Cheetah Mobile (CMCM US):Improving visibility of business model on product optimization and mobile m

Evolving products and product mix

    We believe outstanding products and deep understanding onuser behavior are the most important factorsin the success of Cheetah. As for product upgrades, Clean Master carried out a major update(see text) in 1Q15, significantly increasingcontent capacity while improving user experience.We believe both the frequency and duration of usage will increase. Its strategic product CM Launcher is already among the top 20 of non-game apps downloads onGooglePlay. CM Backup, another strategic product,can increase loyalty of users by targeting backup functions. The companyexpects to acquire 100 mn users in 2015. In addition, it has also rolled out keyboard products (CM Keyboard) and data transfer products (CM Transfer).

    Huge potential on improved liquidity of mobile business

    The company’s daily overseas revenue increased by 500% to US$600k in 1Q15 from US$100k in 3Q14. Its overseas mobile ARPU increased 241% to RMB0.82 in 1Q15 from RMB0.24 in 3Q14. In addition, the advertisement inventoryin 1Q15 increased more than 100% YoY. In terms of pricing of advertisements, we believe the eCPM of Cheetah’s advertising still considerably lags behind Facebook and the pricing model is still mainly CPI.In addition, the 1Q15 ARPU of Facebook is 13 times higher than Cheetah, implying huge potentialahead.

    Valuation

    Our new TP US$43.6 is based on 48% 2016-18EEPADS CAGRand 0.6x PEG. We revised up our TP mainly due to the changeof 2016E PEG to 0.6x (vs 0.7x of sector) from 0.5x, implying 28.8x2016E P/E.We believe the discount of the company’s valuation against its peers will narrow as the visibility of its business model improves. We believe valuation premium is possible as the company may become a leading mobile advertising platform.