58.com:Keep tight rein on ad spending

We are incrementally positive on WUBA’s margin recovery, as seen in 1Q17results and 2Q17 guidance beat. Job saw healthy revenue growth of 40-50%YoY in 1Q17, whereas growth in real estate, yellow page and used itemsslowed down modestly. In 1Q17, advertising expense was prudentlycontrolled along with saving from Anjuke/Ganji acquisitions. We lift 2017/18adjusted OPM from 13/22% to 16/22% and raise TP from US$43 to US$53 on30x FY18PE (up from 25x previously for faster earnings growth). Retain OP.

1Q17 results and 2Q17 guidance beat. 1Q17 revenue grew 25% YoY anddeclined 6% QoQ to US$288mn, 11/9% above MQ/consensus, on the back ofsolid job growth but partly offset by soft property. No. of paying members grewhealthily 22% YoY to 2.2mn. Non-GAAP OPM improved from -14% in 1Q16 to11% in 1Q17, owing to a larger scale as well as control over S&M expense.

Non-GAAP net profit was US$15mn in 1Q17, up from US$53mn/$3mn lossesin 1Q/4Q16, respectively, and above MQ/consensus of US$49/36mn loss.

2Q17 revenue is guided to grow 16-21% YoY in RMB terms to RMB2.25-2.35bn, above MQ/consensus of RMB2.1/2.2bn.

Job stayed on growth trajectory. Job revenue growth maintained at 40-50%YoY in 1Q17. With a low double-digit% YoY increase in paying members and10%+ YoY price hike, the company maintains its target of 40%+ YoY revenuegrowth in the job vertical in 2017. WUBA is looking to increase monetizationthrough additional value-added services as part of the marketing package.

Soft property from tightening policies. Property revenue growthdecelerated to single-digit% YoY in 1Q17 as a result soft physical marketvolume. Rentals, which contributed to about 25-30% of WUBA’s propertyrevenue, held up. The company expects the property market will remain underpressure during the rest of 2017 and still targets flat revenue growth in 2017.

Meanwhile, revenue of used goods slowed modestly due to competition.

Higher visibility in margin recovery. 1Q17 non-GAAP OPM improved to11% YoY as cost savings from Anjuke/Ganji acquisitions kicked in and WUBAunderspent the ad budget during the quarter. The company aims to maintainad expense flat from last year. Also WUBA may consider deconsolidatingloss-making Zhuanzhuan after Tencent’s US$200mn investment. As such, wemodel non-GAAP OPM to expand from 10% in 2016 to 16% in 2017.