Moko Social Media (MKB.ASX) Exposure to the booming mobile advertising market.

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Moko Social Media (MKB.ASX)

Exposure to the booming mobile advertising market.

Rating BUY

Previous n/a

Price Target $ 0.40

Previous n/a

Share Price (A$) $ 0.21

52 week low - high (A$) $0.05-0.25

Valuation (A$/share) 1.21

Methodology DCF

Risk High

Capital Structure

Shares on Issue (m) 472

Shares on Issue diluted (m) 670

Free Float (%) 100%

12mth Av Daily Volume ('000) 1130

Market Cap ($m) 141

EV ($m) 149

Key Metrics 2014e 2015e 2016e 2017e

Revenue ($m) 13.3 97.8 116.4 128.8 EBITDA ($m) 2.0 60.2 72.6 81.0 NPAT rep ($m) 1.4 49.6 67.1 75.4 NPAT adj($m) 1.4 49.6 67.1 75.4 EPS adj (¢) 0.2 7.4 10.0 11.4 Revenue Growth (%) 57% 634% 19% 11%

EBITDA growth (%) n/a 2938% 21% 11%

EBITDA margin (%) 15% 62% 62% 63%

EPS growth (%) n/a n/a 3351% 35%

PER 83.9x 83.9x 2.4x 1.8x EV / EBITDA 56.8x 56.8x 1.9x 1.5x Op Cashflow ($m) 1.0 39.7 67.1 78.6 Capex ($m) -0.5 -1.0 -1.5 -1.7 FCF ($m) 0.5 38.7 65.6 76.9 Net Cash ($m) 6.3 6.3 45.0 110.6

Share Price Graph

Analyst

Ha ri s Kha l i qi +61 2 9993 8168

haris.khaliqi@fostock.com.au Event:

 We initiate coverage on MKB with a Buy recommendation and a price target of $0.40/sh

Investment Highlights:

 Exposure to the booming mobile advertising market. Moko provides exposure to the booming mobile advertising thematic which is growing at phenomenal rates driven by the proliferation and use of smart phones. Marketers have seen a drastic change in where dollars are spent when it comes to online advertising and likewise investors are seeking exposure to companies that will grow quickly in expanding markets. Moko is well positioned to take advantage of these trends.

 Focus on mobile social networks: Moko is focused on delivering mobile social networking services for large interest groups in the USA and monetizing the user base through mobile advertising. The initial focus is on US colleges were Moko is targeting to roll-out its REC.IT mobile application. REC.IT is a mobile application which allows student and staff to manage their non-curricular activities.

 Exclusive access to 10 million highly marketable US college students: The primary driver in the share price rerating over the past 6 months is due to the signing of exclusive mobile-rights agreements providing Moko access to 600 of the top tier colleges in the US providing an audience of ~10m students. To put this in context this provides MKB access to about half the US college population. Given the extremely attractive demographic we believe there will be great demand for advertisers to utilise the REC.IT application when it is rolled out in 2HCY14.

 Business model provides significant ‘blue-sky’ potential. We anticipate revenues should start to climb in the back half of CY2014 when the rollout to 600 colleges has been completed. Under our ‘base case’ scenario we forecast profitability in CY14 with NPAT growing from revenue growing from $1.4m in FY14 to $75m by FY17.

 Scalable platform to be expanded beyond colleges. Beyond REC.IT there are other opportunities which MKB can leverage their platform and use it towards other high volume specialty audiences such as running groups, cycling groups etc. This represents significant upside beyond US college application.

 Nasdaq listing to provide re-rating. The company will seek a full listing on Nasdaq, which is scheduled for Q1CY14. We believe a Nasdaq listing could provide a re-rating in the stock given the valuation precedence being set by the larger players in this space. The impressive listing of Twitter which on its debut traded at over 100% premium to its listing price highlights investor demand and interest in the social media/mobile advertising space.

Catalysts

 Nasdaq listing: Q1CY14

 Pilot program: Q1CY14

 Roll-out of application: Q3CY14

Recommendation:

 We initiate on MKB with a SPEC BUY recommendation and a price target of $0.40/sh.

EQUITY RESEARCH

Industrials

12 November 2013

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 0.00 0.05 0.10 0.15 0.20 0.25 0.30 M a r 1 2 M a y 1 2 Ju n 1 2 Ju l 1 2 A u g 1 2 O ct 1 2 N o v 1 2 D e c 1 2 Ja n 1 3 Fe b 1 3 M a r 1 3 A p r 1 3 Volume ('000) Share Price ($)

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M o k o S o c i a l M e d i a L T D

Moko Social Media (MKB) Full Year Ended 30 June

Profit and Loss ($m) 2014e 2015e 2016e 2017e Operational Metrics 2014e 2015e 2016e 2017e

Revenue 13.3 97.8 116.4 128.8 Revenue Growth 57% 634% 19% 11%

Cost of Sales -3.3 -24.4 -29.1 -32.2 EBITDA Growth n/a 2938% 21% 11%

Gross Margin 10.0 73.3 87.3 96.6 NPAT Growth n/a 3351% 35% 12%

Operating Costs -8.4 -13.6 -15.1 -16.2 EPS Growth n/a 3351% 35% 14%

EBITDA 2.0 60.2 72.6 81.0 Operating cost margin 63% 14% 13% 13%

D&A -0.3 -0.3 -0.3 -0.3 EBITDA Margin 15% 62% 62% 63%

EBIT 1.7 59.9 72.3 80.7 NPAT margin 11% 51% 58% 59%

Net Interest exp / (income) 0.0 0.0 0.0 0.0 Effective Tax rate -9% -17% -7% -5%

Profit before tax 1.7 59.9 72.3 80.7 DPS (c/sh) 0.0 0.0 0.0 0.0

Tax exp / (benefit) -0.2 -10.2 -5.1 -4.0 Dividend Yield 0.0% 0.0% 0.0% 0.0%

NPAT 1.4 49.6 67.1 76.4 Payout Ratio 0% 0% 0% 0%

Minority interest 0.0 0.0 0.0 1.0 ROE 17% 85% 53% 38%

Reported NPAT 1.4 49.6 67.1 75.4 ROA 11% 78% 51% 37%

Non recurring items 0.0 0.0 0.0 0.0

NPAT adjusted 1.4 49.6 67.1 75.4

EPS (c) 0.2 7.4 10.0 11.4 Valuation Multiples 2014e 2015e 2016e 2017e

EBITDA Margin(%) 14.9% 61.5% 62.4% 62.8% Reported P/E 83.9x 2.4x 1.8x 1.6x

Cash Flow ($m) 2014e 2015e 2016e 2017e Normalised P/E 83.9x 2.4x 1.8x 1.6x

Net Income 1.4 49.6 67.1 76.4 _EV/Revenue _8.4x _1.2x _1.0x _0.9x

Add: D&A 0.3 0.3 0.3 0.3 EV/EBIT 56.8x 1.9x 1.5x 1.4x

Add: Other non cash 0.5 0.6 0.7 0.7 EV/EBITDA 56.8x 1.9x 1.5x 1.4x

Δ Working Capital -1.3 -10.8 -0.9 1.2 _EV/FCF _83.9x _2.4x _1.8x _1.6x

Other 0.0 1.0 2.0 3.0

Operating Cashflow 1.0 39.7 67.1 78.6

Purchase of PP&E -0.5 -1.0 -1.5 -1.7

Purchase of intangible assets 0.0 0.0 0.0 0.0

Investing Cashflow -0.5 -1.0 -1.5 -1.7 Valuation A$m $/sh

Equity proceeds 3.5 0.0 0.0 0.0 Enterprise NPV (10 years) 512 0.76

Debt proceeds 0.0 0.0 0.0 0.0 Terminal value 293 0.44

Debt repayment 0.0 0.0 0.0 0.0 Enterprise Value 806 1.20

Financing Cashflow 3.3 0.0 0.0 0.0 Net Cash 8 0.01

Net Cashflow 3.8 38.7 65.6 76.9 Equity Value 814 1.21

Assumption: Discount rate 10%, terminal growth rate 3%

Balance Sheet ($m) 2014e 2015e 2016e 2017e

Cash 6.3 45.0 110.6 187.5 Capital Structure

Receivables 1.8 12.7 14.0 12.9 Ordinary 472

Other Current assets 0.2 0.2 0.2 0.2 Listed options 148

PPE 0.3 1.0 2.2 3.6 Unquoted options 49

Intangibles 4.4 4.4 4.4 4.4 Fully Diluted 670

Total Assets 13.0 63.2 131.3 208.5

Accounts payable 1.6 1.6 1.9 2.0 Major Shareholders %

Deffered Consideration 1.4 1.4 1.4 1.4 Peter yates 10.1%

Borrowings 1.1 1.1 1.1 1.1 Emrose BV 7.7%

Other 0.7 0.7 0.7 0.7 Board and Management 25.0%

Total Liabilities 4.8 4.9 5.2 5.3 Top 20 65.0%

Reserves and capital 32.4 33.0 33.6 34.3

Retained earnings -24.0 25.5 92.7 169.1

Minorities 0.0 0.0 0.0 0.0

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BUSINESS OVERVIEW

 Moko Social Media Ltd (“MKB”, “Moko” or the “Company) is focused on the delivery

of mobile social networking services for large interest groups in the USA that enables monetizing the user base through mobile advertising. The Company’s strategy is to target large organized groups with a compelling need for a customized mobile community platform.

 The initial focus is on US colleges, where Moko has signed agreements for the mobile rights with two US sports organizations that manage college sport and group recreation data American Collegiate Intramural Sports (‘ACIS’) and IM leagues LLC (‘IML‘) to roll out its REC.IT application.

 The agreements provide MKB with exclusive access to 600 of the top tier colleges in the US reaching an audience of ~10m students. To put this in context it provides MKB access to about half the US college population, which is an extremely attractive demographic for advertisers via social media platforms.

Figure 1: Moko business model

Source: Company, FSB Research

REC.IT APPLICATION – WHAT IS IT?

 The MKB product - REC.IT - is a mobile application that will allow students to manage all their non-curricular activities such as registering for team activities, check schedules, scores and provide a social networking platform for college students. Sporting and wellness in US colleges is an integral part of the US college lifestyle. The application is also to be used by faculty staff to push alerts, re-scheduling updates, news feeds and other communications direct to student’s phones.

 MKB is licensing exclusive access for all of the non-curricular content which is currently being managed by IML and inputted by college staff, enhancing it, re-collating, and then pushing it out to the student so that each student gets the information on an individual basis via an ‘app’ on their smart phone which is relevant to the individual. The application has tangible benefits for both students and staff.

Moko Social Media Ltd is focused on the delivery of mobile social networking services for large interest groups in the USA and monetizing them via mobile advertising.

The initial focus is on US colleges, where Moko has signed agreements providing them with exclusive access to 600 colleges and 10m students.

The MKB product - REC.IT - is a mobile application that will allow students to manage all their non-curricular activities.

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 The application is specifically white labeled for each school, which will have the schools colors logos emblems etc. It also provides all the bells and whistles that a social media platform offers including: calendar; chatting; sharing photos and media; along with integration to other social media platforms such as Facebook and Twitter.  Figure 2 below provides screenshots of the RECIT application

Figure 2: REC.IT APP prototype (adverst shown for demonstration purposes only)

EXCLUSIVE ACESS TO 10M HIGHLY MARKETABLE COLLEGE STUDENTS

 Below is an overview of the two agreements which Moko has signed, which effectively provides them with exclusive mobile rights to 600 top tier colleges in the US and a captive 10m student audience.

ACIS DEAL

 In March 2013 Moko signed an exclusive deal with American Collegiate Intramural Sports (ACIS) to build the mobile intramural sports network for over 200 US colleges in partnership with ACIS. The initial term is 3 years, 25% revenue share agreement and requires Moko to deliver performance hurdles including minimum advertising revenue (we note minimum revenue threshold has not been disclosed by management).

 ACIS’s background is in student guides & campus publications since the 1990s, and it has exclusive agreements regarding on-campus marketing for 200 colleges. In essence, ACIS are the conduit between university and sponsorship and have relationships with large brands such as Nike, Sara Lee, Microsoft and P&G which MKB can leverage off.

ACIS deal provides exclusive access to 200 US colleges and importantly provides established relationships with large brands to leverage off.

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IML DEAL

 In October Moko signed an agreement with IM Leagues LLC (IML) which provides Moko exclusive mobile rights to IML’s data content which consists of student and team schedules, fixtures, standings, statistics and news feeds for over 600 colleges.

 IML operates the imleagues.com sports website used by recreational and intramural

sports departments in over 600 colleges across the US. IML offers a suite of tools from online signup to comprehensive scheduling required and currently used by college staff to manage college intramural leagues. It’s important to note that the actual data is owned by the university and IML in essence acts as a back end database and interface to REC.IT application.

 The agreement is for three years commencing Jan 2014 and has options to extend. It is a straight license fee (fee structure not disclosed by management) with IML incentivized to grow their portfolio of universities.

 It is prudent to note that the 25% revenue share is limited to the schools in the ACIS pool only, so the additional 400 schools that are part of the IML deal are not subject to the ACIS revenue share agreement. We view this as a major improvement on the ACIS deal as not only has the addressable pool of students increased but 2/3’s of the revenue pool remains 100% with MKB.

SIMPLE MODEL - INCREASED USAGE INCREASES ADVERTISING REVENUE

 Key to any social media or digital application are the barriers to entry. For MKB it will be high given the two major data sources are under exclusive license to MKB.  In essence, for students who attend the 600 colleges REC.IT is the key application

that will be made available for sporting and recreation groups, and for advertisers REC.IT will be a key social media platform to access such a large and targeted audience.

 This is a very important point given data is gold in a mobile world, primarily because of the advertising revenue it can generate. Given the richness in user data that MKB will access they will be able to provide a very sophisticated level of profiling to an advertiser.

 In turn, this enables an advertiser to provide very specific products and marketing campaigns to consumers which have a higher prepotency to purchase their products, which ultimately means that MKB can monetize the platform through higher priced mobile advertising revenue.

 To give an example when a user creates a profile you know their age, gender, where they live, their interests and habits and activities which ultimately build an interest profile. So you get all the profiling information that you would get from a Facebook type profile plus all the information about the user habits and activities of a student.  This is very powerful information because if you’re Nike, for example, you want to know if you’re selling basketball shoes or running shoes, and depending on the student’s profile, that simple distinction will be the key difference in regards to what product you push and what deals you push.

IML deal provides exclusive content which consists of student and team schedules, fixtures, standings, statistics and news feeds for over 600 colleges.

Key to any social media or digital application is the barriers to entry for this market will be high given the two major data sources are under exclusive license to MKB.

We believe advertisers will be attracted to the RECIT product from the outset given the sophisticated level of profiling which it can offer.

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MOBILE ADVERTISING A BOOMING MARKET STILL AT ITS INFANCY

 The mobile advertising market is growing at phenomenal rates driven by the proliferation and use of smart phones. Marketers have seen a drastic change of where dollars are spent when it comes to online advertising.

 It makes sense that advertisers are spending so much in the mobile space. More than 20% of American cell phone owners use phones as their primary way of accessing the Internet, according to a Pew Internet & American Life Project study. Two in three cell phone owners use the device to surf the Web and check email, double the amount from 2009.

 It is precisely the phenomenal growth in mobile advertising revenue that has driven the rich market valuations of Facebook, Twitter, Linkedin, Tumblr and Pandora in the US over the past 12 months. To be more precise it is not only the scale of the userbase but also the rich level of user profiling that is attracting advertisers to these platforms. Both characteristics are evident in Moko’s business model.

 Here are some eye-opening statistics according to AdAge’s Mobile Fact Pack that show just how fast mobile is growing:

- U.S. mobile ad spending is projected to hit $11.8 billion in 2014.

- There was 75% growth in U.S. mobile ad spending for 2013.

- Before year’s end, mobile ads will account for more than 70% of Facebook’s revenue; Google’s projected mobile ad revenue is $4 billion.

- In 2013, there were 123.1 million U.S. tablet users (projected 143.2 million in 2014).

ADOPTION AND USAGE OF REC.IT APP KEY TO SUCCESS.

 The key to bring in the advertisers is getting ‘eye-balls’ on the app. In our view, advertisers will be attracted to Moko’s product right from the start and it’s not a case of will it be successful but rather how successful will it be.

 Success will determined by two key factors to determine the number of page views

and ultimately how many ads can be sold or ‘served up’: i. the adoption rate of students using the app; and ii. the frequency in which they use the app.

 With respect to deployment of REC.IT, technical development is expected to be complete by the end of CY13, followed by a pilot phase to operate during January-March 2014, and then full rollout of the application to 600 schools by mid 2014.

 By late March, post the completion of the pilot phase, management should have a

preliminary view of the core results from the pilot which will be based on a meaningful sample of 20 colleges and include circa 500,000 students.

 When the full deployment takes place to 600 colleges we anticipate adoption rates

should be high, given all new enrolments will be given the app as part of their orientation kit and the product will be promoted on-campus. With ~1/3 of all university students being new enrolments this should ensure a quick ramp up to a large user base.

The mobile advertising market is growing at phenomenal rates driven by the proliferation and use of smart phone advertising.

Marketers have seen a drastic change of where dollars are spent when it comes to online

advertising primarily due to the targeted profiling which certain platforms offer.

The key to bring in the advertisers is getting ‘eye-balls’ on the app. This will be determined primarily by adoption of the product and frequency of usage.

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IT PLATFORM PROVIDES AUTOMATED AD PUBLISHING FUNCTIONALITY.

 With respect to advertising there are already established relationships through IML and ACIS with ‘hero’ brands’ (i.e. Nike, Sara Lee, Microsoft and P&G). A lot of the advertising will come from the ad networks, which already exist in the USA, where you plug into existing back-end systems such as Mopub (which Twitter recently purchased) and Millennial Media (which just announced its acquisition of JumpTap, another established mobile ad network).

 MKB effectively acts as the publisher; it displays the inventory of advertising slots, target audience, geographic region, demographic of audience and advertising rates to the ad networks. The advertising networks then sell the inventory to advertisers and receive a commission for their service.

 We understand the whole process is fully automated with management indicating there is already an inventory of advertisers ready to place ads onto the REC.IT platform. This includes an initial number of ads deployed during the pilot phase.

MOBILE ADVERTISING PRICING MODEL.

 Mobile advertising revenue can be generated through three different methods. Below we have outlined each and what the lower an upper unit price could be.  CPM (cost per thousand views) – Pricing $0.50c to $75.00. Attract more brand

advertising, paid for on a cost per thousand impressions (CPM) model – i.e. you pay X for every 1,000 devices that visit/download the page. This is for marketers who want exposure, perhaps to create awareness of a new product. Costs vary considerably – campaigns targeted at top-tier inventory can be as high as US$20 CPM.

 CPC (cost per click) - $0.25 to $2.00. Performance advertising is also available paid for by cost per click (CPC). This is for marketers who want an active response to ads e.g. clicking through a banner to the advertiser’s site, click to download/call etc. The price of CPC varies with supply and demand, determined usually in a self-service auction.

 CPA (cost per acquisition) – Pricing $1.00 to $20.00. This is where the advertiser only pays if the customer clicks through and then buys, signs up etc – or cost per download (CPD) for companies advertising mobile content/apps.

 The more targeted your demographic is, the higher the price the advertiser will pay. The reason why you can get rates as high as $50 because they can provide a very targeted relevant audience.

 Figure 3 below is an example of the CPM rates that Berkshire Eagle (which is a local US based newspaper) offer. The cost is $15 per thousand page views with the advertiser paying additional costs for features such as demographic or behavioral segmentation.

 CPM advertising rates for the mobile application “Shazam” for instance are as high $75. Hence our assumption for CPM advertising of $10 per thousand page views in our MKB revenue model below is very conservative, especially given the sophisticated level of profiling which could be provided to perspective advertisers.

Pilot phase is to operate during January-March 2014, and then full rollout of the application to 600 schools by mid 2014.

There is a large range in advertising rates. The more targeted your demographic is, the higher the price the advertiser will pay.

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Figure 3: CPM rates received by Berkshire Eagle

 The average conversion CPA and CPC rate can be anywhere from $0.25 to $20. The

average conversion rate in the market is somewhere between 2-3% (that’s converting an action where a user has to do something).

 Facebook has a conversion rate of 4-5%, the higher conversion rates are primarily a function of being able to provide relevant advertising to the user groups. Our modeling for MKB has assumed 1% conversion rates which again in our view is very conservative.

REVENUE GENERATION TO COMMENCE 2HCY14

 We anticipate revenues can start to climb in the back half of CY2014 when the rollout to 600 colleges has been completed.

 We have made a series of assumptions to forecast how many advertisements can be

served up and apply pricing assumptions around the different type of advertisements to determine the revenue.

 By way of example, in FY17 if we have an audience of 10 million and 50% of those

students are active on a day to day basis then we have 5m active users. If each user on average uses the application 1 time per day and views 2 pages within the application then it will be generating 10m page views which mean 30m advertisements can be served.

 Below is our conceptual revenue model for MKB based on a series of assumptions

which we deem to be conservative. Under our ‘base case’ scenario we forecast revenue growing from $97m in FY15 to $128m by FY17. Post the pilot period we should be able to get a better view on some of the key assumptions outlined below.

We anticipate revenues can start to climb in the back half of CY2014 when the rollout to 600 colleges has been completed. Based on our conceptual model we forecast

revenue to climb to $128m by FY17

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Figure 4: Moko revenue model assumptions and outputs (Base case)

Source: FSB Research

 There is a wide range of input variables in our revenue model. Below we have provided a sensitivity analysis on two of the most sensitive variables: CPA conversion rate and frequency of usage of the app. We have modeled a 1% conversion rate for the CPA revenue, but if you move from 1% to 2% revenue increases ~75%. Facebook has an average between 2-5%, so if MKB can get to a 2-5% range then the revenue numbers get very serious.

Figure 5: Sensitivity analysis on revenue

Assumptions value Comments

CPM ($ cost per thousand) 10 CPC ($ click per action) 0.5 CPA ($ cost per acquisition) 3 CPC/CPA ads per page 25% CPC (Conversion rate) 1.0% CPA (conversion rate) 1.0% Number of ads per page (number) 3 Frequency of usage (times per day) 1 Discount rate 10%

Description Metric FY14 FY15 FY16 FY17 FY18 FY19 FY20

Audience m 3 10 10 10 10 10 10

Adoption rate % 20% 40% 45% 50% 55% 55% 55%

Active users m 0.6 4 4.5 5 5.5 5.5 5.5

Usage views per day 0.5 1 1 1 1 1 1

Pages viewed within app views 2 2 2 2 2 2 2 Daily page views m 0.6 8 9 10 11 11 11 number of ads per page # 3 3 3 3 3 3 3 Total ads served per page m 1.8 24 27 30 33 33 33 CPM AD Utilisation % 50% 60% 70% 70% 70% 70% 70% Annual usage % 70% 70% 70% 70% 70% 70% 70%

P&L Metric FY14 FY15 FY16 FY17 FY18 FY19 FY20

CPM revenue $m 2.3 36.8 48.3 53.7 59.0 59.0 59.0 CPC revenue $m 0.6 7.7 8.6 9.6 10.5 10.5 10.5 CPA revenue $m 3.4 46.0 51.7 57.5 63.2 63.2 63.2 Other - (current business) $m 7.0 7.4 7.7 8.1 8.5 8.9 9.4 Total Revenue $m 13.3 97.8 116.4 128.8 141.3 141.7 142.2

Industry average ~3%

Number of advertisments per page

number of times a user logs into the application on a daily basis Range between $0.50 - $75.0

Range between $0.25 - $2.00 Range between $1.00 to $20.0 75% of all ads served will be CPM Industry average ~3%

Frequency of usage (times per day)

141.3 0.5 1 1.5 2 2.5 3 0.5% 109.7 109.7 109.7 109.7 109.7 109.7 1.0% 141.3 141.3 141.3 141.3 141.3 141.3 1.5% 172.9 172.9 172.9 172.9 172.9 172.9 2.0% 204.5 204.5 204.5 204.5 204.5 204.5 3.0% 267.8 267.8 267.8 267.8 267.8 267.8 4.0% 331.0 331.0 331.0 331.0 331.0 331.0 5.0% 394.2 394.2 394.2 394.2 394.2 394.2 6.0% 457.5 457.5 457.5 457.5 457.5 457.5 CP A c o n ve rs io n r at e

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

The attraction of the business model is if it works well then most of the metrics/revenue drivers would start trending upwards. Below we have provided a base case to bull case analysis which highlights the significant upside which could potentially be achieved. Higher usage, adoption and conversion would also drive advertising prices towards the top end of the ranges which has a material impact on valuation. Below we have provided a base case to bull case analysis which highlights the significant upside which could potentially be achieved.

Figure 6: Base case to agressive case valuation analysis

EARNINGS FORECASTS

 MKB could be a solid generator of free cash on the back of a scalable business model which requires minimal capital investment and additional operational costs to support continued growth.

 From a cost perspective, minimal incremental capital and operating costs will be required to support the current forecasted growth profile, given the scalable IT platform, systems and processes in place.

 We have assumed a 25% COS, which incorporates the license fee payable to IML. We

have modelled the ACIS revenue share agreement as 25% share of the net revenue applicable only to the 200 colleges under the agreement (which we estimate to be 25%)

 Based on our conceptual model we forecast NPAT growing to $75m by FY17 with EBITDA margin of 62.8%, given the operating leverage of the business model.  The cash position has been bolstered to $8m, post the recent $4m raising, providing

sufficient funding to reach a self funding profile which we forecast should occur in 2HCY14.

Assumption Base Case High case Aggressive

CPM ($ cost per thousand) 10 10 15

CPC ($ click per action) 0.5 1 2

CPA ($ cost per acquisition) 3 5 5

CPC (Conversion rate) 1.0% 2.0% 5.0%

CPA (conversion rate) 1.0% 2.0% 5.0%

Frequency of usage (times per day) 1 1 1

Adoption (FY17 onwards) 55% 60% 70%

Pages viewed within ap 2 3 3

Revenue (FY18) 111.8 346.5 781

Valuation 809 2,080 4,680

MKB could be a solid generator of free cash on the back of a scalable business model which requires minimal capital investment and additional operational costs to support continued growth.

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Figure 7: MKB Earnings forecasts

CURRENT OPERATIONAL BUSINESSES TRANSITIONING TO SUPPORT RECIT

 In regards to the current revenue generating operations, which contributed $6m in

FY13, these are split primarily into 2 main businesses;

- Existing mobile advertising performance network; and

- E-commerce.

 The mobile advertising business is based in New York and is currently being re-shaped to become an internal ad network that will manage and sell performance based campaigns in MKB’s various project silos – REC.IT being the first. This will also integrate with other ad networks.

 The e-commerce business (Deals I Love) will be transitioned into become the "deal aggregator" and conduit to filter targeted offers and deals to the students from existing US based merchants.

 There are still some legacy revenues from "MOKO.mobi Chat & Share" service in Australia, but this is only about $50k per month.

Profit and Loss ($m) 2014e 2015e 2016e 2017e

Revenue 13.3 97.8 116.4 128.8 Cost of Sales -3.3 -24.4 -29.1 -32.2 Gross Margin 10.0 73.3 87.3 96.6 Operating Costs -8.4 -13.6 -15.1 -16.2 EBITDA 2.0 60.2 72.6 81.0 D&A -0.4 -0.4 -0.5 -0.5 EBIT 1.6 59.7 72.2 80.5

Net Interest exp / (income) 0.0 0.0 0.0 0.0

Profit before tax 1.6 59.7 72.2 80.5

Tax exp / (benefit) -0.2 -10.2 -5.1 -4.0

NPAT 1.4 49.6 67.1 76.4

Minority interest 0.0 0.0 0.0 1.0

Reported NPAT 1.4 49.6 67.1 75.4

Non recurring items 0.0 0.0 0.0 0.0

NPAT adjusted 1.4 49.6 67.1 75.4

EPS (c) 0.2 7.4 10.0 11.4

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LISTING ON THE NASDAQ TO PROVIDE RE-RATING

 The company will seek a full listing on the Nasdaq, which is scheduled for Q1CY14. We believe the listing on the Nasdaq can provide a re-rating in the stock given the precedence being set by the larger players in this space. The impressive listing of Twitter which on its debut traded at over 100% premium to its listing price highlights investor demand and interest in the social media/mobile advertising space. We believe a more sophisticated investor base exists in the region hunting for the next early stage IPO.

 Comparative US peer valuations include Facebook at US$94 per subscriber, twitter being priced at US$11 per subscriber, Tumblr purchased at US$10 per member and Instagram purchased at US$30 per member.

 The higher value assigned on a per subscriber basis is largely driven by the most mature businesses in terms of building out monetization models (read advertising, subscriptions, platform partner deals, etc), but also because they have a somewhat strong lock in the short term over their user base relative to other social networks.  The salient point to highlight is that 100% of Moko’s audience is targeted, providing

a very detailed demographic and high level of user profiling. Unlike Twitter or Tumblr which do not have this data available. Therefore if the business model works we believe Moko’s value as $ per user would be more like FB or Linkedin in the $90-100 per user range.

 While management haven’t provided guidance on the quantum of capital to be raised in the proposed Nasdaq listing, we believe any new capital will be deployed towards new projects.

Figure 8: US Peer comps (US$)

Source: FSB Research, consensus, Bloomberg

SCALABLE PLATFORM TO BE EXPANDED BEYOND COLLEGES

 Beyond REC.IT there are other opportunities which MKB can leverage their platform

and use it towards other high volume specialty audiences such as running groups, cycling groups etc. This represents significant upside beyond just the REC.IT application.

Metric Facebook Twitter Likedin Instagram Tumblr Pandora

Market Cap 120,000 26,000 26,260 715 1,100 4,450 Debt/Cash 8,000 1,800 2,280 0 0 100 Enterprice Value 112,000 24,200 23,980 715 1,100 4,350 FY14 Revenue Forecast (US$m) 10,800 800 1,600 n/a n/a 643 FY15 Revenue forecast (US$m) 894 Active subscriber base (m) 1,190 250 259 100 110 150 % Mobile advertising revenue 50% 90% 10% n/a n/a 15%

Multiples

$ per subscriber 94.1 96.8 92.6 7.2 10.0 29.0 FY14 revenue multiple 10.4 30.3 15.0 n/a n/a 6.8

We believe the listing on the Nasdaq can provide a re-rating in the stock given the precedence being set by the larger players in this space

If the business model work we believe Moko value as $ per user would be more like FB or Linkedin in the $90-100 per user range

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VALUATION

 Our un-risked enterprise valuation for MKB is $802.0m, or $1.20/sh and comprises a 10 year operational NPV of $510.5m and a terminal value $292.0m. We have assumed a 10% discount rate and a terminal growth rate of 3%. Accounting for $8m in cash we derive an equity valuation of $810.5 or $1.21/sh.

 We have risked our valuation by 70% to account for the uncertainty around implementation, usage and adoption of the application. Our risked valuation is $251.3m or $0.38/sh. We will look to unwind our risk weighting upon completion of key milestones the first being completion of the pilot program (Q1CY14) followed by the commercial rollout (Q3CY14).

Figure 9: Valuation Summary

 Given the terminal value represents 36% of our equity valuation we have provided a sensitivity analysis on the key variables, growth rate and discount rate to highlight the valuation impact.

Figure 10: Sensitivity Analysis

Source: FSB Research Description A$m $/sh Enterprise NPV (10 years) 510.5 0.76 Terminal value 292.0 0.44 Enterprise Value 802.5 1.20 Net Cash 8.0 0.01 Equity Value 810.5 1.21 Risk Factor (%) 30% 30% Risked valuation 251.3 0.38 Assumptions

Fully Diluted shares on issue 669.8 Discount rate 10% Terminal growth rate 3% Terminal value as a % of EV 36%

Moko social - Net Present Value Sensitivity - Terminal Growth Rates Discount Rate #### 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 0.0% $ 1.34 $ 1.29 $ 1.25 $ 1.22 $ 1.19 $ 1.16 $ 1.13 1.0% $ 1.35 $ 1.30 $ 1.25 $ 1.21 $ 1.17 $ 1.14 $ 1.11 2.0% $ 1.39 $ 1.32 $ 1.26 $ 1.21 $ 1.17 $ 1.13 $ 1.09 3.0% $ 1.47 $ 1.38 $ 1.30 $ 1.23 $ 1.18 $ 1.13 $ 1.09 4.0% $ 1.60 $ 1.47 $ 1.37 $ 1.28 $ 1.21 $ 1.15 $ 1.10 5.0% $ 1.84 $ 1.64 $ 1.49 $ 1.37 $ 1.27 $ 1.20 $ 1.13 Te rm ina l G row th R at e

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RECOMMENDATION

 We view MKB as a speculative investment given the early stage of the business model has yet to be validated through the planned pilot stage early in CY14. However, despite the early stage nature of the business and the recent share appreciation over the past 6 months we believe MKB still provides a compelling risk/reward proposition given:

- Barriers to entry for the college social network segment MKB is targeting are high.

- Our revenue and earnings assumptions and forecasts outlined in Figure 6 and Figure 8 are conservative;

- The company does not require additional capital to deliver our forecasts outlined above;

- A success case for the pilot and deployment to the 600 colleges over the 2HCY14 will quickly underwrite our base case 5x share price upside; and

- A strong response from the US investment community to the Nasdaq listing could see the stock push on for a 10x return in the next 3-5yrs.

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BOARD AND KEY MANAGEMENT PERSONNEL

Greg McCann - Chairman

 Was a partner with Deloitte for 20+ years, held senior leadership roles including Managing Partner/Director for Deloitte Consulting/ICS in Australia, a systems integrator specializing in implementation of enterprise applications

 Also Chairman of Tel.Pacific, Chairman of National Broadband Network (Tas) & board of Australian law firm Lander and Rogers

 Also Managing Director & principal of Executive Computing Pty Ltd, an independent software & consulting services supplier in the Asia Pacific

Ian, Rodwell –CEO, Founder, Managing Director

 Has 20+ years experience in corporate/consumer design & multimedia & has owned/operated several businesses in this field

 Worked in Aust, Singapore, UK & US managing projects for many international companies inc McKinsey, BMW, UniLever & MTV

 In the consumer area Mr Rodwell led projects for several of world’s biggest names including sport inc Manchester United FC, All Blacks, Adidas & the AFL

Hans De Back – Non-Executive Director

 Founder/former CEO of TriScreen Media Group & former senior executive of Cliq Digital, one of the world’s largest interactive mobile media companies, sold last year to a German listed company

 In 1999 he co-founded Telitas Benelux, one of the first & most successful mobile content providers in Europe (sold to Index for €50m)

Peter Yates AM – Non-Executive Director

 Investor in the digital media space including Inlink (digital lift advertising) & Third Screen Media (mms & mobile advertising)

 Many years either as an adviser, CEO or board member in the digital, mobile & media sectors

 From 2001-04 was CEO of Publishing and Broadcasting Limited, at the time Australia's largest media, gaming & internet company

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RISKS

Project Execution/adoption

 Our earnings growth expectations are generated from the successful implementation and usage of the REC.IT application. The projects are still in its infancy and there is implementation risk and risks that the application is not widely adopted or used as per our forecast resulting in substantial downside to our valuation.

Competition

 MKB has a first mover advantage in acquiring mobile rights to 600 university campuses. These agreements are for an initial 3 year term. Given the growing and ever-changing technological landscape, MKB may face competition from new entrants or growing completion from existing competitors which could access the data post the initial three year term having adverse impact on the company’s growth and margins.

Key person risk

 MKB has a number of key staff (management and software developers) that is critical to the company’s success. We see any staff churn as a negative.

Regulatory risk

 MKB operates in a fast moving and highly lucrative industry. As such we believe there will be growing regulatory pressure to police the use of personal data. Any changes to regulatory policy which prohibit Moko ability to monetise the data through advertising will impact our forecast earnings.

Technology

 Given MKB process are heavily dependent on technology and process any services disruption or technology failures pose a risk to data integrity and business operations.

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