 30,383 30,466 31,278 32,079 32,686 34,398 32,681

Growth RateTotal Revenue (yr-yr) 424% 638% 944% 814% 392% 254% 97% 44%Total Revenue (seq) 129% 61% 93% 29% 23% 15% 7% 16%

Margin Analysis (% of Total Revenue)Gross Margin 32% 60% 71% 77% 82% 83% 87% 84%Operating Expenses 116% 74% 86% 34% 25% 23% 25% 23%

Sales and Marketing/G&A 98% 60% 31% 29% 21% 20% 22% 19% Product Development 16% 11% 4% 4% 4% 3% 3% 4% Share Compensation Cost 16% 7% 4% 2% 2% - - - Asset Impairment Loss 3%EBITDA Margin - - - - - - - -Operating Margin -78% 0% -13% 47% 62% 62% 61% 58% Source: Company reports.



Exhibit 92

NetEase Historical Quarterly Balance Sheet ($ in thousands) 2002 2003

3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03Total Assets: $76,178 $70,317 $69,372 $74,840 $84,162 $94,975 $205,181 $215,870Current Assets: 72,127 66,400 65,900 71,236 80,094 90,585 198,604 209,355 Cash and cash equivalents 69,604 63,771 63,150 67,787 77,234 88,181 192,601 203,966 Accounts Receivable, Prepaid expenses and other 2,523 2,629 2,749 3,449 2,860 2,404 6,003 5,389

Long-Term Assets: 4,051 3,917 3,473 3,604 4,068 4,390 6,577 6,516Fixed assets 4,008 3,917 3,439 3,186 3,270 3,102 3,625 4,882Other assets 43 - 34 418 798 1,288 2,952 1,633

Total Liabilities: 11,137 4,901 4,631 4,668 5,422 6,046 110,172 109,424Current Liabilities: 11,137 4,901 4,631 4,668 5,422 6,008 10,133 9,396 Accounts payable and accrued liabilities 5,056 4,858 3,633 4,648 5,421 6,008 10,133 9,396 Deferred revenue 40 43 - 20 1 - - - Short Term Bank Loans 6,041 - 998 - - - - -

Long Term Liabilities - - - - - 38 100,038 100,028

Stockholders' Equity: 65,041 65,416 64,741 70,172 78,740 88,929 95,009 106,446 Common stock 303 304 308 310 312 315 313 313 Additional paid-in capital 122,081 122,343 122,652 122,770 123,000 124,026 119,948 124,078 Retained Earnings - - - - - - - - Deferred Compensation (357) (246) (145) (57) (27) (24) (20) (8) Accumulated other comprehensive income - - - - - - - - Accumulated Deficit (57,014) (57,012) (58,100) (52,879) (44,569) (35,413) (25,255) (17,961) Notes Receivables from Shareholders - - - - - - - - Ordinary Shares Subject to issuance - - - - - - - - Deferred Cash Consideration - - - - - - - - Transaction Adjustments 28 26 26 28 25 25 24 25Total Liabilities and Shareholders' Equity 76,177 70,317 69,372 74,840 84,162 94,975 205,181 215,870 Source: Company Reports.



Exhibit 93

SOHU Historical Quarterly Income Statement ($ in thousands) 2002 2003

3/01 6/01 9/01 12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03Revenue $2,453 $2,878 $3,563 $4,106 $4,531 $6,126 $7,508 $10,564 $14,411 $19,349 $22,080 $24,585

Advertising $2,087 $2,227 $2,425 $2,506 $2,511 3,363 3,674 $4,304 4,476 6,801 8,748 9,478Non-advertising $366 $651 $1,138 $1,600 $2,020 2,763 3,834 $6,260 9,935 12,548 13,332 15,107

Cost of Revenue 2,148 2,264 2,398 2,583 2,911 3,095 3,343 4,075 5,256 6,271 6,901 6,778Advertising 1,851 1,742 1,575 1,456 1,463 1,495 1,472 1,513 1,602 1,750 1,973 2,134Non-advertising 297 522 823 1,127 1,448 1,600 1,871 2,562 3,654 4,521 4,928 4,644

Gross Profit 305 614 1,165 1,523 1,620 3,031 4,165 6,489 9,155 13,078 15,179 17,807

Operating Expenses 5,347 4,506 4,226 4,337 4,157 4,166 4,291 4,775 4,810 5,766 5,988 6,634 Sales and Marketing 2,470 2,115 1,949 1,840 2,015 1,872 1,862 2,224 1,992 2,528 2,839 3,211 General and Administrative 1,239 1,117 1,070 1,272 967 984 955 1,002 1,076 1,312 1,181 1,517 Product Development 1,638 1,274 1,207 1,225 1,175 1,310 1,474 1,549 1,742 1,926 1,968 1,906

Operating Income (5,042) (3,892) (3,061) (2,814) (2,537) (1,135) (126) 1,714 4,345 7,312 9,191 11,173D&A and other add back - - - - 1,205 1,212 1,209 1,083 1,146 1,054 676 998EBITDA - - - - (1,332) 77 1,083 2,797 5,491 8,366 9,867 12,171

Other income (expense) 799 593 356 320 328 265 238 217 246 214 (20) 546 Other income (106) (2) 22 (58) (67) (114) (81) (129) (552) (202) Interest income, net 799 593 462 322 306 323 305 331 327 343 532 748

Income Taxes - - - - - - - - - - 6,500 150

Net Income - Operating (4,243) (3,299) (2,705) (2,494) (2,209) (870) 112 1,931 4,591 7,526 2,671 11,569

Non-Cash Items (4,223) (4,349) (22,279) 5 - - - - - - - - Amortization of deferred compensation (20) (147) 99 5 - - - - - - - - Amortization of intangible assets (4,203) (4,202) (4,202) - - - - - - - - - Other (b) - - (18,176) - - - - - - - - - Taxes on non-cash items - - - - - - - - - - - -

Net Income - Reported (8,466) (7,648) (24,984) (2,489) (2,209) (870) 112 1,931 4,591 7,526 2,671 11,569

Earnings Per Share - Reported ($0.24) ($0.21) ($0.70) ($0.07) ($0.06) ($0.02) $0.00 $0.05 $0.12 $0.20 $0.06 $0.27Earnings Per Share - Operating ($0.14) ($0.11) ($0.09) ($0.08) ($0.07) ($0.03) ($0.00) $0.04 $0.11 $0.19 $0.22 $0.27

Shares Outstanding 35,626 35,626 35,626 35,626 35,626 35,641 37,413 38,196 39,186 38,196 41,643 42,146

Growth RateTotal Revenue (yr-yr) -86% -86% -86% -90% 85% 113% 111% 157% 218% 216% 194% 133%Total Revenue (seq) -94% 17% 24% 15% 10% 35% 23% 41% 36% 34% 14% 11%

Margin Analysis (% of Total Revenue)Gross Margin 12% 21% 33% 37% 36% 49% 55% 61% 64% 68% 69% 72%Operating Expenses 218% 157% 119% 106% 92% 68% 57% 45% 33% 30% 27% 27%

Sales and Marketing 101% 73% 55% 45% 44% 31% 25% 21% 14% 13% 13% 13% General and Administrative 51% 39% 30% 31% 21% 16% 13% 9% 7% 7% 5% 6% Product Development 67% 44% 34% 30% 26% 21% 20% 15% 12% 10% 9% 8%EBITDA Margin - - - - -29% 1% 14% 26% 38% 43% 45% 50%Operating Margin -206% -135% -86% -69% -56% -19% -2% 16% 30% 38% 42% 45%

2001

Source: Company Reports. Exhibit 94

SOHU Historical Quarterly Balance Sheet ($ in thousands) 2002 2003

3/01 6/01 9/01 12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03Total Assets: $96,583 $88,730 $62,636 $61,958 $60,639 $59,421 $60,689 $61,972 $69,131 $81,671 $187,779 $205,055Current Assets: 60,998 57,513 36,046 51,114 26,181 24,322 28,199 27,374 37,908 54,684 176,314 159,001 Cash and cash equivalents 57,582 54,207 31,653 46,236 21,568 19,522 22,839 18,929 23,215 39,996 161,555 142,570 Account receivable, net of allowance 2,014 2,362 2,485 2,710 2,771 3,007 3,648 3,954 7,716 12,150 11,814 12,381 Prepaid expenses and other 1,402 944 1,908 2,168 1,842 1,793 1,712 4,491 6,977 2,538 2,945 4,050

Long-Term Assets: 35,585 31,217 26,590 10,844 34,458 35,099 32,490 34,598 31,223 26,987 11,465 46,054Fixed assets 7,542 7,404 8,084 7,953 7,936 7,530 6,643 6,012 5,897 5,502 5,574 6,846Intangible assets, net (including Goodwill) 26,080 21,878 0 0 0 0 0 0 0 0 0 35,746Other assets 1,963 1,935 18,506 2,891 26,522 27,569 25,847 28,586 25,326 21,485 5,891 3,462

Total Liabilities: 3,959 3,576 2,563 4,377 5,273 4,858 5,489 6,741 9,109 13,182 109,867 113,416Current Liabilities: 3,959 3,576 2,563 4,377 5,273 4,858 5,489 6,741 9,109 13,182 19,867 23,416 Accounts payable, accrued liabilities and 3,959 3,576 2,563 4,377 5,273 4,858 5,489 6,741 9,109 13,182 19,867 23,416

deferred revenue

Long Term Liabilities -- -- -- -- -- -- -- -- -- -- 90,000 90,000

Stockholders' Equity: 92,624 85,154 60,073 57,581 55,366 54,563 55,200 55,231 60,022 68,489 77,912 91,639

2001




Exhibit 95

chinadotcom Historical Income Statement

(US$, 000) 2002 2003

3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03

Revenue $16,419 $15,228 $15,475 $15,723 $14,551 $21,486 $24,426 $29,316Cost of Revenues 10,644 10,273 10,488 9,833 9,467 12,066 12,642 14,312Gross Profit 5,775 4,955 4,987 5,890 5,084 9,420 11,784 15,004Operating Expenses 16,230 16,172 14,613 9,353 7,751 9,429 10,062 14,504

SG&A 12,412 11,106 11,809 7,228 5,744 7,759 9,305 11,343

Depreciation 3,721 4,982 2,738 2,063 1,953 1,620 708 2,986

Stock based compensation 97 84 66 62 54 50 49 175

Operating Profit (10,455) (11,217) (9,626) (3,463) (2,667) (9) 1,722 500Other Income 1,933 2,424 7,239 5,418 5,874 3,651 5,261 3,335

Interest income 7,417 7,385 4,355 4,783 3,953 3,384 3,228 2,876

Interest expense (758) (757) (513) (604) - (273) (278) (519)

Gain/(loss) on securities (1,227) (2,602) 3,000 671 1,661 1,343 879 716

Gain/(loss) on disposal (204) 293 (121) (76) 295 (182) 350 6

Other non-operating gains - - 107 995 - - 998 503

Other non-operating losses 230 (69) (110) (351) (35) (519) - (37)

Impairments (3,525) (1,826) - - - (113) - -

Equity income - - 521 - - 11 84 (210)

Pre-tax Profit ($8,522) ($8,793) ($2,387) $1,955 $3,207 $3,642 $6,983 $3,835Provision for income taxes (59) 2 (80) (23) 100 (591) 401 779

Minority interest 559 752 301 (576) (571) (136) (1,014) (483)

Profit from cont. oper. (8,022) (8,039) (2,166) 1,356 2,736 2,915 6,370 4,131Profit from discontinued operation - - (1,176) 333 (1,426) 1,163 (280) (85)

Loss from operations - - (1,176) (212) (1,521) (1,137) (12) (85)

Income from disposals - - - 545 95 2,300 (268) -

Net income ($8,022) ($8,039) ($3,342) $1,689 $1,310 $4,078 $6,090 $4,046EPS, Diluted ($0.08) ($0.08) ($0.02) $0.02 $0.01 $0.04 $0.06 $0.04

Source: Company data.



Exhibit 96

chinadotcom Historical Balance Sheet

(US$, 000) 2002 2003

3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03

Assets $567,640 $505,979 $464,430 $580,957 $543,193 $497,265 $557,121 $547,283Current assets $494,832 $438,514 $399,460 $495,966 $462,279 $404,877 $437,754 $364,967

Cash & equiv. 34,053 107,257 126,419 33,153 164,789 60,796 78,346 55,508

Restricted cash 74 282 120 109 42 59 59 238

A/R 20,357 18,061 17,268 15,030 14,078 17,525 23,005 16,562

Deposits, prepay 10,511 10,703 7,358 8,363 13,190 8,018 11,788 10,425

Available for sale debt 291,454 236,529 236,422 300,056 176,224 271,167 259,357 262,745

Restricted debt 138,383 65,682 11,873 139,255 93,956 47,312 65,165 19,213

Deferred tax assets - - - - - - - 240

Amt due from rel’d parties - - - - - - 34 36

LT assets $72,808 $67,465 $64,970 $84,991 $80,914 $92,388 $119,367 $182,316 PPE 16,820 14,207 12,132 9,375 8,422 7,239 7,741 7,210

Avail. for sale equity 1,932 1,974 2,286 2,050 1,999 2,198 1,168 590

Avail. for sale debt 20,000 19,800 19,800 20,000 20,000 20,000 20,000 19,400

Goodwill 11,873 8,929 8,905 12,016 17,264 29,581 42,183 82,656

Intangible assets 16,891 19,589 19,090 16,980 16,641 16,356 28,485 28,880

Restricted debt - - - 11,868 11,882 11,894 11,899 11,896

Investment in equity 2,778 142 392 330 330 409 494 434

Investments under cost method

270 279 312 387 536 889 1,889 609

Deferred tax assets - - - - - - - 305

Loan receivables - - - - - - - 27,000

Other assets 2,244 2,545 2,053 11,985 3,840 3,822 5,508 3,336

Liabilities and Equity $567,640 $505,979 $464,430 $580,957 $543,193 $497,265 $557,121 $547,283 Total liabilities $194,333 $129,722 $92,223 $203,257 $175,490 $120,338 $169,627 $156,837

Current liabilities $154,040 $89,471 $44,928 $155,490 $128,046 $74,122 $109,161 $96,788 A/P 13,727 14,365 15,070 13,662 11,739 13,620 13,232 7,800

Other payables 12,897 10,730 14,410 12,952 11,814 8,412 11,277 10,310

Purchase payable 41,000

Accrued liabilities 12,445 10,467 11,354 9,064 11,168 9,645 17,130 12,295

ST bank loans 113,294 52,282 963 115,650 89,609 39,197 54,184 15,199

LT bank loans, current - - - 149 152 155 1,921 171

Deferred revenue 930 1,033 2,419 2,693 2,589 2,409 10,349 9,357

Taxation 747 594 712 636 291 - 1,068 656

Am’t due to rel’d parties - - - 684 684 684 - -

LT liabilities $40,293 $40,251 $47,295 $47,767 $47,444 $46,216 $60,466 $60,049 LT debt 1,473 1,441 11,482 11,585 11,546 11,498 15,800 11,456

Deferred tax liabilities 1,618

Other payables 2,860 2,860 - - - - - -

Minority interests 35,960 35,950 35,813 36,182 35,898 34,718 44,666 46,975

Shareholders' equity $373,307 $376,257 $372,207 $377,700 $367,703 $376,927 $387,494 $390,446 Share capital 26 26 26 25 25 25 25 25

Paid in capital 614,007 614,122 614,142 610,340 605,416 608,573 613,810 614,721

Treasury stock (4,422) (5,530) (5,966) (238) (5,659) (4,402) (4,067) (4,067)

Accum. comp. inc. (12,096) (114) (406) 1,990 1,028 1,760 665 (1,340)

Accumulated deficit (224,208) (232,247) (235,589) (234,417) (233,107) (229,029) (222,939) (218,893)




Exhibit 97

Tom Online Historical Annual Income Statement

(All figures in USD 000s) 2002 2003REVENUEWireless data 7,450 62,667Advertising 4,228 2,009 Pro Forma Adjustment (3,512) --CES 11,244 13,759 Pro Forma Adjustment (309) --Internet access cards 4,545 1,560TOTAL $23,646 $79,995 Growth YoY 238%

Common Costs $19,297 $42,286 COGS 9,238 11,773 Cost of Services 9,038 29,846 Pro Forma Adjustment (3,069) -- Internet card costs 4,090 667

TOTAL GROSS PROFIT $4,349 $37,709 Growth YoY -- 767% Gross Profit Margin 18% 47%

Selling & Marketing 2,919 3,185General & Administration 8,887 8,760Other Opex 692 689Amortization of Intangibles 88 5,040

Income from Operations (8,237) 20,035 Growth YoY -- -- Gross Profit Margin -- 25%

Non-Operating Income (Loss) (341) (341)Interest Income 27 74Interest Expense (368) (415)

Income Before Taxes (8,578) 19,694

Income Tax Expenses 0 (107) % Effective Tax Rate -- (1%) % Statutory Rate (33%) (33%)

- Minority Interest 389 (127)

Net Income ($8,189) $19,460 Growth YoYNet Margin 24%

One-time adjustments -- 5,040Reported Net Income ($8,189) $24,500

Source: Company Reports, Pro Forma with IVR starting FY2003.



Exhibit 98

Tom Online Historical Quarterly Balance Sheet

(All figures in USD 000s) 2002 2003Current Assets $19,062 $54,879 Cash and equivalents 6,752 22,636 Restricted cash -- -- Account receivables 8,003 14,689Deferred cost -- 15,000Prepayments 1,909 1,405Deposits and other receivables 416 935Due from related parties 460 185 Inventories 1,522 29

Noncurrent assets $6,512 $8,147 L-T prepayment and deposits 994 565 PP&E, NET 5,518 7,094 Deferred tax Asset -- 274 Net Goodwill -- 214 Net Intangibles -- --

Total assets $25,574 $63,026

Current Liabilities $8,498 $29,306 Account Payables 2,926 3,241 Other payables and accrurals 3,838 20,884 Income Tax Payable -- 381 Deferred revenue 1,734 414 Consideration Payable -- 4,386 Short-term bank loans -- --

Noncurrent liabilities Due to related parties 26,316 19,871

Total Liabilities $34,814 $49,177

Minority Interest 224 152

Share capital 3,590 3,590Paid-in Capital 93,184 75,551Accumulated other comprehensive Income (55) (55)Accumulated deficit (106,183) (65,389)Total shareholders' equity ($9,464) $13,697

Total SE and Liabilities $25,574 $63,026

Source: Company Reports, Pro Forma with IVR starting FY2003.



Exhibit 99

Ctrip Historical Income Statement (RMB, millions) 2002 2003

3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03

Gross revenue $18.0 $24.7 $29.7 $32.9 $33.6 $19.6 $58.1 $71.4 Hotel reservation 16.8 23.1 27.2 29.5 30.3 16.6 48.7 57.9 Air tickets 0.7 1 1.7 2.3 2.4 2.4 6.8 8.7 Packaged tour 0.2 0.1 0.1 0 0.1 - 1.6 3.1 Others 0.3 0.5 0.7 1 0.8 0.6 1 1.8

Less: Sales tax 0.9 1.2 1.5 1.6 1.7 1 3 3.9 Net revenue $17.0 $23.5 $28.2 $31.2 $32.0 $18.6 $55.1 $67.4 Cost of revenue $2.6 $3.2 $3.3 $4.6 $4.2 $3.8 $6.5 $11.2Gross profit $14.4 $20.3 $25.0 $26.7 $27.7 $14.9 $48.7 $56.2 Operating expenses $13.6 $15.7 $16.0 $17.7 $17.8 $15.7 $21.9 $34.0

Product development 2.6 3.2 3.4 4.2 4.4 3.8 5 7.4 Sales marketing 6.5 8.2 8.9 8.8 8.8 7.7 11.9 19.2 General & Admin 3.7 3.9 3.6 4.5 4.2 3.7 4.5 6.8 Share based compensation 0.1 0.1 0.1 0.1 0.2 0.4 0.4 0.6 Amortization 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Other expenses 0.6 0.3 - - - - - -

Operating profit/loss $0.8 $4.5 $8.9 $8.9 $10.0 ($0.9) $26.8 $22.2

Other income - - - $0.9 - - $0.0 $1.8 Interest income - - - 0.1 - - 0.1 0.2 Interest expense - - - - - - - - Other income (expense) - - - 0.8 - - (0.1) 1.6

Income before tax - - - $9.8 - - $26.8 $24.0 Income tax benefit (expense) - - - (3.9) - - (7.0) 0.7 Minority Interests - - - - - - - (0.1) Income (loss of JV) - - - (0.2) - - 0.8 -

Net income - - - $5.7 - - $20.6 $24.6

Source: Company Reports



Exhibit 100

Ctrip Historical Balance Sheet

(RMB, millions) 2000 2001 2002 2003

Assets $117.9 $108.9 $97.3 $557.2Current assets $92.3 $88.4 $59.5 $509.2

Cash 88.9 42.5 38.9 472.0

Restricted cash - 24.8 -

A/R 1.7 7.4 14.0 28.9

Due from related parties - - 2.6 0.6

Prepayment and other current assets 1.6 3.9 3.4 7.1

Deferred tax assets, current 0.0 9.8 0.6 0.5

LT assets $25.6 $20.5 $37.7 $48.0 Investment in JV - - 5.1 -

LT loan to related party 2.0 2.0 2.1 2.3

LT deposits 0.8 0.7 1.3 11.2

PPE 5.3 9.6 18.7 23.3

Goodwill 7.7 6.9 9.5 9.5

Other intangibles 2.4 1.3 1.0 1.7

Deferred tax assets, non-current 7.5 - - -

Liabilities and Shareholders' Equity $117.9 $108.9 $97.3 $557.2Total Liabilities $103.9 $121.4 $138.9 $65.4

Current liabilities $9.7 $13.0 $13.1 $64.9 ST bank loan - 4.0 - -

A/P 1.8 0.6 1.0 14.7

Due to related parties 0.2 1.8 1.3 4.0

Salary and welfare payable 2.2 2.8 2.4 9.8

Tax payable 0.1 0.7 1.9 9.3

Advance from customers 0.2 0.3 1.9 3.8

Provision for customer reward 0.1 0.9 2.3 4.7

Deferred acquisition costs 3.0 - - -

Other payables and accruals 2.0 1.9 2.3 18.5

Non-current liabilities $94.2 $108.5 $125.8 $0.6 Minority interest - - 0.8 0.6

Series B convertible 94.2 108.5 125.0 -

Shareholders' equity $14.0 ($12.5) ($41.6) $491.8 Common shares 0.7 0.8 0.8 2.5

Series A convertible 0.4 0.4 0.4 -

Paid in capital 37.9 26.6 - 497.6

Statutory reserve - - - 5.5

Deferred share-base compensation - (0.1) (1.1) (5.0)

Culmulative translation adjustments 0.0 0.1 0.1 1.6

Accumulated deficit (25.0) (40.2) (41.8) (10.5)

Source: Company data



Exhibit 101

Linktone Historical Income Statement

(All figures USD, 000s) 2002 2003 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03

Gross revenue $681 $1,064 $1,297 $1,267 $1,739 $3,281 $4,942 $6,640 Less: sales tax 43 61 74 62 108 222 319 466

Net revenue $638 $1,003 $1,223 $1,205 $1,631 $3,059 $4,623 $6,174Cost of revenue 187 373 492 474 607 1,064 1,754 2,395

Gross profit $451 $630 $731 $731 $1,024 $1,995 $2,869 $3,779Operating expenses 715 738 803 869 926 1,215 1,781 2,162

Product development 116 105 107 99 136 161 201 250

Selling & marketing 251 284 275 362 412 420 597 716

Stock-based compensation - - - - - 181 385 554

Other G&A 348 349 421 408 378 453 598 642

Operating profit/loss ($264) ($108) ($72) ($138) $98 $780 $1,088 $1,617Other income

Interest income 7 10 12 17 7 6 7 13

Income before tax ($257) ($98) ($60) ($121) $105 $786 $1,095 $1,630 Income tax - - - - - - - -

Net income ($257) ($98) ($60) ($121) $105 $786 $1,095 $1,630

Source: Company data. Exhibit 102

Linktone Historical Balance Sheet

(All figures USD, 000s) 1999 2000 2001 2002 2003

Assets $281 $1,028 $3,176 $3,962 $9,710Cash & equiv $281 $296 $2,376 $3,036 $5,613

A/R - 702 444 564 3,093

Deposit and other receivables - - 119 125 554

PPE - 30 237 237 450

Liabilities and Equity $281 $1,028 $3,176 $3,962 $9,710Total Liabilities $4 $22 $621 $908 $1,920

Shareholders' equity $277 $1,006 $2,555 $3,054 $7,790

Series B convertible - - 331 440 -

Series C convertible - - 2,000 2,000 -

Series E converitible - 1,000 -

Common shares - - 10 10 20

Series A convertible - - 1,590 1,625 -

Series B convertible - - 901 901 -

Series D convertible - - 1,000 1,000 -

Paid in capital - - - - 12,910

Deferred compensation - - - - (4,692)

Statutory reserves - - - - 500

Accumulated other comprehensive loss - - (1) (1) 0

Accumulated deficit - - (3,275) (3,920) (948)




Exhibit 103

Shanda Networking Historical Income Statement (US$ Thousands) 2000A (1) 2001A (1) 2002A (1) 2003ANet Revenue $287 $550 $39,414 $72,490

Revenue Growth (%) -- 91.7% 7066.5% 83.9%Cost of Goods Sold 0 238 14,750 28,236Gross Profit $287 $312 $24,664 $44,254

Gross Margin (%) 100.0% 56.7% 62.6% 61.0%Product Development 0 220 602 3,474Sales and Marketing 0 290 1,308 5,286General and Administrative 72 567 3,106 7,919Share-Based Compensation 0 0 0 1,819

Total Operating Expenses 72 1,077 5,016 18,498Operating Income $215 ($765) $19,648 $25,756

Operating Margin (%) 74.9% (139.2%) 49.9% 35.5%Depreciation & Amortization 0 41 612 3,036EBITDA $215 ($725) $20,260 $28,792

EBITDA Margin (%) 74.9% (131.7%) 51.4% 39.7%Interest (Income) (2) (25) (132) (843)Investment (Income) 10 0 (3) (792)Other (Income) / Expense 0 2 166 (7,388)Pre-Tax Profit $207 ($743) $19,617 $34,779Provision / (Benefit) for Income Taxes 0 (11) 2,788 2,253Minority Interest 0 (578) 0 (440)Extraordinary Gain 0 (546) 0 0Accretion for Preferred Shares 0 0 0 3,016Cumulative Preferred Dividends 0 0 0 1,955Net Income $207 $391 $16,829 $27,995Source: Shanda Interactive Entertainment F1 filing, 4/2/04.(1) Calculated based on 12/31/03 RMB8.2767/US$ exchange rate per Shanda filing for Y/Y consistency. Filing indicates RMB amounts.



Exhibit 104

Shanda Networking Historical Balance Sheet (US$ Thousands) 2000A (1) 2001A (1) 2002A (1) 2003ACash & Cash Equivalents $396 $941 $21,390 $72,362Other Current Assets 200 411 21,829 19,837Total Current Assets $596 $1,352 $43,219 $92,199Non-Current Assets 22 617 5,677 20,041Total Assets $618 $1,969 $48,896 $112,240Total Liabilities 351 1,130 31,248 36,689Minority Interest 0 0 0 328Shareholders Equity 267 839 17,648 75,223Total Liabilities & Equity $618 $1,969 $48,896 $112,240

Source: Shanda Interactive Entertainment F1 filing, 4/2/04.(1) Calculated based on 12/31/03 RMB8.2767/US$ exchange rate per Shanda filing for Y/Y consistency. Filing indicates RMB amounts.

Exhibit 105

Shanda Networking Historical Key Metrics 2001A 2002A 2003A

Registered Accounts (1) 1,900,000 88,000,000 236,000,000Peak Concurrent Users 72,035 627,276 1,185,844Average Concurrent Users 43,736 278,186 683,917Peak Concurrent Users for MMORPGs 72,035 627,276 863,805Average Concurrent Users for MMORPGs 43,736 278,186 425,416Average Revenue per User-Hour for MMORPGs (RMB) 0.120 0.140 0.170Average Revenue per User-Hour for MMORPGs (US$) (2) 0.014 0.017 0.021

Source: Shanda Interactive Entertainment F1 filing, 4/2/04.(1) Users must register new accounts for each different title played, and users may have multiple accounts for a single title.(2) Calculated based on 12/31/03 RMB8.2767/US$ exchange rate per Shanda filing for Y/Y consistency. Filing indicates RMB amounts.



Company Models — Japan



Exhibit 106

Yahoo! Japan Historical Quarterly Consolidated Income Statement

(¥Millions) F2001 F2002 F2003

6/01 9/01 12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03

Net Revenues 4,868 6,976 8,261 9,652 8,476 10,899 12,923 14,394 15,564 17,549 20,081Cost of Revenues 452 2,030 2,015 2,565 720 780 937 1,161 1,202 1,257 1,324Gross Profit 4,416 4,946 6,246 7,087 7,756 10,119 11,986 13,233 14,362 16,292 18,757Operating Expense 2,495 3,022 2,991 3,617 3,661 4,736 5,179 5,445 5,929 7,065 7,651Personnel Expenses 704 756 828 904 945 1,225 1,293 1,256 1,379 1,628 1,858Marketing/Advertising Costs 277 344 83 84 66 315 503 38 82 73 82Content Provider Fees 231 257 271 295 313 444 362 380 405 451 423Sales Commissions 365 371 374 434 470 512 574 678 665 664 779Depreciation Expenses 220 276 348 411 423 463 541 564 578 684 816Communication Charges 230 289 298 296 297 336 392 469 640 680 734Royalties (to Yahoo Inc.) 122 146 167 184 213 284 338 371 399 455 524Business Commissions – – – – 284 376 554 598 676 838 858Utilities – – – – 166 194 196 208 259 315 361Other (Reserves, Amortization, Insurance, etc) 343 580 621 1,006 480 583 426 883 846 1,277 1,212Operating Income 1,921 1,923 3,254 3,470 4,095 5,382 6,807 7,788 8,433 9,227 11,106Other Income (Expense) 25 -37 -27 -49 12 -130 -24 -407 -176 58 100Ordinary Income 1,946 1,886 3,227 3,421 4,108 5,252 6,782 7,381 8,257 9,285 11,206Extraordinary Items – – -222 197 -264 -288 -572 -671 -302 -32 110Pretax Income 1,946 1,886 3,005 3,618 3,844 4,964 6,210 6,710 7,955 9,253 11,316Taxes (Benefit) 837 920 1,214 1,455 1,687 2,187 2,671 3,163 3,422 3,339 4,643Minority Interests – – – – 20 23 15 17 6 -2 -24Net Income (Operating) 1,109 966 2,014 1,967 2,440 3,088 4,126 4,235 4,841 5,944 6,539Net Income (Reported) 1,109 966 1,792 2,164 2,176 2,800 3,554 3,564 4,539 5,912 6,649Average Split-Adjusted Shares Out (000) 1,884 1,884 1,884 1,884 1,884 1,884 1,884 1,884 1,884 1,884 1,884




Exhibit 107

Yahoo! Japan Historical Quarterly Consolidated Balance Sheet

(¥Millions)

F2001 F2002 F2003

6/01 9/01 12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03

Total Assets 26,205 24,769 27,630 29,218 29,465 34,324 38,121 47,772 44,264 58,310 65,986Current Assets 7,919 10,102 10,816 15,053 15,829 22,447 26,116 35,485 31,216 35,277 41,521Cash, Cash Equivalents (a) 1,020 709 6,450 7,341 8,131 14,535 16,607 23,215 21,210 24,291 28,439Accounts Receivable, Trade 3,186 3,435 2,654 4,942 6,718 7,043 8,774 11,034 8,586 9,576 11,122Accounts Receivable, Other – – – 1,982 138 130 165 153 155 153 190Inventory – 833 998 6 7 10 6 14 9 33 71Marketable Securities (a) 3,341 4,692 99 99 99 99 – – – – –Deferred Tax Assets 195 184 184 373 373 468 468 1,004 1,004 832 823Prepaid Expenses 152 – – – – – – – – – –Other Current Assets 30 285 468 354 384 330 308 355 518 763 1,390Allowance for Doubtful Debt -6 -38 -38 -46 -23 -169 -213 -290 -266 -372 -515Fixed Assets 18,286 14,667 16,814 14,165 13,636 11,876 12,004 12,287 13,048 23,033 24,464PP&E, Net 2,653 3,228 3,448 3,259 3,540 3,709 4,744 5,816 6,365 7,140 7,405Intangible Fixed Assets 110 927 1,351 1,285 1,398 1,399 1,342 811 814 927 1,514Investment Securities 13,652 9,011 10,512 8,209 7,282 5,337 3,658 3,195 3,740 7,357 7,954Investment in Affiliated Companies 460 – – – – – – – – – –Other Non-Current Assets 1,409 1,499 1,501 1,410 1,415 1,430 2,259 2,465 2,129 7,608 7,590Total Liabilities and Equity 26,205 24,769 27,630 29,218 29,465 34,324 38,121 47,772 44,264 58,309 65,986Current Liabilities 2,820 5,817 5,014 6,911 5,529 9,247 10,658 17,167 8,683 12,587 12,493Accounts Payable 1,586 3,550 2,556 2,276 3,060 3,875 4,910 7,102 3,890 4,088 4,203Current Portion of Corporate Debt – 137 137 117 39 – – – – – –Accrued Expenses and Other Liabilities 1,009 1,780 1,808 3,760 1,734 4,251 4,491 8,505 3,511 6,709 5,859Other Current Liabilities 224 350 512 757 696 1,120 1,256 1,560 1,281 1,789 2,430Long-Term Liabilities 4,662 2,169 3,139 2,023 1,800 887 388 54 172 1,760 2,300Long-Term Deferred Taxes - 2,149 2,941 1,870 1,600 747 273 - 128 1,728 2,056Retirement Allowances - 19 32 14 23 - - - - - -Other Long-Term Liabilities - - 165 139 176 139 114 54 44 32 244Total Liabilities 7,483 7,987 8,154 8,935 7,330 10,134 11,046 17,221 8,856 14,347 14,793Minority Interest – 13 106 56 36 101 86 69 63 113 137Shareholders Equity 18,722 16,768 19,369 20,227 22,099 24,088 26,989 30,482 35,345 43,848 51,054




Exhibit 108

Softbank Historical Annual Consolidated Income Statement (¥Millions) FY3/99 FY3/00 FY3/01 FY3/02 FY 3/03

Total Revenues 528,159 423,220 397,104 405,315 406,891 Operating Income 12,129 8,377 16,431 (23,901) (91,997) Other Income (Loss) (27,576) (60,311) 3,635 (9,401) (17,811)

Non-Operating Income 19,808 17,571 42,373 32,530 17,753 Interest Income 11,200 2,779 4,363 2,065 1,092 Exchange Gain 3,958 – 28,115 24,935 – Equity in Earnings of Affiliates – 4,744 – – 11,107 Others 4,649 10,047 9,894 5,526 5,553

Non-Operating Expenses (47,385) (77,881) (38,738) (41,931) (35,564) Interest Expenses (36,880) (20,153) (12,263) (15,640) (8,741) Bond Interests – – – – – Exchange Loss – (44,370) – – (7,704) Equity in Losses of Affiliates (6,495) – (19,765) (17,575) – Loss on Revaluation of Inventories – – – – – Others (4,009) (13,357) (6,710) (8,715) (19,119)

Recurring Income (Loss) (15,447) (51,932) 20,066 (33,302) (109,808) Extraordinary Income (Loss) 52,086 84,100 66,944 (86,637) 38,333

Extraordinary Income 66,115 289,072 169,925 91,198 134,404 Gain on Sales of Investment Securities 50,736 218,207 119,054 67,068 127,607 Dilution Gain from Changes in Equity Interest 10,757 40,072 49,712 19,353 2,138 Exchange Gain 308 – – – – Gain on Sales of Operations – 29,001 – – – Others 4,312 1,791 1,158 4,776 4,659

Extraordinary Loss (14,028) (204,971) (102,981) (177,836) (96,071) Loss on Sales of Investment Securities (3,455) (602) (23,764) (15,673) (10,846) Loss on Revaluation of Investment Securities (5,568) (3,662) (29,230) (99,046) (33,851) Loss on Revaluation of Investments in Affiliates – – (28,761) (19,413) (32,323) Depreciation of Intangible Assets in Affiliates – – (19,978) – Loss on Discontinues Operations (3,399) (77,043) (8,604) – – Dilution Loss from Changes in Equity Interest – (3,236) (1,558) (3,761) (1,393) Loss form Fund Restructuring – – – – – Valuation Loss on Intangible Assets – (119,126) – – – Others (1,605) (1,300) (11,062) (19,963) (17,658)

Pretax Income 36,639 32,168 87,010 (119,939) (71,475) Income Taxes (Benefit) 3,334 52,784 48,616 (27,841) 31,074 Minority Interest 4,233 29,063 (1,762) 3,343 2,560 Net Income (Loss) 37,538 8,446 36,633 (88,755) (99,989)




Exhibit 44

Softbank Historical Consolidated Balance Sheet

Semi-Annual(¥ Millions, Except Per Share Data) 3/00 9/00 3/01 9/01 3/02 9/02 3/03 9/03 12/03Total Assets 1,168,305 1,078,146 1,146,082 1,123,856 1,163,678 903,283 946,329 974,455 1,194,034

Current Assets 516,458 366,693 365,166 372,942 394,447 354,368 407,436 494,048 675,034Cash, Cash Equivalents 254,708 170,880 141,056 128,824 113,580 102,379 147,503 174,814 309,720Receivables 92,454 71,147 81,286 67,784 62,047 55,912 64,255 64,783 70,097Marketable Securities (MMF) 17,848 14,829 29,343 19,458 9,545 7,612 5,059 2,512 1,661Inventories 16,954 19,503 23,413 25,874 36,312 41,119 42,201 30,345 32,743Deferred Tax Assets 6,340 10,620 8,234 8,175 15,430 6,155 7,035 4,655 4,899Cash Deposits Related to Securities Busin -- -- -- -- -- -- 34,574 66,093 75,899Receivables Related to Margin Transactio -- -- -- -- 42,316 52,319 48,847 95,022 117,712Other Current Assets 131,379 80,459 83,075 124,461 116,802 90,363 65,227 64,578 71,312Allowance for Doubtful Accounts (3,227) (747) (1,244) (1,637) (1,586) (1,494) (7,268) (8,757) (9,011)

Fixed Assets 651,411 710,985 780,318 748,320 768,473 548,359 538,433 480,162 518,251Tangible Fixed Assets 8,243 11,300 13,529 21,740 28,408 73,566 102,249 100,989 103,520Intangible Fixed Assets 131,783 111,049 119,774 134,228 31,531 29,678 23,838 19,096 15,031 Goodwill 56,664 39,637 41,680 48,962 -- -- -- -- -- Trade Mark Rights 38,438 38,326 41,093 43,979 -- -- -- -- -- Advertiser Lists 2,514 -- -- -- -- -- -- -- -- Consolidation Adjustment 15,940 14,789 15,079 16,040 16,190 12,829 9,830 3,811 -- Other Intangible Assets 18,225 18,296 21,920 25,246 15,341 16,848 14,008 15,284 15,031Investments & Other Assets 511,384 588,635 647,014 592,352 708,534 445,116 412,346 360,077 399,699 Investments in Securities 398,270 434,207 492,853 419,997 521,150 254,633 267,414 221,574 262,631 Investments in Partnership 94,727 136,156 133,303 134,514 141,456 130,527 97,606 94,557 90,497 Long-Term Loans 2,634 3,001 3,033 2,862 1,287 858 780 -- -- Deferred Tax Assets 2,261 476 9,826 26,639 35,832 48,835 32,701 28,827 28,555 Other Assets 14,604 16,740 9,440 9,971 10,313 11,799 15,637 16,597 23,675 Allowance for Doubtful Accounts (1,113) (1,947) (1,442) (1,632) (1,506) (1,538) (1,794) (1,480) (5,660)0Deferred Assets 436 467 598 2,593 757 555 459 245 749

Liabilities & Shareholders' Equity 1,168,305 1,078,146 1,146,082 1,123,856 1,163,678 903,283 946,329 974,455 1,194,034Current Liabilities 344,767 360,684 379,309 383,357 358,976 391,778 458,505 529,723 501,787Notes and Accounts Payable 55,828 53,391 63,935 53,267 56,742 55,192 58,534 41,591 41,660Short-Term Borrowings 88,885 112,609 128,482 132,316 114,190 82,358 150,557 173,546 127,585Commercial Paper -- 50,000 30,000 20,000 10,000 10,000 4,000 21,000 16,000Corporate Bonds Due in One Year 26,300 32,385 21,400 45,469 48,841 67,919 56,219 41,924 44,584Convertible Bonds Due in One Year -- -- 6,614 6,586 -- -- 60 60 0Accounts Payable and Accrued Expenses 23,681 6,937 10,654 11,140 10,176 13,086 74,819 54,913 55,696Income Taxe Paylable 57,743 28,063 23,428 7,329 9,593 23,516 10,912 13,153 9,144Deferred Tax Liabilities 28,565 5,713 298 3,407 47 553 5,978 106 311Advance Received Profit -- 14,111 -- 13,637 -- -- -- -- --Payables Related to Margin Transactions -- -- -- -- 37,417 44,720 44,458 87,683 99,416Guarantee Deposits Related to Brokerage -- -- -- -- -- -- 34,565 60,808 73,020Allowance for Sales Return 2,259 1,212 1,471 1,343 1,139 -- -- --Other Short-Term Liabilities 61,503 56,259 93,024 90,203 70,623 93,291 18,399 34,935 34,369

Long-Term Liabilities 336,462 270,597 283,058 320,383 292,242 176,360 184,423 174,495 355,194Corporate Bonds 169,089 183,164 175,368 269,490 179,365 137,132 121,763 89,315 245,560Convertible Bonds 8,182 6,669 -- 125 125 105 45 45 0Long-Term Borrowings 126,248 51,004 51,578 13,476 13,121 9,875 8,149 10,243 18,932Deferred Tax Liabilities 3,764 26,003 32,372 12,337 70,962 8,383 33,285 53,900 67,352Consolidation Adjustment Account -- -- -- -- -- -- -- -- 2,713Allowance for Retirement Benefits 76 576 152 372 331 39 49 0Other Long-Term Liabilities 29,102 3,179 23,587 24,581 28,335 20,825 21,130 20,990 20,635

Total Liabilities 681,230 631,282 662,367 703,741 651,218 568,138 642,929 704,218 856,981

Minority Interests 104,284 62,920 59,453 67,687 47,134 46,802 46,005 52,941 71,403

Stockholders' Equity 382,791 383,944 424,261 352,429 465,326 288,343 257,395 217,296 265,650 Common Stock 124,957 125,881 137,630 137,808 137,867 137,867 137,867 137,958 162,303 Additional Paid-in Capital 149,211 150,200 161,953 162,172 162,231 162,231 162,231 162,354 186,690 Earned Surplus reserved -- -- -- -- -- (54,223) -- (181,079) (197,416) Retained Earnings 59,091 93,177 94,803 38,505 4,035 -- (101,031) -- -- Net Realized Gains on Securities Availab 47,546 15,292 18,435 (13,569) 126,626 19,215 39,595 86,547 107,623 Translation Adjustments 2,051 (602) 11,441 27,512 34,577 23,268 20,932 11,567 6,510 Treasury Stock (66) (4) (2) (0) (10) (17) (2,199) (52) (60) Source: Morgan Stanley Research.



Exhibit 109

Rakuten Historical Quarterly Consolidated Income Statement (¥millions) F2001 F2002 F2003 1QA 2QA 3QA 4QA 1QA 2QA 3QA 4QA 1QA 2QA 3QA 4QA

Net Revenues 1,523 1,569 1,770 1,917 1,984 2,372 2,602 2,936 3,631 4,120 4,214 6,118 Costs of Revenue 259 302 346 423 488 608 743 813 362 389 403 403 Gross Profit 1,264 1,268 1,425 1,494 1,495 1,764 1,859 2,124 3,269 3,732 3,811 5,715 Operating Expenses (SG&A) 910 935 942 1,059 1,055 1,159 1,173 1,305 2,578 2,676 2,736 3,786

Personnel Expenses 283 277 274 299 306 298 305 288 921 973 1,048 1,301 Marketing/Advertising Spending 66 43 77 82 77 95 119 105 316 258 185 519 Rent 67 71 44 49 49 48 50 53 – – – – Other 561 615 590 678 672 766 749 912 1,342 1,445 1,503 1,966

Operating Income 354 333 483 436 440 605 687 819 691 1,056 1,075 1,929 Net Non-Operating Income (Expense) 34 (9) (10) (212) (73) (155) (73) (8) 49 (109) 15 (267) Recurring Income (Operating) 388 323 473 224 367 450 613 811 740 947 1,090 1,662 Extraordinary Items (897) (208) (3,446) (307) (504) (159) (1,272) (3,257) (434) (401)(32,831)(26,574) Pretax Income (Reported) (508) 115 (2,974) (84) (137) 291 (658) (2,446) 305 546 (31,742)(24,912) Minority Interests – – – (6) 1 2 (6) 8 (29) (23) (0) (2) Net Income (702) (73) (3,186) (198) (326) 219 (876) (2,277) 80 336 (27,537)(25,523)

Notes: Not pro-forma for acquisitions. Source: Morgan Stanley Research. Exhibit 110

Rakuten Historical Quarterly Consolidated Balance Sheet (¥millions) F2001 F2002 F2003 1QA 2QA 3QA 4QA 1QA 2QA 3QA 4QA 1QA 2QA 3QA 4QA

Total Assets 39,310 39,065 36,160 36,387 35,443 35,562 34,623 34,055 33,405 34,562 26,276 188,016 Current Assets 32,614 32,712 29,711 27,999 26,772 27,074 26,414 25,789 25,330 24,741 10,721 172,747 Cash, Cash Equivalents (a) 1,803 3,639 2,825 8,811 12,501 13,103 8,421 8,750 9,312 14,877 6,292 25,791 Accounts Receivable 565 559 748 809 830 1,143 1,202 1,679 1,733 2,237 3,344 4,236 Marketable Securities (a) 30,170 28,377 25,951 18,140 13,048 12,552 16,252 14,526 13,802 7,159 - - Other Current Assets 81 150 207 258 413 303 577 890 538 535 1,183 142,826 Allowance for Bad Debts (5) (13) (20) (20) (20) (27) (38) (55) (56) (68) (99) (106) Fixed Assets 6,695 6,353 6,449 8,388 8,671 8,488 8,209 8,265 8,075 9,820 15,556 15,269 PP&E, net 1,716 1,833 1,847 2,159 2,188 2,156 2,087 2,755 2,720 2,705 3,400 3,868 Intangible Fixed Assets 519 558 609 660 717 826 840 1,041 997 1,056 1,352 1,476 Investment Securities/Other Fixed Assets 4,495 4,015 4,040 5,601 5,793 5,540 5,315 4,499 4,387 6,098 10,853 9,988 Allowance for Bad Debts (35) (53) (47) (32) (28) (34) (34) (29) (29) (38) (48) (62) Total Liabilities and Equity 39,310 39,065 36,160 36,387 35,443 35,562 34,623 34,055 33,405 34,562 26,276 188,016 Current Liability 1,560 2,079 2,312 2,527 1,895 2,088 2,253 3,617 2,941 3,791 22,155 157,357 Accounts Payable 94 96 250 82 82 94 107 154 194 184 96 286 Accrued Liabilities 295 533 468 785 418 446 481 710 767 1,065 2,141 2,802 Accrued Income Taxes 190 435 424 603 205 408 228 1,042 251 703 302 279 Deferred Revenue 882 899 957 1,019 1,024 1,004 1,219 1,350 1,332 1,350 1,536 1,632 Other Current Liabilities 99 117 211 38 166 135 218 361 396 489 18,080 152,357 Short-Term Borrowings – – – – – – – – – – 17,500 16,185 Long-Term Liabilities 25 6 14 63 169 4 5 6 60 28 98 4,105 Total Liabilities 1,585 2,085 2,325 2,590 2,064 2,092 2,258 3,623 3,002 3,819 22,253 161,461 Minority Interest – – 57 52 52 55 112 211 182 32 32 190 Shareholders Equity 37,724 36,980 33,777 33,746 33,327 33,415 32,254 30,220 30,222 30,711 3,991 26,365

Notes: Not pro-forma for acquisitions. Source: Morgan Stanley Research.



Exhibit 111

Trend Micro Historical Quarterly Consolidated Income Statement (¥millions) C2001 C2002 C2003 3/01 6/01 9/01 12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03

Net Revenue 6,626 6,312 7,548 10,839 9,752 10,754 10,712 11,760 10,918 11,391 12,389 13,391 Cost of Revenues 396 336 370 796 596 599 520 638 804 724 781 859 Gross Profit 6,230 5,976 7,178 10,043 9,156 10,155 10,191 11,122 10,114 10,667 11,608 12,531 Operating Expenses (SG&A) 4,226 5,082 4,512 6,125 6,127 6,833 7,110 6,689 7,153 7,806 7,527 7,280

Sales & Marketing – – – – 3,490 3,762 3,909 3,947 3,953 4,063 3,741 3,604 R&D – – – – 715 1,123 853 803 857 1,072 1,072 918 Support – – – – 820 949 995 1,070 1,165 1,237 1,211 1,218 Others – – – – 1,100 999 1,351 870 1,178 1,434 1,503 1,541

Operating Income 2,004 893 2,665 3,918 3,029 3,322 3,081 4,433 2,961 2,861 4,081 5,251 Other Income (Expense) 248 (142) (360) 323 40 15 112 (491) 105 (50) 53 67 Pretax Income 2,252 751 2,288 4,205 3,069 3,337 3,193 3,942 3,066 2,811 4,134 5,318 Taxes (Benefit) – – – – 1,364 1,390 1,420 1,361 1,327 1,250 1,818 1,707 Net Income (Reported) – – – – 1,705 1,950 1,777 2,576 1,740 1,568 2,335 3,608 Shares Out (000s) 131,591 131,591 131,591 131,591 132,111 132,111 132,111 132,111 131,940 131,940 131,940 131,940 Source: Morgan Stanley Research. Exhibit 112

Trend Micro Historical Semi-Annual Consolidated Balance Sheet (¥millions) C2000 C2001 C2002 C2003 6/00 12/00 6/01 12/01 6/02 12/02 6/03 12/03

Total Assets 38,519 44,574 52,993 64,729 68,791 73,838 73,158 81,271 Current Assets 33,769 38,076 48,182 58,375 62,530 67,175 66,622 75,466 Cash and Cash Equivalents (a) 20,902 24,436 34,619 40,853 46,055 47,896 42,721 47,159 Marketable Securities (a) 3,263 1,893 2,506 1,847 2,220 2,747 9,198 10,253 Notes and Accounts Receivable 6,812 8,134 7,059 11,430 9,352 11,325 9,078 11,681 Inventories 102 318 207 239 372 364 143 78 Deferred Income Taxes 941 2,688 2,798 3,219 3,313 4,045 4,384 4,897 Prepaid Expenses and Other Current Assets 1,749 607 994 787 1,218 798 1,097 1,398 Non-Current Assets 4,751 6,499 4,810 6,353 6,261 6,663 6,536 5,805 Property and Equipment 1,666 1,980 2,518 3,321 3,451 3,721 3,932 3,862

Less: Accumulated Depreciation 667 757 1,000 1,308 1,504 1,776 2,016 2,158 Investments and Other Non-Current Assets 3,751 5,276 3,292 4,340 4,314 4,719 4,620 4,101

Investment in Securities 981 1,336 1,257 1,304 1,255 691 598 625 Investment in and Advances to Affiliate Companies 247 182 110 85 88 96 104 120 Goodwill and Intangibles (including Software Development) 1,587 2,741 980 1,110 934 1,297 1,107 817 Deferred Income Taxes 398 446 150 972 1,098 1,548 1,682 1,804 Other 539 571 796 868 940 1,086 1,131 735

Total Liabilities, Minority Interest and Equity 38,519 44,574 52,993 64,729 68,791 73,838 73,158 81,271 Current Liabilities 6,030 9,714 9,749 20,989 26,222 27,438 29,767 33,621 Short-Term Borrowings/Current-Portion of Long-Term Debt – 57 57 3,000 8,000 5,000 6,500 6,500 Notes Payable, Trade 148 132 81 176 388 85 95 96 Accounts Payable, Trade 472 797 628 1,206 919 1,014 986 900 Accounts Payable, Other 591 517 638 1,807 1,112 1,202 1,286 1,326 Withholding Income Taxes 146 121 173 265 172 184 438 490 Accrued Expenses 477 616 982 1,529 1,873 1,807 1,942 1,984 Accrued Income and Other Taxes 947 2,015 607 3,360 2,131 4,089 3,233 4,281 Deferred Revenues 2,899 5,043 6,311 9,343 11,160 13,484 15,068 17,486 Other Current Liabilities 349 415 273 305 466 573 220 557 Long-Term Liabilities 11,340 10,516 16,353 12,974 7,827 9,255 3,754 3,699 Long-Term Debt 10,866 9,800 15,471 11,500 6,500 6,500 – 0 Deferred Revenues 331 548 655 917 858 2,188 3,062 3,017 Accrued Pension and Severance Costs 144 168 226 277 307 356 437 487 Other – – – 279 163 211 255 194 Total Liabilities 17,369 20,230 26,102 33,963 34,049 36,694 33,521 37,319 Minority Interest 151 0 0 0 0 0 0 0 Shareholders’ Equity 20,999 24,344 26,891 30,766 34,742 37,144 39,636 43,952 Source: Morgan Stanley Research.



Company Models — Korea



Exhibit 113

NCsoft Quarterly Income Statement

(Won in millions) 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03E 1Q04E 2Q04E 3Q04E 4Q04ERevenue 25,466 26,579 33,826 38,864 41,613 35,932 39,290 37,985 37,486 36,573 36,822 54,254 53,560 57,905 60,237 62,721

Lineage 23,020 23,861 30,942 35,438 36,495 31,098 33,468 31,683 30,740 29,558 29,743 28,597 27,280 26,209 25,351 24,524 Royalty 1,615 2,046 2,608 3,056 4,306 4,833 5,821 6,302 6,746 7,014 7,078 6,937 7,145 12,146 13,361 14,697 Lineage II - - - - - - - - - - 18,720 19,110 19,500 21,450 23,400 Publishing - - - - - - - - - - - 25 50 75 100 Others 831 672 276 370 812 1 1 0 - - - - - - -

Cost of goods sold 2,909 3,290 4,165 6,578 5,348 4,756 5,837 7,515 3,644 3,999 4,945 6,283 7,093 7,669 8,120 8,632

Gross profit 22,557 23,289 29,661 32,286 36,265 31,175 33,453 30,470 33,842 32,674 31,877 47,970 46,467 50,236 52,117 54,089

SG&A 10,759 59,664 16,144 21,250 16,772 17,229 20,479 23,225 15,704 20,916 20,384 31,414 24,637 26,636 27,709 28,852 Operating profit 14,708 (33,084) 17,682 17,615 24,841 18,703 18,811 14,760 18,137 11,658 11,493 16,556 21,829 23,599 24,408 25,238 Interest income 1,248 1,083 813 1,286 1,176 1,427 1,665 1,735 1,501 1,297 1,262 2,309 1,919 1,919 1,919 1,919Interest expense 0 -7 0 0 0 0 0 -14 -102 -103 -104 -102 -103 -103 -103 -103Net forex gain/(loss) 0 0 0 0 0 0 0 0 294 -269 -81 0 0 0 0 0Equity method losses -240 -445 -1,694 -3,657 -2,952 -1,940 -2,137 -1,630 -4,454 -5,557 -5,424 -6,797 -1,724 -862 -345 0Other non-operating income/(expense) 171 39 180 -381 66 -739 -134 -4,176 -3,728 -20 -36 -5,702 -32 -28 -25 -23Net non-operating income/(loss) 1,178 669 -701 -2,751 -1,710 -1,252 -605 -4,084 -6,488 -4,650 -4,383 -10,292 61 926 1,447 1,794Recurring profit 15,886 (32,415) 16,981 14,863 23,131 17,451 18,206 10,676 11,650 7,007 7,110 6,264 21,891 24,526 25,855 27,032 Extraordinary gains/(loss) - - - - - - - - - - - - - - - Pretax profit 15,886 (32,415) 16,981 14,863 23,131 17,451 18,206 10,676 11,650 7,007 7,110 6,264 21,891 24,526 25,855 27,032 Income taxes 3,307 (9,054) 5,284 4,109 6,925 1,607 3,381 4,438 2,458 1,279 80 626 4,378 4,905 5,171 5,406 Tax rate 20.8 27.9 31.1 27.6 29.9 9.2 18.6 41.6 21.1 18.3 1.1 10.0 20.0 20.0 20.0 20.0 Net profit 12,579 (23,362) 11,697 10,754 16,206 15,844 14,825 6,238 9,192 5,728 7,030 5,638 17,513 19,621 20,684 21,625

Average no. of shares outs. (mn) - - - 18.82 18.82 18.82 18.82 18.82 18.82 18.82 18.82 18.82 18.82 18.82 18.82Common - - - - 18.82 18.82 18.82 18.82 18.82 18.82 18.82 18.82 18.82 18.82 18.82 18.82

Margin (%) 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03E 1Q04E 2Q04E 3Q04E 4Q04EGross profit 88.6% 87.6% 87.7% 83.1% 87.1% 86.8% 85.1% 80.2% 90.3% 89.3% 86.6% 88.4% 86.8% 86.8% 86.5% 86.2%Operating profit 57.8% -124.5% 52.3% 45.3% 59.7% 52.1% 47.9% 38.9% 48.4% 31.9% 31.2% 30.5% 40.8% 40.8% 40.5% 40.2%Recurring profit 62.4% -122.0% 50.2% 38.2% 55.6% 48.6% 46.3% 28.1% 31.1% 19.2% 19.3% 11.5% 40.9% 42.4% 42.9% 43.1%Pre-tax profit 62.4% -122.0% 50.2% 38.2% 55.6% 48.6% 46.3% 28.1% 31.1% 19.2% 19.3% 11.5% 40.9% 42.4% 42.9% 43.1%Net profit 49.4% -87.9% 34.6% 27.7% 38.9% 44.1% 37.7% 16.4% 24.5% 15.7% 19.1% 10.4% 32.7% 33.9% 34.3% 34.5%Effective tax rate 20.8% 27.9% 31.1% 27.6% 29.9% 9.2% 18.6% 41.6% 21.1% 18.3% 1.1% 10.0% 20.0% 20.0% 20.0% 20.0%

Q/Q growth (%) 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03E 1Q04E 2Q04E 3Q04E 4Q04ESales 13.7% 4.4% 27.3% 14.9% 7.1% (13.7%) 9.3% (3.3%) -1.3% -2.4% 0.7% 47.3% -1.3% 8.1% 4.0% 4.1%Gross profit 34.5% 3.2% 27.4% 8.9% 12.3% (14.0%) 7.3% (8.9%) 11.1% -3.5% -2.4% 50.5% -3.1% 8.1% 3.7% 3.8%Operating profit 55.1% (324.9%) (153.4%) (0.4%) 41.0% (24.7%) 0.6% (21.5%) 22.9% -35.7% -1.4% 44.1% 31.8% 8.1% 3.4% 3.4%Recurring profit 50.3% (304.1%) (152.4%) (12.5%) 55.6% (24.6%) 4.3% (41.4%) 9.1% -39.9% 1.5% -11.9% 249.5% 12.0% 5.4% 4.6%Net profit 317.9% (285.7%) (150.1%) (8.1%) 50.7% (2.2%) (6.4%) (57.9%) 47.4% -37.7% 22.7% -19.8% 210.6% 12.0% 5.4% 4.6%

2001 200420032002




Exhibit 114

NCsoft Quarterly Historical Balance Sheet 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 Cash & Financial Goods 75,215 71,521 76,941 104,552 118,256 138,915 152,868 135,502 122,383 121,507 123,773 120,537 Marketable Securities 5,023 2 7 7 7 7 18 26 0 0 0 0 Accounts Receivable 6,100 7,787 10,060 12,814 14,364 12,803 14,645 14,675 13,660 14,022 15,071 21,058 Other Quick Assets 1,675 1,483 3,693 2,763 3,108 5,729 8,469 8,171 12,432 10,557 10,497 24,545 Current Assets 88,013 80,793 90,700 120,136 135,734 157,453 176,000 158,374 148,474 146,086 149,341 166,140 Investment Assets 19,598 32,427 28,001 19,570 22,927 17,562 18,036 69,644 67,239 63,249 67,026 72,391 NPPE & Land 5,622 5,818 7,644 8,902 9,028 11,006 10,346 9,357 8,952 8,789 9,935 9,792 Intangible Assets 6 16 14 925 896 850 802 3,329 4,771 4,714 5,232 747 Fixed Assets 25,227 38,260 35,659 29,397 32,851 29,418 29,184 82,330 80,962 76,752 82,192 82,930 Total Assets 113,240 119,053 126,359 149,532 168,585 186,872 205,184 240,703 229,436 222,838 231,533 249,069 Accounts Payable 0 5 20 3 1 0 0 0 0 0 0 0 Other Current Liabilities 9,005 13,101 5,752 12,688 12,873 14,491 16,478 37,945 16,140 11,921 13,802 18,494 Current Liabilities 9,005 13,106 5,772 12,691 12,874 14,491 16,478 37,945 16,140 11,921 13,802 18,494 Bonds 0 0 0 0 0 0 0 7,161 7,262 7,365 7,468 7,573 Allowance for Liab. Nature 183 303 454 1,668 1,348 2,122 1,970 2,258 2,228 2,851 3,301 5,519 Other Lt. Liabilities 3,284 0 1,495 3,225 4,244 3,130 2,581 0 0 0 0 0 Long-term Liabilities 3,466 303 1,948 4,892 5,593 5,252 4,551 9,419 9,490 10,215 10,769 13,092 Total Liabilities 12,472 13,409 7,720 17,583 18,467 19,743 21,030 47,364 25,629 22,137 24,571 31,586 Paid-in Capital 2,250 2,396 2,396 2,396 2,396 2,396 2,396 2,396 2,396 2,396 9,411 9,411 Capital Surplus 62,966 90,867 90,867 90,867 90,867 90,867 90,867 91,686 91,686 91,686 84,626 84,626 Retained Earnings 37,779 14,585 26,282 37,037 53,242 69,086 83,912 90,150 99,341 105,070 112,100 121,816 Capital Adjustment -2,227 -2,204 -906 1,650 3,613 4,780 6,980 9,107 10,383 1,549 826 1,631 Total Stockholders' Equity 100,768 105,644 118,639 131,950 150,118 167,129 184,154 193,340 203,807 200,702 206,963 217,483




Exhibit 115

Daum Quarterly Income Statement

($ millions) 2002 2003

1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03

Revenue $35.7 $42.9 $49.1 $66.4 $24.3 $29.0 $32.7 $36.7

Operating Profit 1.5 2.1 3.5 5.9 7.3 8.1 9 9.1Recurring Profit 0 -0.1 2.1 1.9 7.9 4.7 8.9 5.5

Net Profit 0 -0.5 2.1 0.8 5.2 1.9 5.8 10.1

Source: Company Data. Exhibit 116

Daum Quarterly Balance Sheet

($ millions) 2002 2003

1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03

Total Assets $121.5 $122.0 $135.3 $136.8 $144.7 $163.0 $176.5 $183.1Current Assets 52.8 46.9 61.4 68.5 73.6 91.5 99.5 91.1Fixed Assets 68.6 75.1 73.9 68.2 71.1 71.5 77.1 92

Total Liabilities 65.9 58.2 67.1 67.9 69.3 69.9 73 68Current Liabilities 30.9 28.9 32.6 41.4 45 59.6 62 58Long-Term Liabilities 35 29.3 34.5 26.5 24.3 10.4 11 10

Shareholders Equity 55.5 63.7 68.1 68.9 75.4 93.1 103.5 115.1Paid-in Capital 5.8 5.9 6 6 6 6.2 6.3 6.4Capital Surplus 59.2 67.6 70.4 70.4 71.9 87.3 91.8 93.7Retained Earnings -14.3 -14.8 -12.7 -11.9 -6.9 -4.8 1 11.1Capital Adjustment 4.9 5.1 4.5 4.4 4.4 4.3 4.3 4

Source: Company Data.



Exhibit 117

Webzen Quarterly Historical Income Statement (Won million) 2003

1Q03 2Q03 3Q03 4Q03

Net Sales 12,991 14,552 14,653 14,778 Cost of Sales 1,260 1,396 1,994 2,135

Gross Profit 11,731 13,156 12,659 12,644 Selling General & Administrative Expenses 2,939 5,156 4,245 5,041

Operating Profit 8,792 8,000 8,414 7,603 Non-operating Income 213 2,826 1,911 2,500 Interest Expenses 0 0 0 0 Amortization & Asset Valuaton Loss 1 166 172 -335 Other Non-operating Expenses 30 3 7 383

Recurring Profit 8,975 10,658 10,146 10,055 Extraordinary Income 0 0 32 -32 Extraordinary Expenses 0 0 0 0

Pre-tax Profit 8,975 10,658 10,178 10,023 Income Taxes 1,259 1,787 1,503 1,787Net Profit 7,716 8,871 8,675 8,236




Exhibit 118

Webzen Quarterly Historical Balance Sheet

(Won million) 2003

1Q03 2Q03 3Q03 4Q03

Current Assets 24,642 57,310 65,615 185,218 Cash & Financial Goods 15,738 45,674 51,874 175,496 Marketable Securities - - 995 - Accounts Receivable 6,724 7,789 8,721 7,925 Other Quick Assets 2,144 3,844 4,026 1,797 Inventory 36 3 - -

Total Assets 33,111 74,932 85,525 206,801Fixed Assets 8,469 17,622 19,910 21,583 Investment Assets 1,559 6,347 8,216 10,059 NPPE & Land 6,539 10,562 10,845 10,616 *Land 1,097 2,194 2,194 2,194 Construction in Progress - - - - Intangible Assets 372 713 848 908 Deferred Assets - - - -

Current Liabilities 6,170 8,996 10,649 13,524 Accounts Payable - - - - St. Debt - - - - Current Portion of Lt. Debt - - - - Current Portion of Bonds - - - - Other Current Liabilities 6,170 8,996 10,649 13,524

Total Liabilities 6,749 10,147 12,201 15,249Long-term Liabilities 579 1,151 1,552 1,726 Bonds - - - - Lt. Debt - - - - Allowance for Liab. Nature 579 879 1,077 1,162 Other Lt. Liabilities - 272 474 563

Deferred Liabilities - - - -

Total Stockholders' Equity 26,362 64,785 73,325 191,552 Paid-in Capital 1,270 1,750 1,750 2,185 New Stock Subscriptions - - - - Capital Surplus 1,315 30,364 30,364 139,728 Retained Earnings 23,678 32,548 41,223 49,459 Capital Adjustment 98 123 -12 179




Exhibit 119

NHN Quarterly Income Statement

($ millions) 2002 2003

3Q02 4Q02 1Q03 2Q03 3Q03 4Q03

Revenue $17.4 $21.4 $30.5 $35.5 $38.0 $39.4

Operating Profit 6.7 7.6 14.5 14.9 15.3 11.7Recurring Profit 6.3 5.4 14.9 15.4 15.5 11.3

Net Profit 5.1 5.3 12.5 13 12.9 9.5

Source: Company Data. Exhibit 120

NHN Quarterly Balance Sheet

($ millions) 2002 2003

3Q02 4Q02 1Q03 2Q03 3Q03 4Q03

Total Assets 62.3 107.9 123.8 139.1 157.5 173Current Assets 32.7 69.9 81.2 88.5 88.3 91.5Fixed Assets 29.7 38.1 42.6 50.7 69.2 81.5

Total Liabilities 11.8 16.2 18.8 21 26.2 32.1Current Liabilities 11.8 16 18.3 20.2 25 31.3Long-Term Liabilities - 0.2 0.5 0.8 1.2 0.8

Shareholders Equity 50.5 91.7 105 118.2 131.3 140.9Paid-in Capital 2.3 3.2 3.2 3.2 3.2 3.2Capital Surplus 37.9 74.7 75.5 75.6 75.6 75.6Retained Earnings 9.9 13.7 26.2 39.1 52 61.5Capital Adjustment 0.4 0.2 0.2 0.2 0.4 0.6

Source: Company Data.



Company Models — US



Exhibit 121

Amazon.com Historical and Projected Quarterly Income Statement ($ Thousands, Except EPS) 2002 2003 2004E

3/02 6/02(o) 9/02(p) 12/02 3/03 6/03 9/03 12/03 3/04E 6/04E 9/04E 12/04ETotal Revenue $847,422 $805,605 $851,299 $1,428,610 $1,083,559 $1,099,912 $1,134,456 $1,945,772 $1,446,875 $1,413,436 $1,435,096 $2,272,605

North America 621,303 586,479 587,004 966,671 704,712 702,523 709,271 1,141,907 851,586 806,301 810,333 1,274,135Media 471,343 439,245 435,793 648,568 517,259 499,051 502,271 750,891 585,695 538,839 541,534 785,224Electronics and other general merchandise 127,644 130,203 133,355 289,839 168,145 177,439 180,418 352,517 239,712 239,712 240,910 445,684Other 22,316 17,031 17,856 28,264 19,308 26,033 26,582 38,499 26,179 27,750 27,889 43,228

International 226,119 219,126 264,295 461,939 378,847 397,389 425,185 803,865 595,289 607,134 624,763 998,470Media 214,269 208,923 249,855 430,618 355,712 366,034 374,989 682,741 498,401 503,385 508,419 864,312Electronics and other general merchandise 11,358 9,685 13,875 30,959 22,863 31,089 49,804 120,850 96,680 103,448 115,861 133,241Other 492 518 565 362 272 266 392 274 208 302 483 918

Consolidated 847,422 805,605 851,299 1,428,610 1,083,559 1,099,912 1,134,456 1,945,772 1,446,875 1,413,436 1,435,096 2,272,605Media 685,612 648,168 685,648 1,079,186 872,971 865,085 877,260 1,433,632 1,084,096 1,042,224 1,049,952 1,649,536Electronics and other general merchandise 139,002 139,888 147,230 320,798 191,008 208,528 230,222 473,367 336,392 343,159 356,771 578,924Other 22,808 17,549 18,421 28,626 19,580 26,299 26,974 38,773 26,388 28,052 28,372 44,146

Company Guidance $1.0-$1.05B $1.075-1.15B $1.76-1.91B $1.39-1.49B

Cost of Goods 624,297 587,438 635,132 1,093,451 812,977 825,984 848,635 1,518,935 1,093,391 1,065,191 1,088,112 1,775,107North America Cost of Goods 447,781 416,350 432,319 724,023 517,880 512,466 508,150 853,253 -- -- -- --International Cost of Goods 176,516 171,088 202,813 369,428 295,097 313,518 340,485 665,682 -- -- -- --

Gross Profit 223,125 218,167 216,167 335,159 270,582 273,928 285,821 426,837 353,484 348,245 346,984 497,499North America Gross Profit 173,522 170,129 154,685 242,648 186,832 190,057 201,121 288,654 223,115 215,282 222,031 305,792International Gross Profit 49,603 48,038 61,482 92,511 83,750 83,871 84,700 138,183 130,368 132,962 124,953 191,706

Operating Expenses 198,467 192,173 188,675 233,201 203,122 206,739 212,168 273,901 233,697 234,508 233,629 356,068Marketing 32,244 28,832 26,728 37,579 28,227 25,326 28,943 40,291 31,831 33,922 31,572 49,997Fulfillment 89,815 85,751 90,342 126,559 103,705 107,455 107,057 158,815 122,984 121,555 121,983 193,171Technology and Content 55,497 58,165 52,907 49,048 50,088 52,135 53,775 51,811 54,981 53,711 54,534 86,359General & Administrative 20,911 19,425 18,698 20,015 21,102 21,823 22,393 22,984 23,900 25,320 25,540 26,540

Operating Income 24,658 25,994 27,492 101,958 67,460 67,189 73,653 152,936 119,787 113,736 113,355 141,431North American Operating Income 35,426 35,661 26,346 82,234 51,661 54,598 62,515 114,271 -- -- -- --International Operating Income (10,768) (9,667) 1,146 19,724 15,799 12,591 11,138 38,665 -- -- -- --

Company Guidance -- -- -- -- -- $45-$60MM $55-70MM $125-155MM $95-115MM -- -- --Depreciation Add Back 20,940 20,970 20,501 19,863 19,750 19,003 18,338 18,467 18,450 18,023 18,299 28,979EBITDA 45,598 46,964 47,993 121,821 87,210 86,192 91,991 171,403 138,237 131,760 131,654 170,410

Net Interest Expense and Other (29,497) (30,403) (27,139) (26,576) (27,112) (24,921) (25,226) (27,957) (22,695) (21,507) (21,507) (21,507)Interest Income 5,652 5,650 5,600 6,785 6,540 5,761 4,324 5,330 4,134 4,134 4,134 4,134Interest expense (35,244) (35,651) (35,922) (36,108) (36,511) (34,367) (29,802) (29,299) (26,828) (25,641) (25,641) (25,641) Cash interest expense (28,183) (28,187) (28,011) (28,867) (28,634) (30,835) (28,459) (29,133) (23,933) (22,745) (22,745) (22,745) Non-cash interest expense (7,061) (7,464) (7,911) (7,241) (7,877) (3,532) (1,343) (166) (2,895) (2,895) (2,895) (2,895)Other Income/(Expense), net 95 (402) 3,183 2,747 2,859 3,685 252 (3,988) 0 0 0 0

Pre-Tax Income - Operating (4,839) (4,409) 353 75,382 40,348 42,268 48,427 124,979 97,092 92,229 91,848 119,924Provision for Income Tax - Operating 0 0 0 0 0 0 0 0 0 0 0 0Net Income - Operating (4,839) (4,409) 353 75,382 40,348 42,268 48,427 124,979 97,092 92,229 91,848 119,924

Company Guidance $110-140MM

Extraordinary Items (16,567) (87,976) (34,876) (72,031) (50,033) (85,582) (32,864) (51,825) (15,039) (15,039) (15,039) (15,039)Stock-Based Compensation (10,931) (23,148) 832 (35,680) (27,323) (24,453) (20,936) (15,039) (15,039) (15,039) (15,039) (15,039)Amortization of Goodwill and Intangibles (1,979) (1,374) (1,212) (913) (912) (913) (786) (141) -- -- -- --Acquisition & Investment-Related Charges -- -- -- -- -- -- -- -- -- -- -- --Other (3,657) (63,454) (34,496) (35,438) (21,798) (60,216) (11,142) (36,645) -- -- -- --Equity in Losses of Equity Method Investees (1,744) (1,168) (557) (700) (436) -- -- -- -- -- -- --Pre-Tax Income - Reported (23,150) (93,553) (35,080) 2,651 (10,121) (43,314) 15,563 73,154 82,053 77,190 76,809 104,885Provision for Income Tax - Reported -- -- -- -- -- -- -- -- -- -- -- --Net Income - Reported (23,150) (93,553) (35,080) 2,651 (10,121) (43,314) 15,563 73,154 82,053 77,190 76,809 104,885Earnings Per Share - Reported ($0.06) ($0.25) ($0.09) $0.01 ($0.03) ($0.10) $0.04 $0.17 $0.19 $0.18 $0.18 $0.24Earnings Per Share - Operating ($0.01) ($0.01) $0.00 $0.19 $0.10 $0.10 $0.11 $0.29 $0.23 $0.21 $0.21 $0.28

Company GuidanceShares used to calculate EPS ('000) 373,031 376,937 398,361 407,056 388,541 418,138 422,802 425,214 427,514 429,814 432,114 434,284

Revenue GrowthTotal Revenue Y/Y 21% 21% 33% 28% 28% 37% 33% 36% 34% 29% 27% 17%Total Revenue Q/Q (24) (5) 6 68 (24) 2 3 72 (26) (2) 2 58

North America Y/Y 9 9 17 13 13 20 21 18 21 15 14 12International Y/Y 71 71 91 76 68 81 61 74 57 53 47 24

Media Y/Y 21 20 34 29 27 33 28 33 24 20 20 15Electronics and other genl. merch. Y/Y 20 25 30 27 37 49 56 48 76 65 55 22Other Y/Y 35 16 29 7 (14) 50 46 35 35 7 5 14

Revenue MixNorth America (% of total revenue) 73% 73% 69% 68% 65% 64% 63% 59% 59% 57% 56% 56%International (% of total revenue) 27% 27% 31% 32% 35% 36% 37% 41% 41% 43% 44% 44%

Media (% of total revenue) 81% 80% 81% 76% 81% 79% 77% 74% 75% 74% 73% 73%Electronics and other genl. merch. (% of total reven 16% 17% 17% 22% 18% 19% 20% 24% 23% 24% 25% 25%Other (% of total revenue) 3% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%

Expense GrowthExpenses Y/Y (14) (7) (0) 8 2 8 12 17 15 13 10 30Expenses Q/Q (8) (3) (2) 24 (13) 2 3 29 (15) 0 (0) 52

Additional Growth MetricsOperating Income Y/Y -- (2) (101) 74 174 158 168 50 78 69 54 (8)Operating Income Q/Q -- 5 6 271 (34) (0) 10 108 (22) (5) (0) 25

Operating EPS Y/Y 59 119 112 86 (6)Operating EPS Q/Q 157 (23) (6) (1) 30

Margin Analysis (% of Total Rev)Gross Margin 26.3% 27.1% 25.4% 23.5% 25.0% 24.9% 25.2% 21.9% 24.4% 24.6% 24.2% 21.9%Operating Expenses 23% 24% 22% 16% 19% 19% 19% 14% 16% 17% 16% 16%

Marketing 4 4 3 3 3 2 3 2 2 2 2 2Fulfillment 11 11 11 9 10 10 9 8 9 9 9 9Technology and Content 7 7 6 3 5 5 5 3 4 4 4 4General & Administrative 2 2 2 1 2 2 2 1 2 2 2 1

Operating Margin 2.9% 3.2% 3.2% 7.1% 6.2% 6.1% 6.5% 7.9% 8.3% 8.0% 7.9% 6.2%EBITDA Margin 5.4% 5.8% 5.6% 8.5% 8.0% 7.8% 8.1% 8.8% 9.6% 9.3% 9.2% 7.5%

(a) From period from July 5, 1994 (Inception) to December 31, 1994; (b) Amazon.com completed an IPO of (pre-splits) 3MM shares at $18 on May 15, 1997 (d) Includes interest related to 5/5/98 offering of $325MM ten-year senior discount notes (@ 10%); interest terms are non-cash for years 1-5. (e) Includes goodwill amort. related to the 4/98 acq. of Bookpages, Telebook, IMD, as well as charges related to the 8/98 acq. of Junglee and PlanetAll, incl. amort. of goodwill & intang., transaction costs, inprocess R&D.(f) On 1/29/99, AMZN issued 4.75% convertible subordinated notes due 2009 with net proceeds of $1.25B; Cash interest expenses associated with the notes amounts to approximately $16MM per quarter. (g) Merger & acquisition costs include $4.7MM in stock-based compensation costs. (h) CQ4:99 COGS includes $39MM in inventory charges. (i) On 2/11/00, AMZN issued 6 7/8% convertible subordinated notes due 2010 with net proceeds of $664MM; Cash interest expenses associated with the notes amounts to approximately $12MM per quarter.(j) CQ3:00 includes $19.6MM in Services/ACN revenue related to at-cost sale of inventory to toysrus.com. (k) CQ4:00 includes $9MM in Services/ACN revenue related to at-cost sale of inventory to toysrus.com(l) For CQ1:01, Extraordinary Items include a $114MM restructuring charge; (m) For CQ2:01, Extraordinary Items include a $59MM restructuring charge; (n) For CQ3:01, Extraordinary items include a $40MM foreign currency loss and a $16MM loss on sales of investments.(o) For CQ2:02, Extraordinary items include a $71MM foreign currency loss and a $10MM net gain on sales of equity investments; (p) For CQ3:02, Extraordinary Items include a $37MM restructuring charge associated with ongoing lease obligations.(q) For CQ4:02, Extraordinary Items include a $5MM restructuring credit and $41MM in foreign currency loss .(r) For CQ1:03, Extraordinary Items include $22MM in foreign currency loss.AMZN stock splits: 2-for-1 on 6/2/98; 3-for-1 on 1/5/99; 2-for-1 on 9/2/99; Fiscal year ends in December; E = Morgan Stanley Research Estimates. E = Morgan Stanley Research Estimates Source: Morgan Stanley Equity Research.



Exhibit 122

Amazon.com Historical Quarterly Balance Sheet ($ Thousands) 2001 2002 2003

3/01 6/01 9/01 12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03Total Assets $1,470,155 $1,345,036 $1,346,368 $1,637,547 $1,361,928 $1,435,047 $1,497,405 $1,990,449 $1,705,933 $1,596,854 $1,749,685 $2,162,033

Current Assets 855,710 809,357 870,276 1,207,920 954,273 1,043,577 1,119,607 1,615,676 1,344,496 1,251,254 1,410,200 1,820,809 Cash & Cash Equivalents 446,944 462,949 432,307 540,282 296,689 270,438 327,564 738,254 495,773 641,728 666,418 1,102,273 Real Cash Usage (a) (426,421) (7,940) (77,328) 341,586 (245,887) (2,803) 26,755 357,063 (258,176) 118,883 21,625 463,727 Marketable Securities 196,029 146,020 235,793 456,303 448,569 553,141 538,238 562,715 586,779 347,044 398,242 292,550 Inventories 155,562 129,035 130,739 143,722 138,996 126,794 151,514 202,425 173,030 178,107 241,667 293,917 Accounts Receivable, net and Other Current Assets 57,175 71,353 71,437 67,613 70,019 93,204 102,291 112,282 88,914 84,375 103,873 132,069

Cash, Cash Equivalents, Marketable Securities 642,973 608,969 668,100 996,585 745,258 823,579 865,802 1,300,969 1,082,552 988,772 1,064,660 1,394,823

Long Term Assets 614,445 535,679 476,092 429,627 407,655 391,470 377,798 374,773 361,437 345,600 339,485 341,224 Fixed Assets, net 304,179 292,422 288,373 271,751 256,403 249,452 239,238 239,398 228,279 221,674 221,459 224,285 Deferred Charges 0 0 0 0 0 0 0 0 0 0 0 0 Other Assets 54,804 53,410 51,311 49,768 48,069 47,146 46,878 45,662 46,346 38,716 35,297 32,469 Investments in Equity-Method Investees 51,042 36,952 25,347 28,359 25,413 18,476 16,498 15,442 13,453 12,764 12,949 14,831 Other Intangibles, net 80,424 63,893 48,273 34,382 6,959 5,585 4,373 3,460 2,548 1,635 659 518 Goodwill , net 123,996 89,002 62,788 45,367 70,811 70,811 70,811 70,811 70,811 70,811 69,121 69,121

Liabilities & Shareholders' Equity $1,470,155 $1,345,036 $1,346,368 $1,637,547 $1,361,928 $1,435,047 $1,497,405 $1,990,449 $1,705,933 $1,596,854 $1,749,685 $2,162,033

Total Liabilities $2,723,566 $2,774,967 $2,800,362 $3,077,547 $2,809,303 $2,878,958 $2,975,844 $3,343,263 $2,994,997 $2,843,690 $2,907,719 $3,198,140

Current Liabilities 604,710 648,240 628,198 921,414 657,030 660,532 710,998 1,065,958 698,579 769,384 826,750 1,252,701Accounts Payable 257,411 257,976 236,992 444,748 314,616 296,368 347,519 618,128 393,696 445,098 499,189 819,811Current Portion of Debt 19,305 18,337 16,054 14,992 13,958 14,406 13,134 13,318 11,078 8,143 6,058 4,216Interest Payable 16,720 43,833 41,635 68,632 16,197 44,396 42,793 71,661 16,632 45,179 44,476 73,100Unearned Revenue 93,661 86,945 90,288 87,978 79,361 69,128 65,878 47,916 42,979 38,733 40,843 37,844Accrued Expenses and Other Current Liabilities 217,613 241,149 243,229 305,064 232,898 236,234 241,674 314,935 234,194 232,231 236,184 317,730

Long Term Liabilities 2,118,856 2,126,727 2,172,164 2,156,133 2,152,273 2,218,426 2,264,846 2,277,305 2,296,418 2,074,306 2,080,969 1,945,439Long term debt 2,118,856 2,126,727 2,172,164 2,156,133 2,152,273 2,218,426 2,264,846 2,277,305 2,296,418 2,074,306 2,080,969 1,945,439

Shareholders' Equity (1,253,411) (1,429,931) (1,453,994) (1,440,000) (1,447,375) (1,443,911) (1,478,439) (1,352,814) (1,289,064) (1,246,836) (1,158,034) (1,036,107)Common Stock 3,588 3,622 3,718 3,732 3,751 3,803 3,812 3,879 3,916 3,967 4,004 4,034Additional Paid-In Capital 1,344,083 1,356,216 1,455,693 1,462,769 1,480,935 1,546,941 1,550,118 1,649,946 1,714,616 1,790,835 1,852,308 1,899,398Stock-Based Compensation (10,532) (10,132) (11,306) (9,853) (9,710) (9,778) (7,775) (6,591) (5,420) (4,201) (3,525) (2,850)Accumulated Other Comprehensive Loss (63,118) (83,846) (36,434) (36,070) (38,623) (7,596) (12,233) 9,662 17,655 25,708 36,761 37,739Accumulated Deficit (2,527,432) (2,695,791) (2,865,665) (2,860,578) (2,883,728) (2,977,281) (3,012,361) (3,009,710) (3,019,831) (3,063,145) (3,047,582) (2,974,428)

Source: Morgan Stanley Equity Research.



Exhibit 123

Amazon.com Historical Key Metrics ($ Thousands, Except EPS) 2002 2003

3/02 6/02(o) 9/02(p) 12/02 3/03 6/03 9/03 12/03Key MetricsHeadcount 7,900 7,700 7,800 7,500 7,700 7,600 7,900 7,800Ann. Rev ('000)/Employee $429 $418 $437 $762 $563 $579 $574 $998Ann. Rev ('000)/Active Customers (MM) $125 $125 $125 $127 $126 $129 $129 $133Ann. Opex('000)/Employee 100 100 97 124 106 109 107 115Ann. Opex/Ann. Rev. (per Emp.) 23% 24% 22% 16% 19% 19% 19% 12%Active Customers (MM) 26 27 29 31 33 35 37 39TTM Active Sellers (MM) -- -- -- 353 -- -- 550 600

Active Sellers Y/Y -- -- -- -- -- -- -- 70%Unit Growth Y/Y 28% 28% 39% 36% 35% 41% 36% 33%Third-party units as a % of total 13% 14% 17% 21% 19% 19% 22% 24%

Free Cash Flow CalculationOperating Cash Flow - TTM 46,169 48,321 150,832 174,291 163,542 284,929 283,638 392,022Purchases of fixed assets (capex) - TTM (35,738) (32,753) (31,181) (39,163) (40,703) (40,404) (44,243) (45,963)Free Cash Flow - TTM 10,431 15,568 119,651 135,128 122,839 244,525 239,395 346,059Shares - TTM 371,220 375,516 383,094 388,846 392,724 403,024 409,134 413,674Free Cash Flow per share $0.03 $0.04 $0.31 $0.35 $0.31 $0.61 $0.59 $0.84

Growth Y/Y -- -- -- -- 1013% 1363% 87% 141% Source: Morgan Stanley Equity Research.



Exhibit 124 eBay Historical and Projected Quarterly Income Statement (Includes PayPal Results Beginning in CQ4:02) ($ Thousands, Except EPS) 2002 2003 2004E

3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03 3/04E 6/04E 9/04E 12/04ENet Revenue $245,106 $266,287 $288,779 $413,928 $476,492 $509,269 $530,942 $648,393 700,000 720,000 725,000 855,000

Company Guidance $440MM $500MM $515MM $590MM $700MM $720MM $725MM $855MM

Cost of Revenues 41,277 44,561 45,374 82,664 92,098 99,150 109,353 115,457 129,507 140,400 148,698 149,634

Gross Profit 203,829 221,726 243,405 331,264 384,394 410,119 421,589 532,936 570,493 579,600 576,303 705,366

Operating Expenses 133,113 142,285 153,288 217,341 236,250 288,036 265,717 329,794 346,400 360,810 356,625 424,770Sales & Marketing 73,104 79,804 88,008 108,734 123,760 134,616 136,408 172,781 185,500 190,800 192,125 226,575Product Development 24,307 24,346 24,163 31,820 34,332 38,819 39,737 46,427 52,500 56,880 54,375 64,125General & Administrative 32,493 36,596 39,352 63,344 63,000 69,476 74,238 95,989 88,900 92,880 90,625 114,570Patent Litigation Expense 29,965 0

Amort of Acquired Intangibles 1,530 1,108 1,239 12,064 11,868 11,976 13,824 12,991 13,000 13,500 13,000 13,000Merger Related Costs 0 0 0 0 0 0 0 0 0 0 0 0Payroll Taxes on Option Exercises 1,679 431 526 1,379 3,290 3,184 1,510 1,606 6,500 6,750 6,500 6,500

Reported Operating Income 70,716 79,441 90,117 113,923 148,144 122,083 155,872 203,142 224,093 218,790 219,678 280,596

Adjusted Operating Income (a) 74,384 80,655 92,211 132,389 165,574 138,742 172,167 218,499 233,893 229,090 229,478 290,396Depreciation Add Back 11,481 17,594 15,933 15,952 20,152 25,032 29,534 32,127 29,260 31,050 30,590 31,255 EBITDA 85,865 98,249 108,144 148,341 185,726 163,774 201,701 250,626 263,153 260,140 260,068 321,651

Interest and Other Income, net 6,279 8,153 5,200 22,008 5,065 9,328 (1,485) 6,360 4,000 6,000 3,000 4,000

Taxes (29,411) (33,286) (34,314) (48,935) (49,018) (39,543) (51,137) (67,040) (68,200) (67,212) (66,581) (85,094)

Operating Net Income 50,552 53,955 62,717 87,640 116,200 103,069 118,329 156,983 169,693 167,878 165,897 209,302

Add-Back Items 3,668 1,214 2,094 18,466 17,430 16,659 16,295 15,357 9,800 10,300 9,800 9,800Merger Related Costs 0 0 0 0 0 0 0 0 0 0 0 0Amortization of Stock Compensation 459 (325) 329 5,023 2,272 1,499 961 760 300 300 300 300Amort of Acquired Intangibles 1,530 1,108 1,239 12,064 11,868 11,976 13,824 12,991 13,000 13,500 13,000 13,000Charitable Contributions/Other 0 0 399 6,393 0 0 0 0 (5,500) (5,500) (5,500) (5,500)Payroll Taxes on Option Exercises 1,679 431 526 1,379 3,290 3,184 1,510 1,606 2,000 2,000 2,000 2,000

Adjustment for Items Below Operating Line 591 (1,584) 399 (17,459) 230 (979) 5,413 1,000Tax Adjustment for Taxable Extraordinary Items (1,291) 17 (779) (363) (5,651) (4,479) (6,629) (1,836)

Reported Net Income 47,584 54,308 61,003 86,996 104,191 91,868 103,250 142,462 159,893 157,578 156,097 199,502

Operating EPS $0.09 $0.09 $0.11 $0.14 $0.18 $0.16 $0.18 $0.24 $0.25 $0.25 $0.24 $0.30Reported EPS $0.08 $0.10 $0.11 $0.14 $0.16 $0.14 $0.16 $0.21 $0.24 $0.23 $0.23 $0.29Company Guidance $0.15 $0.15 $0.15 $0.19 $0.24 $0.23 $0.23 $0.29

Shares used in EPS Calculation 569,782 570,832 573,182 628,790 642,518 656,148 662,231 666,165 672,827 679,555 686,350 692,528

Growth RateNet Revenue (Y/Y) 59% 47% 49% 89% 94% 91% 84% 57% 47% 41% 37% 32%Net Revenue (Q/Q) 12 9 8 43 15 7 4 22 8 3 1 18Operating Expenses (Y/Y) 38 26 21 58 77 102 73 52 47 25 34 29Operating Expenses (Q/Q) (3) 7 8 42 9 22 (8) 24 5 4 (1) 19Adjusted Operating Income (Y/Y) 113 79 101 139 123 72 87 65 41 65 33 33Adjusted Operating Income (Q/Q) 34 8 14 44 25 (16) 24 27 7 (2) 0 27Operating EPS (Y/Y) 61 60 77 105 104 66 63 69 39 57 35 28

Margin Analysis (% of Total Rev)Gross Margin 83% 83% 84% 80% 81% 81% 79% 82% 81% 81% 79% 82%Operating Expenses 54 53 53 53 50 57 50 51 49 50 49 50

Sales & Marketing 30 30 30 26 26 26 26 27 27 27 27 27Product Development 10 9 8 8 7 8 7 7 8 8 8 8General & Administrative 13 14 14 15 13 14 14 15 13 13 13 13

Adjusted Operating Margin 30 30 32 32 35 27 (e) 32 34 33 32 32 34EBITDA Margin 35 37 37 36 39 32 38 39 38 36 36 38Operating Net Margin 21 20 22 21 24 20 22 24 24 23 23 24Tax Rate (Using Reported Oper. Income) 38 38 36 36 32 30 33 32 30 30 30 30

Headcount 3,000 -- -- -- -- -- -- --Annualized Revenue Run-Rate -- -- -- -- -- -- -- --Annualized Rev / Headcount ($000) 327 -- -- -- -- -- -- --Annualized Opex/ Headcount ($000) 177 -- -- -- -- -- -- --

(a) eBay includes unusual items such as amortization of stock compensation in operating expenses and then adjusts these with "add back charges." Adjusted operating income removes these items from operating expenses and treats them directly as "below-the-line" unusual items.(c) Unusual items include $4.0MM ($3.5MM of which is non-cash) in one-time merger related charges. (d) New online registered users include 3.2MM from the acquisition of Internet Auction.(c) Unusual items include $4.0MM ($3.5MM of which is non-cash) in one-time merger related charges. (e) Adjusted operating margin was 33% for CQ2:03 excluding $30MM MercExchange patent settlementEBAY stock splits: 3-for-1 on 3/2/99 and 2-for-1 on 5/24/00 AMd 2-for-1 on 8/29/03; F = Fiscal year ends in December E = Morgan Stanley Research Estimates Source: Morgan Stanley Equity Research.



Exhibit 125 eBay Historical Quarterly Balance Sheet (Includes PayPal Results Beginning in CQ4:02) ($ Thousands) 2001 2002 2003

3/01 6/01 9/01 12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03Total Assets $1,257,029 $1,475,657 $1,548,607 $1,678,529 $1,789,014 $1,970,023 $2,080,565 $4,040,226 $4,572,975 $5,042,979 $5,500,694 $5,820,134

Current Assets 739,337 852,609 810,478 883,805 910,672 937,586 1,044,161 1,468,458 2,013,674 2,003,519 2,111,006 2,145,882Cash and cash equivalents 314,263 439,765 423,729 523,969 576,851 616,867 748,623 1,109,313 1,554,418 1,391,557 1,583,875 1,381,513Short-term investments 273,838 246,473 227,324 199,450 152,936 121,651 97,430 89,690 122,283 271,337 163,765 340,576 Real Cash Gain/(Usage) (c) 26,731 51,163 46,858 69,940 80,779 30,116 91,726 138,612 146,098 22,603 168,384 171,650Accounts receivable 75,494 103,717 97,931 101,703 120,912 128,769 138,378 131,453 157,263 164,621 169,050 225,871Funds receivable -- -- -- -- -- -- -- 41,014 83,885 83,063 84,659 79,893Other current assets 75,742 62,654 61,494 58,683 59,973 70,299 59,730 96,988 95,825 92,941 109,657 118,029

Long-Term Assets 517,692 623,048 738,129 794,724 878,342 1,032,437 1,036,404 2,571,768 2,559,301 3,039,460 3,389,688 3,674,252Long-Term Investments 135,540 107,571 225,997 286,998 343,813 412,969 439,962 470,227 361,989 670,309 730,155 934,171Restricted cash 126,390 129,467 129,690 129,614 126,390 129,963 130,026 134,644 127,736 127,069 127,083 127,432PP&E 133,279 141,747 142,845 142,349 142,387 187,055 164,990 218,028 241,800 403,295 534,624 601,785Goodwill -- -- -- 187,829 220,969 252,891 249,856 1,456,024 1,470,867 1,487,018 1,643,120 1,719,311Deferred Tax Assets 10,937 9,843 10,572 21,540 23,031 23,520 18,101 76,861 75,873 63,547Intangible and other assets 111,546 234,420 229,025 26,394 21,752 26,039 33,469 292,845 280,048 275,896 291,159 291,553

Intangible Assets, Net 213,415 212,929 10,810 11,229 11,089 9,582 279,465 267,742 257,889 271,578 274,057Other Assets 21,005 16,096 15,584 10,523 14,950 23,887 13,380 12,306 18,007 19,581 17,496

Total Liabilities 212,757 247,173 237,830 249,391 261,409 273,920 257,215 483,753 647,784 710,181 908,337 923,892

Current Liabilities 144,382 177,584 168,103 180,139 202,301 213,221 195,542 386,224 464,855 532,493 607,826 647,276 Accounts payable 21,395 40,111 30,739 33,235 33,619 36,531 32,697 47,424 54,039 64,666 54,584 64,633 Deferred revenue/customer advances 12,081 18,123 15,535 15,583 16,283 22,373 16,771 18,846 20,535 21,485 25,246 28,874 Debt and capital leases, current portion 30,254 15,141 15,958 16,111 15,049 14,974 108 2,970 3,340 3,586 3,586 2,840 Income taxes payable 10,995 10,945 10,981 20,617 22,990 23,318 17,721 67,265 71,642 89,510 78,352 87,870 Deferred tax liabilities 0 0 0 0 0 0 0 0 0 0 0 0 Other current liabilities 69,657 93,264 94,890 94,593 114,360 116,025 128,245 249,719 315,299 353,246 446,058 463,059

Funds Payable and amounts due to customers 0 0 0 0 0 0 0 50,396 97,277 100,192 110,071 106,568Accrued Expenses and other current liabilities 69,657 93,264 94,890 94,593 114,360 116,025 128,245 199,323 218,022 253,054 335,987 356,491

Long-Term Liabilities 68,375 69,589 69,727 69,252 59,108 60,699 61,673 97,529 182,929 177,688 300,511 276,616Debt and leases, long-term portion 11,339 11,337 12,046 12,008 9,774 9,808 9,363 13,798 13,122 12,384 133,954 124,476Deferred tax liabilities 0 0 0 0 0 0 0 27,625 106,677 102,028 101,169 79,238Other Liabilities 13,717 14,119 17,966 19,493 19,002 20,421 21,077 22,874 20,693 19,253 15,862 33,494Minority Interests 43,319 44,133 39,715 37,751 30,332 30,470 31,233 33,232 42,437 44,023 49,526 39,408Series B convertibles and warrants 0 0 0 0 0 0 0 0 0 0 0 0

Shareholders' Equity 1,044,272 1,228,484 1,310,777 1,429,138 1,527,605 1,696,103 1,823,350 3,556,473 3,925,191 4,332,798 4,592,357 4,896,242Common stock 269 273 275 277 280 282 282 282 282 282 282 282Additional Paid-in capital 960,790 1,120,010 1,178,942 1,275,240 1,331,829 1,406,083 1,406,083 1,406,083 1,406,083 1,406,083 1,406,083 1,406,083Notes receivable from stockholders 0 0 0 0 0 0 0 0 0 0 0 0Unearned compensation (5,051) (4,200) (3,288) (2,367) (1,558) (692) (692) (692) (692) (692) (692) (692)Retained earnings 95,423 119,109 138,645 164,633 212,167 266,475 327,478 414,474 518,665 610,533 713,783 856,245Accumulated other comprehensive income (7,159) (6,708) (3,797) (8,645) (15,113) 23,955 23,955 23,955 23,955 23,955 23,955 23,955

Total Liabilities & Shareholders' Equity $1,257,029 $1,475,657 $1,548,607 $1,678,529 $1,789,014 $1,970,023 $2,080,565 $4,040,226 $4,572,975 $5,042,979 $5,500,694 $5,820,134

Ratio AnalysisBook Value Per Share $1.87 $2.17 $2.32 $2.52 $2.68 $2.97 $3.18 $5.66 $6.11 $6.60 $6.93 $7.35Cash, Equivalents, Investments Per Share $1.30 $1.40 $1.55 $1.78 $1.88 $2.02 $2.24 $2.65 $3.17 $3.56 $3.74 $3.99Cash, Equivalents, Investments $723,641 $793,809 $877,050 $1,010,417 $1,073,600 $1,151,487 $1,286,015 $1,669,230 $2,038,690 $2,333,203 $2,477,795 $2,656,260Long-Term Debt/Equity 7% 6% 5% 5% 4% 4% 3% 3% 5% 4% 7% 6%Days Accts. Receivable 45 52 46 42 45 44 44 29 30 29 29 32Days Accts. Payable 72 111 80 76 74 75 66 52 54 60 46 51(b) Cash and equivalents and long-term investments in CQ2:99 includes gross proceeds of approximately $700M from the April 1999 offering of 6.5MM shares.(c) Real Cash Gain/(Usage) includes operating cash flow AMd purchases of property AMd equipment Source: Morgan Stanley Equity Research.



Exhibit 126 eBay Historical Key Metrics (Includes PayPal Results Beginning in CQ4:02)

2002 20033/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03

Financial Metrics

Cash Flow from Operations ($000) 92,273 92,840 111,928 182,862 190,006 208,682 208,013 267,418Acquisitions of Property and Equipment ($000) (11,494) (62,724) (20,202) (44,250) (43,908) (186,079) (39,629) (95,768)Free Cash Flow ($000) 80,779 30,116 91,726 138,612 146,098 22,603 168,384 171,650

Y/Y Growth 202% -41% 96% 98% 81% -25% 84% 24%Q/Q Growth 15% -63% 205% 51% 5% -85% 645% 2%

Free Cash Flow Per Share $0.14 $0.05 $0.16 $0.22 $0.23 $0.03 $0.25 $0.26Employees 3,000 3,200 3,400 4,000 4,300 5,300 5,600 6,200Annualized Revenue Run-Rate ($000) 980,424 1,065,148 1,155,116 1,655,712 1,905,968 2,037,076 2,123,768 2,593,572Annualized Revenue per Employee (ARPE) ($000) 327 333 340 414 443 384 379 418

Y/Y Growth -- -- 5% 21% 36% 15% 12% 1%Q/Q Growth -5% 2% 2% 22% 7% -13% -1% 10%

Annualized Opex ($000) 532,452 569,140 613,152 869,364 945,000 1,152,144 1,062,868 1,319,176Annualized Opex per Employee ($000) 177 178 180 217 220 217 190 213

Y/Y Growth -- -- -15% 1% 24% 22% 5% -2%Q/Q Growth -17% 0% 1% 21% 1% -1% -13% 12%

Listings DataGlobal Listings (000s) 138,000 145,200 159,600 195,500 219,700 225,000 234,600 291,700

Y/Y Growth 55% 47% 47% 55% 59% 55% 47% 49%Q/Q Growth 9% 5% 10% 22% 12% 2% 4% 24%

U.S. Listings (000s) 96,000 99,200 104,600 127,075 140,608 141,750 143,106 176,479% of Global Listings 70% 68% 66% 65% 64% 63% 61% 61%Y/Y Growth 30% 29% 31% 42% 46% 43% 37% 39%Q/Q Growth 7% 3% 5% 21% 11% 1% 1% 23%

International Listings (000s) 42,000 46,000 55,000 68,425 79,092 83,250 91,494 115,222% of Global Listings 30% 32% 34% 35% 36% 37% 39% 40%Y/Y Growth 180% 109% 90% 85% 88% 81% 66% 68%Q/Q Growth 14% 10% 20% 24% 16% 5% 10% 26%

Annualized Listings per Registered User 12.0 11.7 11.6 12.7 12.8 12.0 11.0 12.3Net Revenue per Listing $1.78 $1.83 $1.81 $2.12 $2.17 $2.26 $2.26 $2.22Average Global Listings per Day (000s) 1,533 1,613 1,773 2,172 2,441 2,500 2,607 3,241

Sales DataGlobal Gross Merchandise Sales ($000) (a) $3,107,000 $3,395,000 $3,766,000 $4,600,000 $5,317,000 $5,635,000 $5,775,000 $7,052,000

Y/Y Growth 57% 51% 60% 68% 71% 66% 53% 53%Q/Q Growth 14% 9% 11% 22% 16% 6% 2% 22%

U.S. Gross Merchandise Sales ($000) $2,308,000 $2,417,000 $2,584,000 $3,000,000 $3,328,442 $3,456,000 $3,534,300 $4,108,108% of Total Online GMS 74% 71% 69% 65% 63% 61% 61% 58%Y/Y Growth 39% 35% 43% 46% 44% 43% 37% 37%Q/Q Growth 13% 5% 7% 16% 11% 4% 2% 16%

International Gross Merchandise Sales ($000) $799,000 $978,000 $1,182,000 $1,600,000 $1,988,558 $2,179,000 $2,240,700 $2,943,892% of Total Online GMS 26% 29% 31% 35% 37% 39% 39% 42%Y/Y Growth 154% 113% 117% 134% 149% 123% 90% 84%Q/Q Growth 17% 22% 21% 35% 24% 10% 3% 31%

TTM Gross Merchandise Sales / Active User $492 $502 $511 $513 $524 $539 -- --Y/Y Growth -- -- -- 5% 7% 7% -- --Q/Q Growth 1% 2% 2% 0% 2% 3% -- --

Online Revenue/Gross Merch. Sales (Online) 7.6% 7.6% 7.6% 9.0% 9.0% 9.0% 9.2% 9.2%Gross Merchandise Sales per Listing $22.51 $23.38 $23.60 $23.53 $24.20 $25.04 $24.62 $24.18

Y/Y Growth 1% 3% 9% 9% 7% 7% 4% 3%Q/Q Growth 4% 4% 1% 0% 3% 3% -2% -2%

eBay New User Acquisition Cost ($) (e) $20 $22 $17 $16 $17 $21 $13 --eBay Active User Acquisition Cost ($) (e) $15 $15 $15 $16 $16 $16 $15 $17Average U.S. Listing Take % 6.8% 6.9% 7.1% 7.0% 7.1% 7.0% 7.2% 7.1%Average International Listing Take % 6.5% 6.5% 6.4% 6.7% 6.9% 7.1% 6.9% 7.2%

(a) GMS excludes HALF.com and Internet Auction(d) New online registered users includes 3.2MM from the acquisition of Internet Auction.(e) User acquisition cost is calculated as sales & marketing spend divided by new registered users(f) Active users are defined as all users, excluding Half.com and Internet Auction, who bid, bought or listed an item within the previous 12 month period. EBAY stock splits: 3-for-1 on 3/2/99 and 2-for-1 on 5/24/00 and 2-for-1 on 8/29/03; F = Fiscal year ends in December Source: Morgan Stanley Equity Research.



Exhibit 127 Yahoo! Historical and Projected Quarterly Income Statement ($ Thousands Except EPS) 2002 2003 2004E

3/02(g) 6/02 9/02 12/02 3/03 6/03 9/03 12/03 3/04E 6/04E 9/04E 12/04ERevenue $192,665 $225,792 $248,823 $285,787 $282,948 $321,406 $356,821 $511,339 $508,918 $543,428 $588,015 $657,602

Marketing Services Excluding TAC (f) 137,675 151,709 165,761 196,422 189,965 219,198 245,072 392,915 383,644 409,465 444,320 501,990Traditional Branded Advertising 115,519 126,760 127,840 144,980 133,290 141,616 153,408 181,805 159,989 169,588 183,155 210,079Global Sponsored Search 22,157 24,950 37,921 51,442 55,175 64,281 76,655 100,311 107,333 117,127 130,491 152,169Inktomi -- -- -- -- 1,500 8,200 10,070 10,070 11,036 11,146 11,258 11,370Overture 3rd Party & Affiliate Revenue -- -- -- -- -- -- -- 100,729 105,286 111,603 119,415 128,372

Fees (f) 39,546 49,063 57,331 62,001 63,729 69,926 79,358 85,179 91,518 99,532 108,589 119,710Listings (f) 15,444 25,019 25,731 27,364 29,254 32,282 32,391 33,245 33,756 34,431 35,105 35,902 International 26,053 38,327 38,688 43,401 44,402 50,061 57,062 81,336 82,963 85,452 91,860 105,316

Company Revenue Guidance $295-315MM $318-338MM $462-502MM $475-$505MMCost of Revenue 37,821 41,708 41,033 42,319 43,132 46,842 47,287 68,259 78,882 81,514 85,262 88,776Gross Profit 154,844 184,084 207,790 243,468 239,816 274,564 309,534 443,080 430,036 461,914 502,753 568,826

Total Operating Expenses 159,019 176,566 178,313 188,100 184,839 211,792 226,036 348,661 337,671 343,627 364,433 403,336Core Operating Expenses 149,977 169,495 171,446 181,492 178,517 201,139 216,040 299,229 293,646 301,602 323,408 364,312

Product Development 32,283 34,687 36,938 37,858 36,398 45,099 47,683 78,105 74,811 76,080 82,322 92,064Sales & Marketing 95,682 109,601 108,752 115,933 113,479 122,106 128,748 166,280 165,398 171,180 182,285 206,487G&A 22,012 25,207 25,756 27,701 28,640 33,934 39,609 54,844 53,436 54,343 58,801 65,760

Other Operating Expenses 9,042 7,071 6,867 6,608 6,322 10,653 9,996 49,432 44,025 42,025 41,025 39,025Amortization of Intangibles 3,422 5,952 5,914 5,898 5,747 9,762 9,511 29,354 29,025 29,025 29,025 29,025Payroll Taxes on Option Exercises -- -- -- -- -- -- -- -- -- -- -- --Stock Compensation Expense 5,620 1,119 953 710 575 891 485 20,078 15,000 13,000 12,000 10,000

Operating Income (4,175) 7,518 29,477 55,368 54,977 62,772 83,498 94,419 92,365 118,287 138,320 165,490

Investment Income 22,669 29,228 19,535 20,156 22,259 20,335 23,935 28,629 24,014 27,443 32,367 32,832Minority Interest 212 139 (916) (986) (1,908) (1,126) (2,063) (824) (1,000) (1,000) (1,000) (1,000)Depreciation 19,533 21,524 23,837 23,309 23,326 24,741 23,502 33,745 33,715 34,521 35,270 35,965Operating Income before D&A (EBITDA) 24,400 36,113 60,181 85,285 84,625 98,166 116,996 157,518 170,105 194,832 214,614 240,479

EBITDA Guidance $60-70MM $85-95MM $94-104MM $130-150MM $150-170MM

Pretax Income 18,706 36,885 48,096 74,538 75,328 81,981 105,370 122,224 115,380 144,730 169,687 197,322 Taxes 8,231 15,491 19,239 28,329 28,625 31,153 40,041 47,205 44,998 56,445 66,178 76,956Net Income (Recurring) 10,475 21,394 28,857 46,209 46,703 50,828 65,329 75,019 70,382 88,285 103,509 120,366Non-Recurring Items 64,120 -- -- -- (977) -- -- -- -- -- -- --Acquisition-Related Costs -- -- -- -- -- -- -- -- -- -- -- --Other 64,120 -- -- -- (977) -- -- -- -- -- -- --

Net Income (GAAP) (53,645) 21,394 28,857 46,209 45,726 50,828 65,329 75,019 70,382 88,285 103,509 120,366Diluted EPS (Recurring) $0.02 $0.03 $0.05 $0.08 $0.08 $0.08 $0.10 $0.11 $0.10 $0.12 $0.14 $0.17Diluted EPS (GAAP) ($0.09) $0.03 $0.05 $0.08 $0.07 $0.08 $0.10 $0.11 $0.10 $0.12 $0.14 $0.17

Consensus $0.11

Basic Shares 586,878 598,740 596,743 592,992 596,642 604,018 610,697 661,247 667,247 689,247 693,247 697,247Diluted Shares 610,020 615,542 607,134 607,544 615,788 628,577 637,444 686,514 692,743 715,584 719,737 723,890Revenue Mix

Marketing Services % of Total Revenue 71% 67% 67% 69% 67% 68% 69% 77% 75% 75% 76% 76% Y/Y % Revenue Change (6) 3 28 33 38 44 48 100 102 87 81 28Fees % of Total Revenue 21 22 23 22 23 22 22 17 18 18 18 18 Y/Y % Revenue Change 39 73 93 91 61 43 38 37 44 42 37 41Listings % of Total Revenue 8 11 10 10 10 10 9 7 7 6 6 5 Y/Y % Revenue Change 226 249 256 233 89 29 26 21 15 7 8 8

International % of Total Revenue 14 17 16 15 16 16 16 17 20 20 20 20 Y/Y % Revenue Change (22) 16 45 45 -- 31 47 87 87 71 61 29 Q/Q % Revenue Change -- -- 1 12 2 13 14 43 2 3 8 15

Growth Rate Revenue (Y/Y) 7% 24% 50% 51% 47% 42% 43% 79% 80% 69% 65% 29%

Revenue (Q/Q) 2 17 10 15 (1) 14 11 43 (0) 7 8 12Core Operating Expenses (Y/Y) (4) 13 27 29 19 19 26 65 64 50 50 22

Core Operating Expenses (Q/Q) 7 13 1 6 (2) 13 7 39 (2) 3 7 13Operating Income before D&A (Y/Y) 2744 381 789 199 247 172 94 85 101 98 83 53

Operating Income before D&A (Q/Q) (14) 48 67 42 (1) 16 19 35 8 15 10 12Operating EPS (Y/Y) (230) (192) (556) 3077 342 133 116 44 34 53 40 52

Operating EPS (Q/Q) 617 102 37 60 (0) 7 27 7 (7) 21 17 16Margin Analysis Gross Margin 80% 82% 84% 85% 85% 85% 87% 87% 85% 85% 86% 87% Operating Margin (2) 3 12 19 19 20 23 18 18 22 24 25EBITDA Margin 13 16 24 30 30 31 33 31 33 36 36 37 Pretax Margin 10 16 19 26 27 26 30 24 23 27 29 30 Net Margin (Recurring) 5 9 12 16 17 16 18 15 14 16 18 18Expenses as Pct. of RevenueCore Operating Expenses 78% 75% 69% 64% 63% 63% 61% 59% 58% 56% 55% 55%

Product Development 17 15 15 13 13 14 13 15 15 14 14 14Sales & Marketing 50 49 44 41 40 38 36 33 33 32 31 31G&A 11 11 10 10 10 11 11 11 11 10 10 10

Tax Rate 44 42 40 38 38 38 38 39 39 39 39 39

(a) Includes the Company's results from March 5, 1995 (inception) to December 31, 1995. (b) Yahoo! completed an IPO of (pre-splits) 2.6MM shares at $13 on April 12, 1996.(c) $23MM acquisition cost related to eGroups acquisition -- 3.4MM share pooling transaction closed on August 31, 2000. (d) Other includes $163MM write-down of equity investments(e) The company took a $41MM restructuring charge in CQ2:01 related to employee severance and building reserves.(f) Quarterly revenue breakouts in C2000 are Morgan Stanley estimates; (g) Other is a $64MM non-cash FAS 142 accounting charge; (h) Metrics do not include Yahoo! Japan.(i) An active user is defined as a user that has registered for a Yahoo! service (free or fee-based) within the past year.YHOO stock splits: 3-for-2 on 7/29/97; 2-for-1 on 7/9/98; 2-for-1 on 2/8/99; 2-for-1 on 2/14/00; Fiscal year ends in December. E = Morgan Stanley Research Estimates.(j) HotJobs revenue contribution to Yahoo! begins mid-CQ1:02(k) Customer acquisition cost is calculated using sales and marketing expense over unique users at quarter end.(l) Other includes Yahoo! Express and Classified (Auctions, Yellow Pages and Autos).(o) Includes Enterprise, Y! Japan and International.(p) An additional 18.3MM shares were added to estimates in 2004 due to the $750MM convertible bond issue that will likely convert (if stock price trades above $45.10 for at least 20 trading day(p) in the 30 trading-day period ending on the last trading day of the immediately preceding fiscal quarter).Italicized data represents Morgan Stanley Internet Research Estimates E = Morgan Stanley Research Estimates Source: Morgan Stanley Equity Research.



Exhibit 128 Yahoo! Historical Quarterly Balance Sheet ($ Thousands) 2001 2002 2003

3/01 6/01 9/01 12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03Total Assets 2,409,625 2,420,569 2,355,269 2,379,346 2,622,796 2,725,763 2,696,306 2,790,181 2,956,932 3,921,521 4,105,705 5,931,654

Current Assets 1,129,157 1,145,474 1,097,411 1,051,533 947,614 972,777 936,534 970,004 1,076,013 1,818,761 1,502,046 1,721,709Cash & Cash Equivalents 428,510 398,320 346,063 372,632 294,248 303,591 319,319 310,972 478,443 1,075,582 681,518 713,539 Real Cash Usage (a) 29,598 (19,205) 11,605 (1,359) 40,156 89,081 58,972 62,686 78,125 71,353 97,088 64,249Marketable Securities 582,447 618,968 635,063 553,795 511,098 526,411 456,371 463,204 387,378 497,400 564,283 595,978Accounts Receivable 55,727 62,186 53,157 68,648 89,850 86,340 103,573 113,612 134,190 142,372 151,024 282,415Prepaid Expenses and Other Current Assets 62,473 66,000 63,128 56,458 52,418 56,435 57,271 82,216 76,002 103,407 105,221 129,777

Long Term Assets 1,280,468 1,275,095 1,257,858 1,327,813 1,675,182 1,752,986 1,759,772 1,820,177 1,880,919 2,102,760 2,603,659 4,209,945Marketable Securities 598,273 614,571 535,817 580,418 549,866 643,080 659,903 763,408 540,896 744,237 1,243,708 1,261,693Restricted Long-Term Investments 166,073 166,073 222,450 258,662 258,662 258,662 0 0 0 0 0 0Property and Equipment 147,521 136,500 140,162 131,648 143,635 135,653 381,816 371,272 377,480 371,794 386,443 449,512Goodwill, Intangibles, Other Assets 368,601 357,951 359,429 357,085 723,019 715,591 718,053 685,497 962,543 986,729 973,508 2,498,740

Goodwill 192,987 463,654 458,132 453,716 415,225 635,082 636,434 635,488 1,805,561Intangible assets, net 19,457 114,547 108,362 102,366 96,252 139,992 130,939 121,023 445,640Other Assets 144,641 144,818 149,097 161,971 174,020 187,469 219,356 216,997 247,539

Total Cash, Equivalents, Mkt Securities 1,609,230 1,631,859 1,516,943 1,506,845 1,355,212 1,473,082 1,435,593 1,537,584 1,406,717 2,317,219 2,489,509 2,571,210

Liabilities & Shareholders' Equity 2,409,625 2,420,569 2,355,269 2,379,346 2,622,796 2,725,763 2,696,306 2,790,181 2,956,932 3,921,521 4,105,705 5,931,654

Total Liabilities 394,399 405,261 414,710 412,329 482,982 526,900 540,651 527,911 596,038 1,364,688 1,380,616 1,568,164

Current Liabilities 328,425 339,519 344,961 358,517 390,282 407,551 420,386 411,814 478,033 477,723 491,588 707,796Accounts Payable 16,675 14,467 11,322 13,218 12,715 14,164 13,151 18,738 22,095 19,086 19,771 31,890Accrued Expenses and Other Liabilities 184,514 205,597 223,683 235,897 252,373 257,576 262,884 257,575 307,157 302,640 321,299 483,628Deferred Revenue 127,236 119,455 109,956 109,402 125,194 135,811 144,351 135,501 148,781 155,997 150,518 192,278

Long Term Liabilities 65,974 65,742 69,749 53,812 92,700 119,349 120,265 116,097 118,005 886,965 889,028 860,368Other Liabilities 36,890 36,890 41,207 23,806 62,906 89,694 89,694 84,540 84,540 102,374 102,374 72,890Long-term Debt 750,000 750,000 750,000Minority Interests in Consolidated Subs. 29,084 28,852 28,542 30,006 29,794 29,655 30,571 31,557 33,465 34,591 36,654 37,478

Shareholders' Equity 2,015,226 2,015,308 1,940,559 1,967,017 2,139,814 2,198,863 2,155,655 2,262,270 2,360,894 2,556,833 2,725,089 4,363,490Common Stock 567 571 574 581 601 606 606 611 614 624 629 639Additional Paid-In Capital 1,980,752 2,025,943 1,976,852 2,007,422 2,249,227 2,283,938 2,207,796 2,270,234 2,325,355 2,621,560 2,569,032Retained Earnings (Accumulated Deficit) 30,994 (17,529) (41,648) (50,307) (103,953) (82,559) (53,702) (7,493) 39,210 90,038 155,367Accumulated Other Comprehensive Income 2,913 6,324 4,782 9,322 (6,061) (3,122) 955 (1,082) (4,285) (155,389) 61

Balance Sheet AnalysisBook Value Per Share $3.38 $3.38 $3.26 $3.29 $3.51 $3.57 $3.55 $3.72 $3.83 $4.07 $4.28 $6.36Cash & Equivalents Per Share (b) $2.70 $2.74 $2.88 $2.52 $2.22 $2.39 $2.36 $2.53 $2.28 $3.69 $3.91 $3.75Days Accts. Payable 50 35 29 30 31 31 29 40 47 37 38 43Receivables Days 37 29 31 29 43 35 38 36 43 40 39 50Long Term Debt/Equity 3% 3% 4% 3% 4% 5% 6% 5% 5% 35% 33% 20%(a) Real Cash Usage includes operating cash flow plus purchases of property and equipment(b) Cash & Equivalents includes current and long-term Marketable Securities(c) Italicized numbers are Morgan Stanley estimates Source: Morgan Stanley Equity Research.



Exhibit 129 Yahoo! Historical Key Metrics ($ Thousands Except EPS) 2001 2002 2003

3/01 6/01(e) 9/01 12/01 3/02(g) 6/02 9/02 12/02 3/03 6/03 9/03 12/03Financial Metrics

EBITDA $24,400 $36,113 $60,181 $85,285 $84,625 $98,166 $116,996 $157,518EBITDA Guidance $60-70MM $85-95MM $94-104MM $130-150MM

Cash Flow from Operations $71,053 (5,604) $28,418 $12,983 47,443 103,382 72,265 79,358 98,628 92,123 135,533 101,860Acquisitions of Property and Equipment (41,455) (13,601) (16,813) (14,342) (7,287) (14,301) (13,293) (16,672) (20,503) (20,770) (38,445) (37,611)Changes in Long-Term Deferred Revenue 0 0 0 0 0 (30,000) 0 0 0 0 0 0Other 0 0 0 0 0 0 0 0 0 0 0 28,071Reported Free Cash Flow 29,598 (19,205) 11,605 (1,359) 40,156 59,081 58,972 62,686 78,125 71,353 97,088 92,320 Y/Y Change Q/Q Change

Changes in Long-Term Deferred Revenue 0 0 0 0 0 0 0 0 0 0 0 0Non-Cash Investment Gains/(Losses) & Other (9,000) (11,789) 0 0 1,633 3,097 230 0 8,147 6,373 0 28,724Non-Cash Restructuring Costs 0 40,700 0 16,771 0 0 0 0 0 0 0 0Free Cash Flow (Normalized) 20,598 9,706 11,605 15,412 41,789 62,178 59,202 62,686 86,272 77,726 97,088 121,044 Y/Y Change 33% -398% 398% -4642% 93% 25% 64% 93% Q/Q Change -- -- -- -- -- 49% -5% 6% 38% -10% 25% 25%

Reported Free Cash Flow Per Share $0.05 ($0.03) $0.02 ($0.00) $0.07 $0.10 $0.10 $0.10 $0.13 $0.11 $0.15 $0.13

Company Free Cash Flow Guidance -- -- -- -- -- -- -- -- -- -- -- --

Employees 3,510 3,093 3,256 3,001 3,534 3,564 3,587 3,571 3,705 3,837 3,976 5,493Annualized Revenue Run-Rate $720,860 $728,662 $664,524 $755,644 $770,661 $903,166 $995,291 $1,143,149 $1,131,792 $1,285,624 $1,427,284 $2,060,062Annualized Revenue per Employee (ARPE) $213 $221 $209 $242 $236 $254 $278 $319 $317 $341 $365 $375 Y/Y Change -73% -49% -49% -39% 11% 15% 33% 32% 34% 34% 31% 17% Q/Q Change -46% 4% -5% 15% -2% 8% 9% 15% -1% 7% 7% 3%Annualized Opex per Employee 206 206 191 205 195 199 199 210 203 225 231 295 Y/Y Change -55% -17% -17% -12% -6% -3% 4% 3% 4% 13% 16% 40% Q/Q Change -11% 0% -7% 7% -5% 2% 0% 5% -3% 11% 3% 27%

User / Usage Metrics

Daily Page Views Qtr. Exit (MM) (h) 986 1,015 1,055 1,122 1,372 1,457 1,504 1,598 1,865 1,914 2,041 2,114 Y/Y Change 77% 71% 58% 43% 39% 44% 43% 42% 36% 31% 36% 32% Q/Q Change 26% 3% 4% 6% 22% 6% 3% 6% 17% 3% 7% 4%Unique Users at Qtr. Exit (MM) (h) 167 172 177 188 201 196 201 213 232 236 245 263 Y/Y Change 36% 27% 22% 18% 20% 14% 14% 13% 15% 20% 22% 23% Q/Q Change 4% 3% 3% 6% 7% -2% 3% 6% 9% 2% 4% 7%Active Registered Users (MM) (h) 59 61 68 74 83 83 93 101 112 116 123 133 Y/Y Change -- -- -- -- 41% 36% 37% 36% 35% 40% 32% 32% Q/Q Change -2% 3% 11% 9% 12% 0% 12% 9% 11% 4% 6% 8%Fee Paying Customers (000s) (s) -- -- -- 375 625 1,025 1,550 2,200 2,900 3,500 4,200 4,900 Y/Y Change -- -- -- -- -- -- -- 487% 364% 241% 171% 123% Q/Q Change -- -- -- -- 67% 64% 51% 42% 32% 21% 20% 17%Streaming Sessions (MM) -- -- -- 14 -- -- -- 70 110 -- -- 140 Y/Y Change -- -- -- -- -- -- -- 385% -- -- -- Q/Q Change -- -- -- -- -- -- -- -- -- -- -- --Advertisers 3,145 3,170 3,215 60,800 64,200 71,600 79,100 86,100 93,300 102,000 102,643 150,000

Y/Y Change -12% -14% -7% 1543% 1941% 2159% 2360% 42% 45% 42% 30% 74% Q/Q Change -15% 1% 1% 1791% 6% 12% 10% 9% 8% 9% 1% 46%

Transactions Enabled ($MM) $916 $790 $739 $854 $776 $784 $783 $1,040 $1,025 -- -- --

User / Usage Ratios

Ex-TAC Revenue Per Average Unique User per Month (ARPU) $0.36 $0.36 $0.32 $0.35 $0.33 $0.38 $0.42 $0.46 $0.42 $0.46 $0.49 $0.67 Y/Y Change -- -- -- -- -8% 6% 32% 33% 28% 21% 18% 46% Q/Q Change -- 0% -11% 9% -4% 15% 10% 10% -8% 8% 8% 37%Revenue per Average Unique User per Year (ARPU) $4.32 $4.30 $3.81 $4.14 $3.96 $4.55 $5.01 $5.52 $5.09 $5.49 $5.93 $8.05Fees/Premium Service Subscribers -- -- -- 87 63 48 37 28 22 20 19 17Customer Acquisition Cost (k) $15.26 $19.90 $17.25 $8.24 $7.36 NM $21.75 $9.66 $5.97 $30.53 $14.31 $9.24Marketing Services Revenue / 1,000 Pages Delivered (RPM) -- $1.63 $1.39 $1.51 $1.23 $1.19 $1.24 $1.41 $1.22 $1.29 $1.38 $2.10Marketing Services Revenue / Advertiser $42,945 $46,447 $40,448 $4,631 $2,203 $2,234 $2,200 $2,378 $2,118 $2,245 $2,395 $3,110

Domestic Versus International BreakdownRevenue 180,215 182,165 166,131 185,911 192,665 225,792 248,823 285,787 282,948 321,406 356,821 511,339

United States 146,974 149,111 139,365 155,882 166,612 187,465 210,135 242,386 238,546 271,345 299,759 430,003International 33,241 33,054 26,766 30,029 26,053 38,327 38,688 43,401 44,402 50,061 57,062 81,336

EBITDA (2,557) (41,592) 5,719 10,735 18,780 34,994 59,228 84,575 84,050 97,275 116,511 157,518United States 6,641 (29,526) 15,216 17,032 26,829 38,554 57,621 81,315 76,948 90,555 106,122 147,669International (9,198) (12,066) (9,497) (6,297) (8,049) (3,560) 1,607 3,260 7,102 6,720 10,389 9,849

(a) Includes the Company's results from March 5, 1995 (inception) to December 31, 1995. (b) Yahoo! completed an IPO of (pre-splits) 2.6MM shares at $13 on April 12, 1996.(c) $23MM acquisition cost related to eGroups acquisition -- 3.4MM share pooling transaction closed on August 31, 2000. (d) Other includes $163MM write-down of equity investments(e) The company took a $41MM restructuring charge in CQ2:01 related to employee severance and building reserves.(f) Quarterly revenue breakouts in C2000 are Morgan Stanley estimates; (g) Other is a $64MM non-cash FAS 142 accounting charge; (h) Metrics do not include Yahoo! Japan(i) An active user is defined as a user that has registered for a Yahoo! service (free or fee-based) within the past year.YHOO stock splits: 3-for-2 on 7/29/97; 2-for-1 on 7/9/98; 2-for-1 on 2/8/99; 2-for-1 on 2/14/00; Fiscal year ends in December. E = Morgan Stanley Research Estimates.(j) HotJobs revenue contribution to Yahoo! begins mid-CQ1:02(k) Customer acquisition cost is calculated using sales and marketing expense over unique users at quarter end(l) Other includes Yahoo! Classifieds (Autos and Real Estate) and other Search and Directory Services (including Yahoo! Express)Italicized data represents Morgan Stanley Internet Research Estimates Source: Morgan Stanley Equity Research.



Exhibit 130

InterActiveCorp Historical Income Statement (All figures US $000s, except EPS) 2002 2003

3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03Total Revenue $971,945 $1,107,068 $1,185,156 $1,330,040 $1,392,066 $1,526,511 $1,610,270 $1,804,603

Service Revenue 509,503 660,396 735,832 763,596 861,850 962,489 1,061,591 1,016,733Product Revenue 462,442 446,672 449,324 566,444 530,216 564,022 548,679 787,870

Cost of Goods 617,779 673,851 706,065 791,010 793,606 839,656 883,575 958,926Service Cost of Goods 316,037 394,367 430,461 445,321 474,432 521,028 562,943 516,805Product Cost of Goods 301,742 279,484 275,604 345,689 319,174 318,628 320,632 442,121

Gross Profit 354,166 433,217 479,091 539,030 598,460 686,855 726,695 845,677Service Gross Profit 193,466 266,029 305,371 318,275 387,418 441,461 498,648 499,928Product Gross Profit 160,700 167,188 173,720 220,755 211,042 245,394 228,047 345,749

Operating Expenses 256,290 278,666 305,119 366,959 387,308 442,260 483,758 516,457Selling & Marketing 163,062 157,046 155,833 167,652 203,043 224,627 253,335 267,131General & Administrative 80,228 91,068 115,406 157,533 170,313 168,297 185,741 203,071Other - 17,488 21,265 26,773 - 34,499 27,933 29,266Cable Distribution Fees 13,000 13,064 12,615 15,001 13,952 14,837 16,749 16,989

Merger/Restructuring Costs, Other - 45,181 34,387 4,719 2,096 8,429 1,648 (67)

EBITDA 97,876 109,370 139,585 167,352 209,056 236,166 241,289 329,287

Amort. of non-cash comp., distribution & marketing 10,772 13,433 13,346 15,494 20,858 27,157 103,022 28,738Amortization of other intangibles 21,101 29,876 62,944 31,746 52,156 55,558 76,890 83,900Depreciation 38,220 40,621 46,670 46,366 42,553 41,697 50,514 38,080Non-recurring items - - - - - - - -

EBIT 27,783 25,440 16,625 73,746 93,489 111,754 10,863 178,569

Net Interest Expense and Other (16,800) (85,223) 10,023 52,558 (229,778) 26,273 32,842 32,696Interest Income 6,765 28,385 38,231 41,218 39774 44,526 46,175 45,291Interest expense 11,433 9,877 10,052 13,145 24398 22,340 20,641 25,654Other Income/(Expense), net (12,132) (103,731) (18,156) 24,485 (245,154) 4,087 7,308 13,059

Pre-Tax Income - Operating 10,983 (59,783) 26,648 126,304 (136,289) 138,027 43,705 211,265Income tax (expense) benefit (15,950) (11,717) (36,052) 10,371 54,877 (51,683) (13,116) (60,066)Minority Interest 8,937 (15,289) (17,235) (16,768) (25,384) (28,415) (8,261) (2,640)Earnings from continuing operations 3,970 (86,789) (26,639) 119,907 (106,796) 57,929 22,328 148,559Discontinued Operations/Accounting Chnages (439,459) 2,360,629 (6,725) 28,209 - 38,265 -348 7,459Earnings before Preferred Dividend (435,489) 2,273,840 (33,364) 148,116 (106,796) 96,194 21,980 156,018Preferred Dividend 1,967 3,264 3,264 3,264 3,264 3,264 3,264 3,263Net Income - Reported (437,456) 2,270,576 (36,628) 144,852 (110,060) 92,930 18,716 152,755

Earnings Per Share - Continuing Operations $0.01 ($0.22) ($0.07) $0.24 ($0.22) $0.09 $0.02 $0.19Earnings Per Share - Reported ($0.56) $5.51 ($0.08) $0.30 ($0.23) $0.16 $0.02 $0.20

Shares used to calculate EPS ('000) 783,211 412,083 457,850 482,840 487,244 580,813 935,800 763,775

Revenue GrowthTotal Revenue Y/Y - - - - 43% 38% 36% 36%Total Revenue Q/Q - 14% 7% 12% 5% 10% 5% 12%

Service Y/Y - - - - 69% 46% 44% 33%Product Y/Y - - - - 15% 26% 22% 39%

Revenue MixService (% of total revenue) 52% 60% 62% 57% 62% 63% 66% 56%Product (% of total revenue) 48% 40% 38% 43% 38% 37% 34% 44%

Expense GrowthExpenses Y/Y - - - - 51% 59% 59% 41%Expenses Q/Q - 9% 9% 20% 6% 14% 9% 7%

Additional Growth MetricsEBITDA Y/Y - - - - 114% 116% 73% 97%EBITDA Q/Q - 12% 28% 20% 25% 13% 2% 36%

Margin Analysis (% of Total Rev)Gross Margin 36% 39% 40% 41% 43% 45% 45% 47%EBITDA Margin 10% 10% 12% 13% 15% 15% 15% 18%




Exhibit 131

InterActiveCorp Historical Balance Sheet (All figures US $000s) 2002 2003

3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03Total Assets $13,025,237 $14,409,106 $14,702,148 $15,658,992 $16,220,043 $18,513,624 $21,747,621 $21,586,588

Current Assets 3,216,663 4,344,068 3,874,374 4,624,141 4,625,096 5,851,004 5,376,274 4,214,976 Cash & Cash Equivalents 1,709,568 3,219,634 675,413 1,998,114 2,593,280 3,142,943 2,418,435 899,062 Marketable Securities 238,266 432,447 2,484,546 1,969,754 1,272,390 1,861,631 2,099,090 2,451,091 Inventories, net 401,550 195,345 216,909 192,751 192,169 204,299 258,173 215,995 Accounts Receivable 668,121 291,789 316,615 308,377 383,014 375,825 392,068 429,424 Other Current Assets 199,158 204,853 180,891 155,145 184,243 266,306 208,508 219,404

Long Term Assets 9,808,574 10,065,038 10,827,774 11,034,851 11,594,947 12,662,620 16,371,347 17,371,612PP&E, net 439,709 424,301 434,264 430,247 430,381 446,458 443,598 473,177Goodwill 7,529,536 5,501,980 6,294,921 5,997,842 6,498,148 7,333,240 10,785,058 11,291,768Intangible assets, net 710,436 714,973 714,457 1,258,070 1,571,809 1,747,683 2,041,661 2,513,889Long-term investments 85,059 1,596,596 1,605,605 1,582,182 1,347,762 1,392,565 1,411,543 1,426,502Preferred Interest exchangeable for Common Stock - 1,428,530 1,428,530 1,428,530 1,428,530 1,428,530 1,428,530 1,428,530Cable Distribution Fees, net 202,727 193,223 173,800 167,249 158,417 146,573 137,452 128,971Other non-current assets 841,107 205,435 176,197 170,731 159,900 167,571 123,505 108,775

Total Liabilities and Shareholders Equity 13,025,237 14,409,106 14,702,148 15,658,992 16,220,043 18,513,624 21,747,621 21,586,588

Total Liabilities 7,750,992 6,600,617 6,925,931 7,727,529 7,484,418 7,487,593 7,017,434 7,171,003

Current Liabilities 1,868,887 1,608,156 1,687,563 1,554,625 1,812,417 1,990,008 2,063,459 1,878,181Accounts Payable 437,126 517,903 566,167 609,391 596,611 644,504 926,534 829,979Current Portion of Debt 36,091 41,225 36,231 24,957 16,875 1,531 1,295 2,850Unearned Revenue 329,465 323,395 307,832 277,928 423,346 508,013 472,839 399,051Income Tax Payable 191,243 205,235 207,766 177,019 121,430 97,312 119,605 96,817Accrued Expenses and Other Current Liabilities 874,962 520,398 569,567 465,330 654,155 738,648 543,186 549,484

Long Term Liabilities 5,882,105 4,992,461 5,238,368 6,172,904 5,672,001 5,497,585 4,953,975 5,292,822Long term debt 544,535 507,322 508,237 1,211,145 1,189,155 1,191,522 1,123,822 1,120,097Minority Interest 4,954,997 824,111 1,009,953 1,081,274 610,350 385,892 90,461 110,799Common stock exchangeable for preferred interest - 1,428,530 1,428,530 1,428,530 1,428,530 1,428,530 1,428,530 1,428,530Other Long-term liabilities 382,573 2,232,498 2,291,648 2,451,955 2,443,966 2,491,641 2,311,162 2,633,396

Shareholders' Equity 5,274,245 7,808,489 7,776,217 7,931,463 8,735,625 11,026,031 14,730,187 14,415,585Preferred Stock 131 131 131 131 131 131 131 131Common Stock 3,419 3,837 3,838 3,852 4,325 5,383 6,452 6,305Class B convertible common stock 630 646 646 646 646 646 646 646Additional paid-in capital 5,541,376 5,931,069 5,933,863 5,941,141 6,848,804 9,105,133 13,517,610 13,634,926Retained Earnings (105,387) 2,014,387 1,977,758 2,122,611 2,012,551 2,105,481 2,124,197 2,276,952Accumulated other comprehensive income (15,251) 10,031 11,774 15,697 22,067 41,061 29,989 36,896Treasury Stock (150,673) (151,612) (151,793) (152,615) (152,899) (231,804) (948,838) (1,540,271)




Company Models — Europe



Exhibit 132

T-Online Historical Income Statement (€ millions) 1998A 1999A 2000A 2001A 2002A 2003AAccess 246.4 394.9 665.9 947.2 1,244.7 1,503.3Non-Access 2.6 16.4 110.0 173.3 323.0 347.9Other 21.8 17.2 21.3 19.4 0.0 0.0Total Revenues €270.7 €428.4 €797.2 €1,139.9 €1,567.7 €1,851.2Revenue Growth (%)Access 36.2% 60.3% 68.6% 42.2% 31.4% 20.8%Non-Access 535.6 571.5 57.6 86.3 7.7Other (16.3) (21.1) 23.9Total Revenues Growth 30.9% 58.2% 86.1% 43.0% 37.5% 18.1%Other Operating Income 4.7 5.6 36.9 20.0 0.0 0.0Cost of Goods Sold (124.7) (210.7) (481.6) (686.4) (799.0) (754.9)

Gross Profit €150.7 €223.4 €352.5 €473.5 €768.6 €1,096.3Gross Margin (%) 55.7% 52.1% 39.6% 39.8% 49.0% 59.2%EBITDA €53.8 €17.6 (€121.7) (€189.3) €114.6 €343.8EBITDA margin (%) 19.9% 4.1% NM NM 7.3% 18.6%Depreciation (16.3) (18.1) (15.1) (24.1) (77.0) (73.2)Amortisation (2.5) (5.7) (244.2) (390.4) (349.0) (353.9)

EBIT €34.9 (€6.3) (€381.0) (€603.9) (€311.4) (€83.3)EBIT margin (%) 12.9 NM NM NM NM NMInterest Expense 2.4 1.3 2.1 1.2Interest Income 1.8 1.4 123.6 164.8 128.0 110.9Other Financial Results (380.7) (263.3) 29.3Assoc. Companies (2.6) (2.0) (40.9) (1.3) (2.1)Financial Result, net (0.9) (0.6) 82.7 (217.3) (137.4) 140.2Extraordinary Items (107.2) 0.0 0.0 (0.5)

PBT €34.0 (€6.9) (€405.5) (€821.2) (€448.8) €56.4Tax Loss Carryforwards 0.0 161.0 592.0 692.0 281.0Tax Rate (%) 40.0% 40.0% 40.0% 40.0%Provision for Income taxes 4.9 (1.4) 0.4 (17.0) 43.0 96.9

Net Profit/(Loss) €29.1 (€5.4) (€405.9) (€804.1) (€491.8) (€40.5)(Inc.)/Loss attr. To Minorities (12.6) 5.4 16.1 7.3 3.2 2.8

Reported Net Profit/(Loss) €16.6 €0.0 (€389.7) (€796.8) (€488.6) (€37.7)Dividends 0.0 0.0 0.0 0.0 0.0 0.0Reported EPS €2.91 (€0.54) (€0.32) (€0.65) (€0.40) (€0.03)Operating EPS 1.91 0.57 (0.12) (0.33) (0.11) 0.26Shares Outstanding 10 10 1,224 1,224 1,224 1,224

Source: Company data, Morgan Stanley Research.



Exhibit 133

T-Online Historical Balance Sheet (€ million) 2000A 2001A 2002A 2003EPP&E, net €50.7 €81.7 €97.9 €103.6Goodwill 2,249.4 1,913.2 1,561.4 1,214.3Financial Assets 691.7 338.1 141.7 164.6Deferred Tax Assets 0.0 0.0 179.8 184.8Total Fixed Assets €2,991.8 €2,332.9 €1,980.8 €1,667.3Accounts Receivable 77.4 119.2 114.7 167.5Inventories, Materials, Supplies 1.4 2.3 0.0 1.7Prepaid expenses 15.8 26.0 31.6 20.8Other assets 55.8 33.8 0.0 0.0Current Assets €150.3 €181.3 €146.3 €190.0Accounts Payable 64.5 83.7 171.9 186.8Liabilities to group companies 262.6 26.9 36.3 116.5Liabilities to other companies 5.4 0.1 0.0 0.0Deferred Income 3.7 6.0 58.7 79.9Other Accruals (Mainly Trade Related) 92.1 162.4 0.0 0.0Other liabilities 11.0 10.6 92.0 64.9Current Liabilities €439.2 €289.6 €358.9 €448.1Net Working Capital (288.9) (108.3) (212.6) (258.1)Total Capital Employed €2,702.9 €2,224.6 €1,768.2 €1,409.2Cash (incl. Rec. held by DT) 3,891.6 3,589.9 3,766.0 4,088.6Marketable Securities 8.4 4.9 0.4 0.4Total Cash 3,900.0 3,594.8 3,766.4 4,089.0ST Liabilities to banks 3.4 0.2 0.0 0.0Pensions and similar obligations 3.0 5.2 14.6 18.7Total Debt 6.4 5.4 14.6 18.7

Net Debt/(Cash) (€3,893.5) (€3,589.4) (€3,751.8) (€4,070.3)Total Share Capital 6,985.7 6,998.2 6,998.9 6,999.2Retained Earnings (390.4) (1,187.2) (1,481.4) (1,519.1)Other 1.1 3.1 0.2 (0.1)Total Shareholders Equity €6,596.4 €5,814.0 €5,517.7 €5,480.0Minorities 0.0 0.0 2.1 (0.5)Total Capitalisation €2,702.9 €2,224.6 €1,768.2 €1,409.2

E = Morgan Stanley Research Estimates Source: Morgan Stanley Equity Research.



Exhibit 134

Wanadoo Historical Income Statement (€ million) 2000A 2001A 2002A 2003AAccess €276.4 €563.7 €1,030.0 €1,514.4Portals 62.7 115.1 116.7 137.9E-Commerce 21.1 36.6 51.0 56.1Directories 751.0 848.0 878.4 917.8Other (holding) 0.0 0.0 (4.0) (9.0)Total Revenue €1,111.2 €1,563.3 €2,072.1 €2,617.2

% Revenue Growth 37% 41% 33% 26%Cost of Goods Sold (555.9) (845.9) (1,017.9) (1,234.8)ISP Gross Profit 64.8 156.5 416.2 695.7

% ISP Gross Margin 18% 22% 35% 41%Directories Gross Profit 490.5 560.9 638.0 687.0

% Directories Gross Margin 65% 66% 73% 75%Gross Profit €555.3 €717.4 €1,054.2 €1,382.1

Gross Margin (%) 50% 46% 51% 53%Sales & Marketing, Sales Force (459.2) (570.8) (696.9) (778.0)Administrative Expenses (159.0) (200.8) (230.8) (221.7)Research & Development (3.5) (3.1) (3.6) (7.9)Holding Expenses 0.0 (12.3) (32.6) (27.3)Operating Expenses (621.8) (787.0) (963.9) (1,034.8)ISP EBITDA (292.0) (290.0) (166.4) 45.4

ISP EBITDA Margin (%) (81%) (41%) (14%) 3%Directories EBITDA 225.6 232.4 289.3 335.1

Directories EBITDA Margin (%) 30% 27% 33% 37%EBITDA (€66.4) (€69.6) €90.3 €347.3

EBITDA Margin (%) (6%) (5%) 4% 13%Goodwill Amortisation (Tax Deductible) (28.5) (63.9) (70.6) (322.4)Depreciation (62.4) (89.5) (96.0) (97.3)

Operating Income (€157.4) (€223.0) (€76.4) (€72.4)Operating Margin (%) (14%) (14%) (4%) (3%)

Net Interest Income (Expense) 38.7 72.4 55.9 73.4Non-Operating Income (Expense) 41.2 (25.3) 17.9 (30.5)Employee Profit Sharing (16.2) (21.7) (26.9) (27.6)Equity in Affiliates 0.6 0.8 0.8 0.7

PBT (€93.1) (€196.8) (€28.7) (€56.4)Provision for Income Taxes (8.9) (2.7) 58.2 214.9Minority Interest (0.1) 0.2 0.4 0.1Net Income (€102.0) (€199.3) €30.0 €158.7

EPS (€0.07) (€0.14) €0.02 €0.11Shares Outstanding 1,442 1,442 1,495 1,495

Source: Morgan Stanley Equity Research.



Exhibit 135

Wanadoo Historical Balance Sheet (€ million) 2000A 2001A 2002A 2003EGoodwill €164.4 €512.3 €427.7 €126.3Fixed Intangible Assets (Exc Goodwill) 0.0 0.0 32.9 16.6Fixed Tangible Assets 153.3 196.0 164.1 137.2Investments Under the Equity Method 1.7 2.0 2.8 2.5Investment Securities 44.5 37.9 21.2 16.8Other Long-Term Assets 19.2 19.3 18.7 166.6Total Fixed Assets €383.0 €767.4 €667.4 €465.9Inventories 15.4 26.9 28.0 21.1Trade accounts receivable 402.8 480.9 575.4 564.7Other Current Assets & Def Income Taxes 189.3 385.5 289.0 358.7Current Assets €607.6 €893.4 €892.4 €944.5Trade Accounts Payable 480.1 663.9 601.5 650.7Deferred Income 344.5 367.1 349.0 494.2Other short term debt and provisions 298.4 238.2 278.8 270.9Current Liabilities €1,123.1 €1,269.3 €1,229.3 €1,415.8Net Working Capital (515.5) (375.9) (336.9) (471.3)Net Capital Employed (€132.5) €391.5 €330.5 (€5.3)Capital 357.4 432.5 448.6 448.6Paid-in capital 3,824.9 6,004.9 6,243.8 4,586.9Legal retained earnings (2,368.9) (4,591.2) (4,785.4) (3,025.3)FX translation adj. & Treasury Stock 3.1 2.0 (69.2) (66.9)Shareholders' equity €1,816.5 €1,848.2 €1,837.8 €1,943.3Minority Interest 2.7 1.2 0.2 0.0Current portion of LT-debt, borrowings 62.5 49.5 114.7 64.1Long-term debt 56.5 33.6 0.3 0.3Retirement provisions & long-term liabilities 24.6 38.4 38.4 55.9Total Bank Debt & Other LT Liabilities €143.6 €121.6 €153.4 €120.3Marketable Securities 28.6 16.1 16.2 21.1Cash and Cash Equivalents 2,066.7 1,563.4 1,644.7 2,047.9Total Cash €2,095.3 €1,579.5 €1,660.9 €2,069.0Net Debt/(Cash) (€1,951.7) (€1,457.9) (€1,507.5) (€1,948.6)Total Capitalisation (€132.5) €391.5 €330.5 (€5.3)

E = Morgan Stanley Research Estimates Source: Morgan Stanley Equity Research.



Appendix



Exhibit 136

Internet Users on a Regional Basis

1998E - 148MM Internet Users

North America

47%

Asia Pacific

9%Japan

7%

Rest of World

6%

Europe28%

Latin America

3%


Europe28%

North America

29%

Latin America

5%Asia

Pacific23%

Rest of World

6%

Japan9%


Europe28%

Rest of World

8%

North America

25%

Latin America

6%

Asia Pacific25%

Japan8%

Source: Morgan Stanley Research. E = Morgan Stanley Research Estimate.

Exhibit 137

Morgan Stanley Internet User Forecasts, 1998E–2005E

02-05E1998E 1999E 2000E 2001E 2002E 2003E 2004E 2005E CAGR

Total Internet Users (MM) 147 229 341 485 609 751 872 976 17%

North America 68 93 122 156 176 198 221 242 11%Europe 41 68 102 136 169 210 249 269 17%Asia/Pacific 13 30 56 100 141 187 217 246 20%Japan 11 17 28 42 53 64 73 82 16%Rest of World 10 13 18 27 38 51 64 79 28%Latin America 5 8 15 24 32 41 49 58 22%

Source: Morgan Stanley Research (US - M. Meeker, B. Pitz), (Europe - J. Marin), (Asia/Pacific - M. Liu), (Japan - Y. Motoyama), (Latin America - M. Epelbaum, N. Sebrell). E = Morgan Stanley Research Estimate. Note that Europe includes both Western and Eastern Europe.



Exhibit 138

Leading TMT Companies in Top 5 Ranked Countries (2002 year-end data)

174MM 70MM 198MM 141MM 141MM 162MM users -- 5.8MM 785MM

1USA Charter - 10% Gateway - 6% Earthlink - 5%

Pop. - 281MM


2China Dell - 6%

Pop. - 1,284MM

62MM 15MM 49MM 79MM 79MM 53MM users -- 7MM 684MM

3Japan

Pop. - 127MM


Palm - 43%4 Compaq - 20%

Germany HP - 8%

Psion - 8%

Handspring - 8%Pop. - 83MM


Palm - 43%5 Compaq - 20%

UK HP - 8%

Psion - 8%

Handspring - 8%Pop. - 60MM

Samsung - 5% MBNAMCI Toshiba - 5%

Alcatel - 5% Tiscali - 7% HSBC BankCable & Wireless Time Group - 6% O2 UK - 23%

Motorola - 10% AOL - 19% RBS/NatWestTelewest - 5% NEC CI - 8% T-Mobile - 24%

Siemens - 18% BT - 19% Lloyds TSBNTL - 7% Telewest Dell - 18% Vodafone - 26%Nokia - 45% Freeserve - 23% BT - 100% Barclays BankBT - 65% NTL HP - 20% Orange - 26%

Samsung - 5% Bankgesellschaft BerlinTesion Acer - 5%

Alcatel - 5% CitibankVentelo Vobis - 6% O2 - 8%

Motorola - 10% AOL - 14% Bayerische Landesbankfreenet.de - 2% Dell - 7% E-Plus - 12%

Siemens - 18% freenet.de - 18% BVR German Coop.Arcor - 5% UPC - 3% HP - 13% Vodafone D2 - 38%Nokia - 45% T-Online - 53% Deutsche Telecom - 100% German Savings BankDeutsche Telekom - 89% Deutsche Telecom Fujitsu - 18% T-Mobile - 42%

UC GroupToshiba - 8% Mitsubishi - 8% OCN (NTT Comm) Toshiba - 10% Credit Saison

Toshiba - 8% YahooBB! NTTDoCoMo - 13%Dell - 8% Tu-ka - 5%

VISA Japan

Japan Telecom Sony - 12% J-Phone - 18% Sharp - 13% DION (KDDI) Casio - 17% NICOS Card Group

Matsushita - 17% BIGLOBE (NEC) Sharp - 20% Softbank BB - 34%KDDI ITS Communications - 3% Fujitsu - 20% au - 19%NTT Jupiter-Telecom - 10% NEC - 21% NTT DoCoMo - 58% NEC - 20% @finity (Fujitsu) Sony - 22% NTT Regional - 36% JCB Group

Siemens - 9% Besta - 2%Tongfang - 6%

IBM - 6% TCL - 9% GSL - 16%

Bird - 10% China Netcom - 10% Legend - 17%Beijing Cable

Bank of ChinaChina Netcom - 33% Guanghzou Cable Founder Elec.- 8% China Unicom - 32% Nokia - 27% China Unicom - 12% Meijin - 18% Huaxia Bank

Motorola - 24% China Telecom High-Tech Wealth - 23% China Tel & CNC - 86%China Telecom - 67% Shanghai Cable Legend - 28% China Mobile - 68%

Bank of AmericaSprint - 5% Adelphia - 8% Apple - 4% Nextel - 8% Sony Ericsson - 7% Comcast - 4% Toshiba - 4% Chase Manhattan

Kyocera - 11% United Online - 5% Handspring - 9% Qwest - 9%Qwest - 10% Cox - 10% IBM - 5% Sprint PCS - 10%

First USA/Bank One

Bell South - 14% AWE - 15% Samsung - 12% HP - 11% Bell South - 18% MBNA

Motorola - 26% MSN - 9% Sony - 15% Verizon - 31%SBC Comm. - 33% Time Warner - 17% HP - 20% Cingular - 15%

Credit/Debit Cards

Verizon - 33% Comcast - 33% Dell - 28% Verizon - 23% Nokia - 27% AOL - 27% Palm - 46% SBC - 38% Citigroup

Mobile Handsets

Internet Service Providers

(ISPs) Handheld Devices DSL

In this sort we place a box around the absolute values for the respective categories in the top 25 TMT countries (based on our relative weighting). Where available, the leading market share leaders are listed with their market share percentages.

Below is our list of the top 25 countries ranked by our relative weighting, equally considering 7 factors -- GDP per Capita, Telephone Lines, Cable Subscribers, PCs, Mobile Phone Subscribers, Internet Users, and Credit Cards (includes both credit and debit cards). In certain markets, like the UK, debit cards are widely used in ecommerce transactions. In other markets, like Germany and France, they are not. There is no single rule of thumb accross all countries for whether they are an indicator of ecommerce potential. Erring on the conservative side, we have included debit cards for now.

Methodology: We calculated each country’s relative share of the global market in each category, and rank ordered them based on summing up these relative shares. The weightings were derived by adding up each country’s market shares in each segment. For example, a 10% share of world telephone lines plus a 15% share of world cable subscribers plus a 7% share of world Internet users produces a weighting of 0.32.

In this sort we list the market share leaders -- by country and category -- in addition to highlighting the respective market totals.

Telephone Lines Cable Subscriptions Installed PCs Mobile Phone Subscriptions

174MM 70MM

1USA Charter - 10%

Pop. - 281MM

Sprint - 5% Adelphia - 8%

SBC Comm. - 33% Time Warner - 17%

Bell South - 14%

Qwest - 10% Cox - 10%

Telephone Lines Cable Subscriptions

Verizon - 33% Comcast - 33%Absolute

ValueMarket Share

Source: Morgan Stanley Research - “Global Market Sizing of TMT Products and Services” - 9/03; Note that for ISPs, the company market shares refer to share of the ISP market, while the boxed user numbers refer to total Internet users in the market. Since, on average, there are multiple Internet users for each ISP subscription, multiplying the ISP market share by the number of Internet users would overstate the number of ISP subscriptions. Note that in Japan in 2002, Yahoo! Japan has emerged as the leading ISP with its broadband/dial-up ISP bundle service.



Exhibit 139 Asia Pacific Broadband Subscriber Data

C2000 C2001 C2002 CQ3:03 Market Focus

Cable Modem Subscribers (Top 4/Other in 000's) 1,890 3,795 5,687 6,929

Harano 398 1,001 1,540 1,620 KoreaOther Korean Able Modem ISP 398 781 1,309 1,433 KoreaThrunet 1,093 1,300 1,302 1,250 KoreaChinese Cable Modem ISP -- 125 675 1,128 ChinaHong Kong I-Cable -- 160 225 250 ChinaOther -- 429 707 1,204 --

DSL Subscribers (Top 4/Other in 000's) 2,461 6,901 11,241 18,519

China Tel and Telcom -- 338 1,823 7,445 China

KT 1,729 3,858 4,923 5,518 KoreaChunghwa -- 920 1,820 1,887 TaiwanHanaro 732 1,015 1,294 1,303 KoreaOther -- 771 1,382 2,366 --

Total Estimated Broadband Subscribers (000's) 4,351 10,696 16,999 25,448Y/Y Growth -- 146% 59% 66%Q/Q Growth -- -- -- 12

Total Estimated Broadband Additions (000's) -- 6,346 6,291 2,807Cable Modem -- 1,906 1,899 269DSL -- 4,440 4,392 2,539

Source: Morgan Stanley Technology Research; M. Kim, L. Choi.



Exhibit 140 Online Chinese Speaking Population (Globally) at 90MM

Chinese, 12%

English, 36%

Malian, 3%

French, 4%

Korean, 4%

German, 7%

Spanish, 8%

Japanese, 10%

Other, 9%

Dutch, 2%

Russian, 3%

Portugese, 3%

Source: http://global-reach.biz — online language populations (total ~ 680MM) — estimated figures for the number of people online in each language zone (native speakers), 9/03.

http://global-reach.biz



Exhibit 141 Asia/Pacific Internet Buyer Online Purchases, 2003

Item Type Percentage Books, video, music Goods 51.2% Consumer goods Goods 35.3% IT or electronics Goods 28.2% Travel-related items Goods 26.0% Movie tickets Goods 19.3% Auction goods Goods 8.4% Big ticket items Goods 2.7% Downloads (MP3s, jpegs, software) Content 33.9% Online games Content/Service 32.6% Anti-virus, anti-spam services Service 31.9% Subscriptions (magazines, news) Service/Content 19.6% Text messages, jokes, picture Content 16.2% Email subscription Service 16.0% Online training, education Service/Content 12.6% Personal photo, video-hosting Service/Content 11.3% Video on demand Content 10.4% Voice over broadband Service 9.4% Online community memberships Service 7.5% Parental controls Service 6.3% Online gambling Service/Content 2.8% Source: IDC - Marco Polo Survey C2003; Online gambling does not include Malaysia. Exhibit 142 Asia/Pacific Internet User Online Purchases, 2003

Item Type Percentage Books, video, music Goods 12% Consumer goods Goods 8% IT or electronics Goods 7% Travel-related items Goods 6% Movie tickets Goods 5% Auction goods Goods 2% Big ticket items Goods 1% Online games Content/Service 22% Downloads (MP3s, jpegs, software) Content 8% Anti-virus, anti-spam service Service 8% Subscriptions Service/Content 5% Text messages, jokes, picture Content 4% Email subscription Service 4% Online training, education Service/Content 3% Personal photo, video-hosting Service/Content 3% Video on demand Content 3% Voice over broadband Service 2% Online community memberships Service 2% Parental controls Service 2% Online gambling Service/Content 1% Source: IDC - Marco Polo Survey C2003; Online gambling does not include Malaysia.



Exhibit 143 Asia/Pacific Internet User Online Purchases by Region, 2003

Leader Percentage Laggard Percentage Books, video, music Korea 20.6% Malaysia 4.6% Consumer goods Korea 28.8% Malaysia 2.2% IT or electronics Korea 13.8% India 3.3% Travel-related items Australia 17.0% India 2.2% Movie tickets Singapore 9.6% Malaysia 1.0% Auction goods Korea 3.2% Malaysia 0.8% Big ticket items Australia 1.2% China 0.2% Downloads (MP3s, jpegs, software) Korea 14.0% Malaysia 3.4% Online Games Singapore 36.4% Taiwan 8.4% Anti-virus, anti-spam service Australia 15.2% Malaysia 2.8% Subscriptions Taiwan 7.4% Korea 0.8% Text messages, jokes, picture China 10.7% Malaysia 0.6% Email subscription China 8.2% Korea 0.6% Online training, education Korea 6.4% India 1.2% Personal photo, video-hosting Taiwan 5.2% Malaysia 0.6% Video on demand Korea 6.8% Malaysia 0.2% Voice over broadband Taiwan 5.4% Malaysia 0.2% Online community memberships China 5.0% Korea 0.6% Parental controls Taiwan 4.2% Malaysia 0.4% Online gambling Korea 3.4% China 0.0% Source: IDC - Marco Polo Survey C2003; Online gambling does not include Malaysia.



Industry Views US US Internet & PC Application Software Industry View — Attractive We continue to believe that, at the margin, online is gaining share from offline, that this will occur for some time to come, and that this should benefit the Internet leaders. China China Telecom Industry View — Cautious Large free cash flow is offset by intensifying competition. Hong Kong Hong Kong Technology Industry View — Attractive Globally competitive, combining a China cost base and access to global markets. Hong Kong Media Industry View — In-Line We expect strong growth in advertising sales in 2004. Pay-TV competition starts in 1Q04 and should intensify throughout 2004 and 2005. Japan Japan Internet Industry View — In-Line While we think long-term Internet-enabled services market growth will be robust, we think that the market discounts this sufficiently for many names. Risk/reward balance as implied by current valuations are less attractive than previously, but strengthening fundamentals from rapid broadband penetration growth should lead the sector to perform largely in line with the market on a 12–18-month perspective. Europe European Media & Internet Industry View — Cautious We see limited opportunities for earnings upgrades, and a re-rating is unlikely, in our view, for the broad group, given the premium at which the stocks already trade. Korea S. Korea Hardware Components Industry View — In-Line The industry is facing currency, low visibility and competitive pricing issues, although we believe most are largely reflected in stock prices. S. Korea Telecoms Industry View — In-Line High ROICs and reasonable valuations are offset in part by slowing top-line growth as well as competitive and regulatory concerns.



Recent Related Reports

Updates from the Digital World

The Internet Ecosystem Framework — An Update February 2004: The absence of a single, dependable global source of Internet Usage/User data frustrates both investors and Internet/communications executives. We compile what we believe are the most relevant publicly available metrics that represent key market trends in various parts of the Internet usage/user spectrum. Market proxies illustrated impressive CQ4 growth.

Who Has the Momentum? November 2003: To determine which Web sites are supporting the greatest growth momentum, we reviewed multi-factor rankings aggregating absolute and sequential trends for visitors, page views, and usage minutes at 1,217 leading properties/sites (using US Media Metrix data). Growth trends for advertising, commerce, content, and community continue to look encouraging.

Microsoft, It Is the Sound of Online Music? June 2003: In our view, the day (May 29, 2003) that Microsoft agreed to pay AOL Time Warner $750MM to settle the lawsuit related to Microsoft’s Netscape-targeted business practices marked an end, and a beginning, for the evolution of the Internet. To put this event in a historical context in our report, we told a short story of the evolution of the commercial Internet to date. Recent data related to online music — a natural SFO business — gave us the sense that music could, finally, become a catalyst that changes the rules of the game in the evolution of the Internet. We also focused on Microsoft’s front- and back-end Internet-related initiatives — Internet Explorer, MSN, and Windows (Longhorn), and .NET.

What’s New at Yahoo!? April 2003: We focused on the positive core secular trends in Internet advertising and drilled down on Yahoo! as a proxy and driver of these trends. In addition, we touched on what we saw as an impressive list of improvements by Yahoo! to provide a better experience for users and more effective marketing for advertisers.

Who’s Keeping the Customer Satisfied — and How? Late-March 2003: Internet leaders such as Amazon.com, eBay, and Expedia had just scored strong relative results in customer satisfaction in the American Customer Satisfaction Survey. Convenience, low (and transparent) prices/pricing, uniquely strong 24x7 customer service, and extensive selection had long been key growth factors for leading online commerce (and information) sites. Owing in part to their technology platforms, Internet leaders were raising the bar on customer satisfaction and loyalty.

What Brought on the Strong Momentum of CQ4:02? March 2003: In addition to improvements in the SFO experiences of the Internet, a key part of the answer may have been the scale and ramp of residential broadband usage, which made possible the emergence of what we saw as a group of Internet-enabled “power consumers.”

The Great Online Migration — Is eBay a Replay of New York City’s 18th Century? February 2003: We focused on the relevance and magnitude of sellers and buyers migrating online, as illustrated by eBay’s momentum, and we drew some historical analogies to the dynamics of the settlement and growth of New York City.

Is Search/Find/Obtain (SFO) Becoming the Internet’s Third Killer Application? December 2002: Our first “Digital World” report examined online vs. offline momentum related to expanded global distribution, lower relative pricing due to transparency and the ramp in the sale of used goods, and the rising impact of replacement products.

http://www.morganstanley.com/institutional/techresearch/digital_world1103.html







http://www.morganstanley.com/institutional/techresearch/digital_world_0204.html?page=research



Other Related Reports The Technology IPO Yearbook: 9th Edition — 23 Years of Tech Investing

October, 2003: Reflected 23 years of technology IPOs and investing and the evolution of PCs and the Internet. A Look at Global TMT Market Status and Internet User/Usage Propensity

September, 2003: Focused on identifying near/long-term opportunities for global Internet user/usage growth by examining penetration technology/media/telecommunications products/services (including telephone lines, mobile phones, cable, PCs and Internet users) as well as fundamental market data (including population and GDP per capita).

The Online Classified Advertising Report: It is About Search/Find/Obtain (SFO) . . . November, 2002: Initial framework setting report on how online search, or search/find/obtain (SFO), might evolve.

Thoughts on Our Investment Approach

May, 2001: Discussion of our investment philosophy, our approach to risk, and our track record. Global IU3, Brand Value, and Customer Monetization

February, 2001: Analyzed the growth rates of Internet leaders, measured the brand strength these companies have achieved, and detailed the customer monetization challenge these companies confronted.

The Internet Retailing Report

May, 1997: Initial framework setting report on how online commerce might evolve. The Internet Advertising Report

December, 1996: Initial framework setting report on how online advertising might evolve. The Internet Report

December, 1995: Initial framework setting report on how the Internet might evolve.

http://www.morganstanley.com/institutional/techresearch/2003_tech_ipo_yearbook.html

http://www.morganstanley.com/institutional/techresearch/2003TMT.html

http://www.morganstanley.com/institutional/techresearch/online_classifieds1102.html

http://www.morganstanley.com/institutional/techresearch/approach.html

http://www.morganstanley.com/institutional/techresearch/globalliu.html

http://www.morganstanley.com/institutional/techresearch/inetretail.html

http://www.morganstanley.com/institutional/techresearch/inetad.html

http://www.morganstanley.com/institutional/techresearch/inet.html



1Please see analyst certification and other important disclosures starting on page 41.

The China Internet ReportDiscussion Points – April 2004

Mary MeekerInternet – US & Global

Lina ChoiTelecommunications – China

Yoshiko MotoyamaInternet – Japan

Full report online at http://www.morganstanley.com/institutional/techresearch/2004_China_Report.html

Morgan Stanley 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 making their investment decision.


Andy XieEconomics – [email protected]

Mark ShuperTelecommunications – [email protected]

Eric WenTechnology – [email protected]

Brian FitzgeraldInternet – [email protected]

Shawn KimTechnology – [email protected]

Javier MarinInternet – [email protected]

Stephen RoachEconomics – [email protected]

Viktor MaTechnology – [email protected]

Brian PitzInternet – [email protected]

Minyan LiuMedia – [email protected]

Mitchell KimTelecommunications - [email protected]

Research Associates:Ramji SrinivasanBenjamin Dorr

Contributors




• 80MM+ Internet users – China is 2nd largest market. Likely largest in 5 years

• Fertile environment for evolution of Internet – owing, in part, to historical governors on media, communication and expression

• Leadership in wireless messaging and online gaming• Online advertising and eCommerce still nascent – owing, in part,

to relatively low levels of disposable income

• Chinese government supportive – Internet is critical tool for local / global economic progress

• Long-term opportunities should prove significant – While Morgan Stanley economists are concerned, near-term, about China’s slowing economy and relative overvaluation of equity values, they remain optimistic about long-term outlook for economic growth and market capitalization appreciation

Key Points


• Most populous country – 1.3B people (21% of world)− 1850 – 33% of global GDP− 1991 – <2% of global GDP− 2003 – 4% of global GDP (or 13% using PPP)

• Top priority for China’s leaders is long-term, sustainable economic growth with relatively high levels of employment

• Designated vehicle for driving growth is technology with Internet at core of technology innovation

− Internet connectivity may help Chinese companies more effectively utilize labor and resource base locally and globally

• Many disruptive forces / challenges in China

Internet as Change Agent for China




• China Internet – 80MM+ users

• S. Korea – Broadband usage, on a relative basis, would be higher than any other country

• Shanda Networking – 236MM registered online gamers (non-unique) in China

• Ringtones – $3B+ annual market

• Picture phones – 1 of 6 mobile phones sold globally in 2003

• Apple – 70%+ market share of online paid-music market

• Yahoo! – 1B+ streaming sessions in 12 months, mostly music videos

• Google – 4MM US visitors/month to site that aggregates news from 5K sources with no human intervention

• eBay – facilitated trades of $7B, up 53% Y/Y, in CQ4:03

• VoIP – Japan leads world in VoIP subscribers with 4MM at Softbank/Yahoo! BB

• Cisco – global installed base of 2MM+ VoIP phones

Technology AdoptionShows Potential for Global Market / Innovators


• Internet is growing very rapidly, and opportunities for setting new standards in emerging areas are still on drawing boards

• A lot of folks around the world have their markers on their virtual white boards

• It is an irony that a few years ago some folks thought the Internet was over — well, it has just started, and it is not all made in America

Emerging Markets Represent New Opportunities




SouthKoreaCategory Japan

InternetUsers

BroadbandAdoption

eCommerce

OnlineAdvertising

Messaging(SMS…)

OnlineGaming

NorthAmerica China

LegendWeakStrong

Europe


Internet Technology/Service Leadership


1. Number of Internet users is significant / growing rapidly2. Relative Web site momentum is strong3. Younger users active on Internet4. Online media development still in early growth stages5. Wireless messaging services linking mobile phones

with the Internet ramping quickly, although transitions occurring

6. Broadband acceptance growing rapidly7. eCommerce in very early stages and governors exist

China Internet Industry Landscape




1Number of Internet Users Is Significant / Growing Rapidly

Source: Morgan Stanley Global Market Sizing of TMT Products and Services, 9/03; http://www.morganstanley.com/techresearch.

TMT CategoryChina Global

RankingChina

2002 Units (MM)China

2002 Growth

Mobile Phones

Cable TV Subscriptions

Telephone Lines

Internet Users

Installed PCs

207

100

214

59

29

1

1

1

2

4

43%

10

20

75

21


2Relative Web Site Usage Momentum Is Strong

Rank Site Name Country

123456789

10111213

Rank Site Name

141516171819202122232425

Yahoo!MSNGoogledaum.netSinaNaver.comYahoo! JapanMicrosofteBay163.com (NetEase)SohuPassport.net3721 (Yahoo!)

baidu.comTom.comNewsgroup.com.hkAmazon.comSayclub.comNateTencent.comGoBugs.co.kr21CNNetMarbleChinaRen (Sohu)

USAUSAUSA

KoreaChinaKoreaJapanUSAUSA

ChinaChinaUSA

China

ChinaChina

HKUSA

KoreaKoreaChinaUSA

KoreaChinaKoreaChina

Alexa — Global Web Site Traffic Rankings

Source: www.alexa.com, 3/23/04. Note that Alexa’s traffic rankings are based on usage patterns of opt-in users of Alexa’s downloadable toolbar.

Country




3Younger Users Active on Internet…

Ages

31-35

12%

Ages 60+

1%

Ages 18-24

34%

Ages

36-40

8%

Ages

41-50

6%

Ages 51-60

3% Under 18

19%

Ages 25-30

17% 70% under 30

53% under 24Source: CNNIC, 13th Statistical Survey Report on the Internet Development in China, Jan 2004.

China – Internet User Demographics


Source: UCLA World Internet Project, UCLA Center for Communication Policy, 1/04.

China(Urban)

3.3

1.1

3.2 3.32.82.6

7.7

0

2

4

6

8

10

HungaryJapan Korea MacaoSingaporeUSA

Num

ber o

f Frie

nds

Average Number of Online Friends Never Met in Person

…Younger Users Active on Internet…




…Younger Users Active on Internet

HomeOfficeSchool InternetCafé

PublicLibrary

MobileAccess

Others0

20

40

6044%

20%18%

0.6%0.5%0.1%

66%80%

Source: CNNIC, 13th Statistical Survey Report on the Internet Development in China, Jan 2004

Includes data gathered on 12 previous surveys; The survey uses multiple survey methods including automatic searching with computer, an online component, an offline sampling component, and data reported from relevant organizations

Percentage of Internet Users by Access Location


4Online Media Development Still in Early Growth Stages

• Historical governors on media (from TV to print to entertainment) have created especially fertile environment for emerging online media

• Internet (with / without mobile phones) is able to deliver information that simply couldn’t be sent, received or interacted with before

• In market that had been cut off from news flow for years, ability to receive information and ability to express oneself should not be underestimated

• Search / Find / Obtain (SFO) will likely play out very well in China




5Wireless Messaging Services Linking Mobile Phones with

Internet Ramping Quickly, Although Transitions Occurring…

Leading Markets for Mobile Phones & Internet Users at YE2002

MobilePhone toInternet

User RatioCountry

MobilePhones

(MM)

InternetUsers(MM)

InstalledPCs(MM)

ChinaUSJapanGermanyUKItalySouth Korea

2071417960494932

591625334322026

3.5 : 10.9 : 11.5 : 11.8 : 11.5 : 12.5 : 11.2 : 1

291984936241213

Source: Morgan Stanley Research –Global Market Sizing of TMT Products and Services – 9/03; 2002 year-end data.


Source: Company data, Morgan Stanley Research, Market Capitalization Data as of 3/15/04.; (1) Market Cap is for AT&T Wireless.

Mobile Phone Subscribers by Leading Country

(US$ and Subscribers in Millions)CQ4:03 Market

Company Country Subscribers Capitalization

China Mobile China 173 $68Vodafone U K 129 170China Unicom China 96 15Telefonica Moviles Spain 46 45Cingular & AT&T Wireless (1) U S 46 37NTT DoCoMo Japan 46 107Telecom Italia Mobile Italy 45 38Orange France 45 52AMX/Telcel Mexico 39 23Verizon Wireless U S 37 104T-Mobile Germany 30 82KDDI Japan 23 22

…Wireless Messaging Services Linking Mobile Phones with Internet Ramping Quickly, Although Transitions Occurring…




Estimated Number of SMS Messages


116

90

200

0

50

100

150

200

2000 2001 2002 2003SMS

Mes

sage

s Se

nt in

Chi

na (B

)

…Wireless Messaging Services Linking Mobile Phones with Internet Ramping Quickly, Although Transitions Occurring…


SMS

WAP

Location-smart


MMS

Mobile Commerce

Conferencing

Focus

Medium Margin

High Margin

Low Margin

Mar

gin


A/V Streaming

Collaboration


Voice

Source: IDC.

…Wireless Messaging Services Linking Mobile Phones with Internet Ramping Quickly, Although Transitions Occurring




6Broadband Acceptance Is Growing Rapidly…

7803,280

17,400

32,906

43,817

0

10,000

20,000

30,000

40,000

50,000

2001 2002 2003 2004E 2005E

Bro

adba

nd U

sers

(000

s)China — Estimated Broadband Users

Source: CNNIC, Lina Choi. E = Morgan Stanley Research Estimates. The ratio of broadband subscribers to users was 63% at YE2003.


…Broadband Acceptance Is Growing Rapidly…

Source: Shanda Interactive Entertainment F1, 4/2/04.

• Online gaming may benefit from and drive broadband adoption

• Younger demographic interest is quite high

Shanda Networking2001 2002 2003

Revenue (US$ '000)Y/Y Growth %

Registered AccountsY/Y Growth %

Peak Concurrent UsersY/Y Growth %

Average Concurrent UsersY/Y Growth %

Avg. Revenue per User-HourY/Y Growth %

$55092%

1,900,000--

72,035--

43,736--

$0.014--

$39,4147067%

88,000,0004532%

627,276771%

278,186536%

$0.01717%

$72,49084%

236,000,000168%

1,185,84489%

683,917146%

$0.02121%




7eCommerce in Very Early Stages and Governors Exist…

China lags in eCommerce for five reasons:1) Poor credit / payment systems

2) Inefficient logistic / distribution / transportation systems

3) Low levels of trust

4) Low PC installed base

5) Low income levels


Percentage of Internet Users who Make Online Purchases

3% 6% 6% 8% 11% 13% 15%

31% 31% 34% 38% 41%48%

21%

0

25

50

75

100%

Hungary ChileSpain

Singap

oreMac

ao

Taiwan Ita

ly

China (Urb

an)

Japan

KoreaBrit

ain USA

Sweden

German

y

Source: CNNIC, 2003.

…eCommerce in Very Early Stages and Governors Exist…




Asia/Pacific — Online Purchasing Payment Methods

0

25

50

75

100%

China

India

Singapore

Taiwan

Korea

Hong Kong

Malays

ia

Australi

a

Credit Card Do Not Pay Immediately Other

Source: CNNIC, 2003.



8. Challenges for multinational companies create opportunities for Chinese companies

9. 3rd generation Internet entrepreneurs impressive, though broad-based experience/leadership still not abundant

10. Sustainability of Internet-related revenue and profits still unproven, but market opportunity is large





8Challenges for Multinational Companies Create

Opportunities for Chinese Companies• Chinese market is complex, especially for non-China

companies• Foreign investment is very restricted• Internet in China is highly regulated• Investors must deal with complex structuring schemes

and legal jurisdiction issues• Entry into WTO may help limit implicit technology transfer,

but time will tell…• China’s WTO entry has had positive impact on foreign

investment so far• Distribution channel and sales control often strongholds

for local companies


93rd Generation Internet Entrepreneurs Are Impressive, though

Broad-based Experience/Leadership Still Not Abundant

• Chinese Internet leaders have proven to be fast followersrelative to their global peers

• When will we see China’s Bill Gates, Michael Dell or Larry Ellison?




10Sustainability of Internet-related Revenue and ProfitsStill Unproven, but Market Opportunity Is Large…

• Wireless messaging has been a blessing for the Internet pure-plays

• What’s next blessing?− MMS?− Interactive Voice Response (IVR)?− Online gaming?− Advertising and eCommerce?


SinaSohuNetEaseTom

34%39163

China Internet Portal Revenue Breakdown

CompanyCQ4:03Revenue % Advertising % Messaging % Gaming

$38252018

60%584082

6%4

4415


Sustainability of Internet-related Revenue and Profits Still Unproven, but Market Opportunity Is Large…

(US$ in Millions)




11. Government focused on ramping Internet users

12. Government’s strategy, in part, reflects need to boost domestic (urban to rural) as well as global trade

13. Economic momentum is strong, though slowing

14. Capital markets have been robust

China Macro Landscape for Internet


11Government Focused on Ramping Internet Users…

China — Installed PC Base(in Millions)

1 3 611

1827

39

0

20

40

60

80

1998 1999 2000 2001 2002 2003 2004E

Source: IDC; CNNIC 13th Statistical Survey Report on the Internet Development in China,1/04; Morgan Stanley Research, Lina Choi and Mark Shuper.E = Morgan Stanley Research Estimates.




China — Internet Users(in Millions)

29

17

32

59

80

0

25

50

75

100

1998 1999 2000 2001 2002 2003

Source: IDC; CNNIC 13th Statistical Survey Report on the Internet Development in China, 1/04; Morgan Stanley Research.

…Government Focused on Ramping Internet Users…


China — Mobile Phone Subscribers(in Millions)

24 4385

145207

269325

376419

0

100

200

300

400

500

1998 1999 2000 2001 2002 2003 2004E 2005E 2006E

Source: IDC; CNNIC 13th Statistical Survey Report on the Internet Development in China, 1/04; and Morgan Stanley Research, Lina Choi and Mark Shuper.E = Morgan Stanley Research Estimates.

…Government Focused on Ramping Internet Users…




12Government’s Strategy, in Part, Reflects Need to Boost

Domestic and Global Trade…Internet Users Concentrated in Coastal Regions and Major Metropolitan Areas

1.5%

Tianjin 1.8 %

West China20.9 %

Coastal China(including Beijing,Tianjin, Shanghai)

57.3 %

1.0 %

0.1 %

0.3%

7.5%

2.1 %2.9% 12.0 %

4.0%

5.7 %

Shanghai5.4%

7.7%

7.9 %

3.7%

1.8%

2.8 %

1.1 %3.3% 2.1%

4.8%

2.8%

2.3%

1.5%

1.9%3.6%

2.5 %

0.5 %

Beijing5.0%

0.4 %

Source: CNNIC 13th Statistical Survey Report on the Internet Development in China,1/04.


…Government’s Strategy, in Part, Reflects Need to Boost Domestic and Global Trade

eBay EachNet Alibaba

eBay EachNet / Alibaba / Taobao Traffic RankTaobao


Top CategoriesCosmetics 106,507Jewelry 54,561Clothing 41,113Collectibles 35,698Toys 31,581Home 28,628Cell Phones 27,425Computers 25,273Music 24,357Sports 21,267


Top CategoriesBooks 286,632Cosmetics 105,796Clothing 77,305Movies 72,394Music 58,343Jewelry 55,062Home 29,402Computers 27,836Cell Phones 23,915Home Theater 10,174


Top CategoriesHome Supplies 31,425Apparel & Fashion 23,308Industrial Supplies 21,218Gifts & Crafts 18,798Electronics 18,006Home Appliances 12,938Sports & Leisure 12,607Textiles & Leather 12,299Construction 11,798Business Services 9,849

eBay EachNet Alibaba Taobao

Source: www.taobao.com, Top Categories - 3/04, M/M growth - 2/17 to 3/17. Source: www.alexa.com, 3/17/04.

Source: www.alibaba.com, Top Categories - 3/17, M/M growth - 2/17 to 3/17Source: www.eachnet.com, Top Categories - 3/17, M/M growth - 2/17 to 3/17.

Daily

Tra

ffic

Ran

k

2003 2004

10

100

1,000

10,000

100,000




13Economic Momentum Strong, though Slowing

• Steve Roach observes that China’s economic growth remains strong, but needs to slow and has begun to do so

• Given impact of China on global economy, changing dynamics in the market will affect many players

• China aggressively trying to do right things for short and long term…


14Capital Markets have Been Robust

• $550B has been invested, mainly in Chinese manufacturing for exports over past 20 years. Andy Xie expects FDI could rise further by US$100B per year, within the next ten years

• High debt-to-equity levels in Chinese economy and high level of non-performing loans raise challenges for policy makers

• Chinese government appears determined to restructure financial sector in order to withstand competition from foreign financial institutions in 2006. In Andy’s view, it is a matter of time before government decides to restructure the stock market

• A high savings rate helps keep the cost of capital low despite China’s high growth, implying that stock valuations would not necessarily decline even after the government stops rationing fund raising, although risk premia could shift meaningfully as restructuring advances




• Messaging-related revenue – sustainability / consistency

• Intramural competition – differentiation is key

• Emerging business segments -- competition / monetization

• Online advertising / eCommerce – nascent

• Content development – nascent

• Online billing/payment and logistics/distribution – very nascent

• Vertical markets -- potential size / scope

• Rising competitive focus -- eBay and Yahoo!

• China telecoms – evolution of potential Internet efforts

• Slowing Chinese economy• Valuation

China Internet Company Risks


Source: FactSet, Based on Conversion Rate as of 4/9/04, 1 EUR = 1.2070 USD, 1 USD = 1141.85 KRW, 1 USD = 105.91 JPY.

(US$) Revenue Op. Income% Price Change4/9/04 Mkt. Cap. C03A C03A

Company Ticker Price ($MM) ($MM) ($MM) 2003 2004 YTDChinaSina SINA $41 $2,380 $114 $41 419% 22%NetEase NTES 57 1,850 66 39 222 53Sohu SOHU 26 1,100 80 32 367 (13)Chinadotcom CHINA 9 903 89 (0) 185 14Tom Online TOMO 14 682 77 20 -- --Ctrip CTRP 29 432 21 7 -- (16)

JapanYahoo! Japan 4689.T 12,369 44,763 722 401 331 84Softbank 9984.T 53 16,645 -- -- 168 72Rakuten 4755.Q 8,186 8,813 171 45 478 86

KoreaNCsoft 036570.KS 69 1,296 140 46 155 24NHN 035420.KS 80 1,201 144 56 209 37Daum 035720.KS 42 619 123 34 68 (7)Webzen WZEN 9 432 50 28 -- (15)

USeBay EBAY 76 50,290 2,165 695 91 18Yahoo! YHOO 56 38,589 1,473 296 175 25Interactive IACI 33 20,934 6,328 866 48 (2)Amazon AMZN 48 20,112 5,264 361 179 (9)

EuropeWanadoo NAD.PA 10 15,529 3,229 (89) 83 27T-Online TOIGn.DE 12 14,721 2,284 (103) 133 (8)

Nasdaq COMP 2,050 -- 50 2

Global Internet Company Comparables




• Internet serving important role in helping modernize China

• But, small revenue / profit levels for China Internet companies

• Like US in mid-1990s, we are just at beginning

• But, in many respects, for China, impact may be greater

• Lots of opportunity

• Lots of risk

Summary…


…Summary

• We maintain that investors still underestimate the impact the Internet will have in changing business process and consumer behavior on a global basis

• eBay – ‘makes markets more efficient…’

• Google – ‘makes finding and creating information more efficient…’

• At its core, the Internet is about driving efficiency, and doing so in a global way

• We think Internet-related developments in China in the coming years will help prove just how significant the changes will be

• Yes, it’s still early innings…




Disclaimer

Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight are not the equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.Analyst Stock RatingsOverweight (O). The stock’s total return is expected to exceed the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Equal-weight (E). The stock’s total return is expected to be in line with the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U). The stock’s total return is expected to be below the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months.More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst’s view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner.Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www.morganstanley.com/companycharts.Analyst Industry ViewsAttractive (A). The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark named on the cover of this report.In-Line (I). The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark named on the cover of this report.Cautious (C). The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark named on the cover of this report.Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts. You may also request this information by writing to Morgan Stanley at 1585 Broadway, 14th Floor (Attention: Research Disclosures), New York, NY, 10036 USA.

Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Mary Meeker, Lina Choi, Yoshiko Motoyama, Andy Xie, Stephen Roach, Mark Shuper, Viktor Ma, Eric Wen, Brian Pitz, Brian Fitzgerald, Minyan Liu, Shawn Kim, Mitchell Kim, Javier Marin.

Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Mary Meeker, Lina Choi, Yoshiko Motoyama, Andy Xie, Stephen Roach, Mark Shuper, Viktor Ma, Eric Wen, Brian Pitz, Brian Fitzgerald, Minyan Liu, Shawn Kim, Mitchell Kim, Javier Marin.

Global Stock Ratings Distribution (as of March 31, 2004)

Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count % of Total Count

% of Total IBC

% of Rating Category

Overweight 619 35% 262 41% 42% Equal-weight 785 44% 280 44% 36% Underweight 375 21% 101 16% 27% Total 1,779 643


DisclaimerOther Important DisclosuresFor a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representati ve or on Client Link at www.morganstanley.com and other electronic systems.This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be sui table for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.This report is not an offer to buy or sell any security or to participate in any trading strategy. In addition to any holdings disclosed in the section entit led "Important US Regulatory Disclosures on Subject Companies", Morgan Stanley and/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associated persons.Morgan Stanley & Co. Incorporated and its affiliate companies do business that relates to companies covered in its research reports, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. Morgan Stanley sells to and buys from customers the equity securities of companies covered in its research reports on a principal basis.Morgan Stanley makes every ef fort to use reliable, comprehensi ve information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company.With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.Morgan Stanley research personnel conduct site visits f rom time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits.The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.This publication is disseminated in Japan by Morgan Stanley Japan Limited; in Hong Kong by Morgan Stanley Dean Witter Asia Limited; in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte., regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia by Morgan Stanley Dean Witter Australia Limited A.B.N. 67 003 734 576, a licensed dealer, which accepts responsibi lity for its contents; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of this publication in Canada; in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that this document has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., which accept responsibility for its contents; and in the United Kingdom, this publication is approved by Morgan Stanley & Co. International Li mited, solely for the purposes of section 21 of the Financial Services and Markets Act 2000 and is distributed in the European Union by Morgan Stanley & Co. International Limited, except as provided above. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International Limited representative about the investments concerned. In Australia, this report, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act.The trademarks and service marks contained herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classif ication Standard ("GICS") was developed by and is the exc lusi ve property of MSCI and S&P.This report or any portion hereof may not be reprinted, sold or redistributed wi thout the written consent of Morgan Stanley.Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form.Additional information on recommended securities is available on request.


Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Mary Meeker, Yoshiko Motoyama, Lina Choi, Andy Xie, Stephen Roach, Mark Shuper, Viktor Ma, Brian Pitz, Minyan Liu, Shawn Kim, Mitchell Kim and Javier Marin.

Important US Regulatory Disclosures on Subject Companies The information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated and its affiliates (collectively, "Morgan Stanley"). The following analyst, strategist, or research associate (or a household member) owns securities in a company that he or she covers or recommends in this report: Mary Meeker - Amazon.com (common stock), eBay (common stock), Yahoo! (common stock); Brian Pitz - Amazon.com (common stock), Yahoo! (common stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition. As of March 31, 2004, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in this report: Amazon.com, eBay, Yahoo! and NCsoft. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from eBay. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Amazon.com, eBay, Yahoo!, Yahoo! Japan and T-Online International AG. The research analysts, strategists, or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley & Co. Incorporated makes a market in the securities of Amazon.com, eBay and Yahoo!.


Global Stock Ratings Distribution (as of March 31, 2004)

Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count % of Total Count

% ofTotal IBC

% of Rating Category

Overweight 619 35% 262 41% 42%Equal-weight 785 44% 280 44% 36%Underweight 375 21% 101 16% 27%Total 1,779 643

Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight are not the equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.

ANALYST STOCK RATINGS Overweight (O). The stock’s total return is expected to exceed the average total return of the analyst’s industry (or industry team’s) coverage universe, or the relevant country MSCI index, on a risk-adjusted basis over the next 12-18 months. Equal-weight (E). The stock’s total return is expected to be in line with the average total return of the analyst’s industry (or industry team’s) coverage universe, or the relevant country MSCI index, on a risk-adjusted basis over the next 12-18 months. Underweight (U). The stock’s total return is expected to be below the average total return of the analyst’s industry (or industry team’s) coverage universe, or the relevant country MSCI index, on a risk-adjusted basis over the next 12-18 months. More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst’s view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner. Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www.morganstanley.com/companycharts.

ANALYST INDUSTRY VIEWS Attractive (A). The analyst expects the performance of his or her industry coverage universe to be attractive vs. the relevant broad market benchmark over the next 12-18 months. In-Line (I). The analyst expects the performance of his or her industry coverage universe to be in line with the relevant broad market benchmark over the next 12-18 months. Cautious (C). The analyst views the performance of his or her industry coverage universe with caution vs. the relevant broad market benchmark over the next 12-18 months.

Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts. You may also request this information by writing to Morgan Stanley at 1585 Broadway, 14th Floor (Attention: Research Disclosures), New York, NY, 10036 USA.


Stock Price, Price Target and Rating History (See Rating Definitions)


Other Important Disclosures For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at www.morganstanley.com and other electronic systems. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This report is not an offer to buy or sell any security or to participate in any trading strategy. In addition to any holdings disclosed in the section entitled "Important US Regulatory Disclosures on Subject Companies", Morgan Stanley and/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associated persons. Morgan Stanley & Co. Incorporated and its affiliate companies do business that relates to companies covered in its research reports, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. Morgan Stanley sells to and buys from customers the equity securities of companies covered in its research reports on a principal basis. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company. With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. This publication is disseminated in Japan by Morgan Stanley Japan Limited; in Hong Kong by Morgan Stanley Dean Witter Asia Limited; in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte., regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia by Morgan Stanley Dean Witter Australia Limited A.B.N. 67 003 734 576, a licensed dealer, which accepts responsibility for its contents; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of this publication in Canada; in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that this document has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. 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