Shenwan Hongyuan Co Delayed Alibaba Group Holding BABA US 1

This document is being provided for the exclusive use of HO SING WONG at CHINESE UNIVERSITY OF
HONG KONG, THE

SWS Research Co. Ltd is a subsidiary of Shenwan Hongyuan Securities.
99 East Nanjing Road, Shanghai | +86 21 2329 7818
www.swsresearch.com
Internet Software& Services | Company Bringing China to the World

R h
24 April 2017
Outperform
Initiation of coverage
Transforming platform
ALIBABA GROUP HOLDING (BABA:US)
Market Data: 21 Apr Financial summary and valuation
Closing Price (US$) 113 FY15 FY16 FY17E FY18E FY19E
Price Target (US$) 127 Revenue (Rmbm) 76,204 101,143 154,790 207,689 270,407
SPX 2349 YoY (%) 45.1 32.7 53.0 34.2 30.2
IXIC 5911
Adj. Net income (Rmbm) 34,922 42,912 60,629 75,137 92,052
YoY (%) 23.9 22.9 41.3 23.9 22.5
52-week High/Low (HK$) 114/73
Adj.EPS (Rmb) 14.9 17.5 24.5 30.3 37.2
Market Cap (US$bn) 280 Adj.Diluted EPS (Rmb) 14.0 16.7 23.6 29.2 35.8
Market Cap (Rmbbn) 1925 ROE (%) 40.0 23.7 25.7 26.8 27.3
Shares Outstanding (Mn) 993 Debt/asset (%) 38 32 34 35 34
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0
Exchange Rate (Rmb-US$) 6.88
P/E (x) 55.9 46.6 33.1 26.7 21.8
Price Performance Chart:
P/B (x) 13.4 9.2 7.8 6.6 5.4
EV/EBITDA (x) 46.5 37.3 27.2 20.0 15.9
Note: Diluted EPS is calculated as if all outstanding convertible securities, such as convertible preferred shares, convertible debentures,
stock options and warrants, were exercised.
Alibaba, best known as Chinas predominant e-commerce platform operator, accounts for
over 70% of domestic retail e-commerce transactions and c.50% of online wholesale
transactions. The firm's commerce segment remains its core, contributing 91% of revenue
in FY16A, but to counter slowing growth in the domestic e-commerce market, Alibaba has
been investing heavily in building an ecosystem of complementary services as well as
Source: Bloomberg expanding its commerce business to offline and overseas. We forecast EPS of US$3.5 in
Analyst FY17E (+41% YoY), US$4.3 in FY17E (+24% YoY) and US$5.3 in FY17E (+23% YoY). We derive
Mae Huang a target price of US$127 and initiate coverage with an Outperform rating.
A0230517010002 Eco growth. We like Alibaba for its efforts to acquire or develop complementary
BGT702 businesses: its Alibaba Cloud tech platform underpins its online services, payments and
huangqian@swsresearch.com data analytics, as well as helping it support partners; affiliate Ant Financial Services
provides both merchants and vendors with the tools they need to optimise spending and
access credit; the Cainiao platform links logistics services and, through data crunching,
helps increase efficiency and lower cost to improve customer service; and Alibabas digital
media services (centred around online video site Youku-Tudou), raises user engagement
and provides advertising clients a wider variety of more interactive marketing options. As
these synergies manifest, rising average revenue per paying user (Arpu) will help offset
slowing growth in gross merchandising volume (GMV).
Online to offline. In particular, we are positive on the companys attempt to incorporate
the advantages of offline retail to its business. Although competition from online channels
has eroded offline growth prospects, we believe Alibaba will be able to introduce
efficiencies to offline retailers through applying data analytics to ensure better supply chain
The company does not hold any equities or management, while offering the convenience of Alipay payment and ease of comparison to
derivatives of the listed company
mentioned in this report (target), but then elevate the experience for shoppers. Ultimately, we may see offline retail, offering a higher
we shall provide financial advisory services take-rates with online channels, as likely to boost the companys overall Arpu.
subject to the relevant laws and
regulations. Any affiliates of the company
may hold equities of the target, which may
New product categories, new sources. We highlight the companys efforts to increase its
exceed 1 percent of issued shares subject footprint to consumer products categories in which online sales account for less of the
to the relevant laws and regulations. The
company may also provide investment
market, such as fast-moving consumer goods (FMCG), catering and autos. Internationally
banking services to the target. The we see Alibaba making strides, with its acquisition of Lazada in SE Asia, cooperation with
Company fulfills its duty of disclosure within
its sphere of knowledge. The clients may
Indian platforms and its servicing of growing domestic demand for internationally sourced
contact compliance@swsresearch.com for products.
relevant disclosure materials or log into
www.swsresearch.com under disclosure Initiate with an Outperform. We forecast EPS based on non-Gaap diluted earnings of
column for further information. The clients
shall have a comprehensive understanding Rmb4.4 in FY4Q17E with Rmb23.6 in FY17E (+41% YoY), Rmb29.2 in FY18E (+24% YoY) and
of the disclosure and disclaimer upon the Rmb35.8 in FY19E (+23% YoY). We derive a target price, based on our sum-of-the-parts
last page.
valuation, of US$127, representing 30x FY18E PE, 7.4x FY18E PB, 1.3x PEG, 22.6x EV/Ebitda,
and 0.5x P/GMV. With 12% upside, we initiate coverage with an Outperform
recommendation.
HONG KONG, THE
SWS Research Co. Ltd is a subsidiary of Shenwan Hongyuan Securities.
99 East Nanjing Road, Shanghai | +86 21 2329 7818
www.swsresearch.com
Internet Software& Services | Company Bringing China to the World

R h

70B2B 50
16 91%

17 3.5
41%18 4.3 2419 5.3
23 127

;

ARPUGMV

ARPU

FMCG
Lazada

17 4 4.4 17
23.6 41%18 29.2
2419 35.8 23
127 18 30x PE7.4x PB1.3x EG22.6x EV / Ebitda
0.5x P / GMV 12
HONG KONG, THE Food,Materials
Building Beverage| &Company
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Table of contents
ALIBABA AT A GLANCE ................................................................................................ 2
CORE COMMERCE........................................................................................................ 6
COMMERCE REVENUE TRENDS: MARKETING VS COMMISSIONS ........................................................ 7
COMMERCE REVENUE TRENDS: PC VS MOBILE ............................................................................. 9
COMMERCE REVENUE TRENDS: RETAIL GMV GROWTH ................................................................ 11
COMMERCE REVENUE TRENDS: OFFLINE RETAIL .......................................................................... 18
CORE COMMCOMMERCE REVENUE TRENDS: INTERNATIONAL ........................................................ 21
CLOUD COMPUTING .................................................................................................. 25
DIGITAL MEDIA & ENTERTAINMENT .......................................................................... 30
ANT FINANCIAL SERVICES .......................................................................................... 33
OTHER BUSINESSES ................................................................................................... 38
EARNINGS OUTLOOK AND FINANCIAL POSITION ....................................................... 40
VALUATION ............................................................................................................... 44
APPENDIX 1: OWNERSHIP STRUCTURE ...................................................................... 51
APPENDIX 2: ANT FINANCIAL SERVICES AGREEMENT ................................................ 55
APPENDIX 3: FINANCIAL STATEMENTS ...................................................................... 56
Please refer to the last page for important disclosures Page 1

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Alibaba at a glance
Alibaba, best known as Chinas predominant e-commerce platform operator, is
frequently referred to as one of the Big Three Internet names in China
comprised of search engine Baidu (BIDU:US N-R) and instant messaging and
gaming empire operator Tencent (700:HK BUY); collectively in local media the
BAT companies. Each of the companies has carved out an ecosystem around
their respective areas of expertise, becoming a driving forces of internet
business models and trends.
Alibaba arranges its business into four main reporting lines in its financial
disclosures historically: retail and wholesale commerce, cloud computing
services and other income. The final category has included the companys
digital media & entertainment and innovation initiatives revenue in its
quarterly reporting as of FY17.
Fig 1: Revenue breakdown, by reporting segment

(Rmbm) FY12 FY13 FY14 FY15 FY16
Revenue 20,025 100.0% 34,517 100.0% 52,504 100.0% 76,204 100.0% 101,143 100.0%
-Retail 13,645 68.1% 27,362 79.3% 43,770 83.4% 61,500 80.7% 82,237 81.3%
-Wholesale 5,757 28.8% 5,965 17.3% 6,213 11.8% 7,923 10.4% 9,713 9.6%
-Other 108 0.5% 540 1.6% 1,748 3.3% 5,510 7.2% 6,174 6.1%
-Cloud computing and
515 2.6% 650 1.9% 773 1.5% 1,271 1.7% 3,019 3.0%
Internet Infrastructure
Source: Bloomberg, SWS Research
Its retail business consists of its customer-to-customer (C2C) sales platform

Taobao, and its business-to-consumer (B2C) platform Tmall (bulk discounting
deals site Juhuasuan was incorporated into Tmall platform at end-2016). The
companys wholesale business consists primarily of two platforms, the
domestically focused 1688.com and the internationally focused Alibaba.com.
Together, the commerce businesses accounted for 91.0% of the firms revenue
in FY16A (the financial year ending 31 M arch 2016), of which retail commerce
revenue contributed Rmb82.2bn (81.0% of revenue for the year) while
wholesale commerce provided 9.6%. The companys cloud computing and
internet infrastructure business contributed 3.0%.
Fig 2: Alibaba revenue, breakdown by core reporting lines Fig 3: Alibaba core retail platforms, by GMV
120 (Rmbbn) 2.0 (Rmbtn)
1.8
100
1.6
1.4
80
1.2
60 1.0
0.8
40
0.6
20 0.4
0.2
0 0.0
FY12 FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16
Retail Wholesale Cloud computing Other Taobao Tmall
Source: Bloomberg, SWS Research Source: Bloomberg, SWS Research
Alimama is a marketing service subsidiary, a major monetisation tool for the

firms commerce segments. Linking these products is the companys online
payment tool, Alipay, accounting for c.75% of gross merchandise value (GMV)
recorded on the domestic retail platforms in FY16, according to the companys

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2016 annual report. Alipay is held through Ant Financial Services, a company
controlled by Alibaba chairman Jack Ma.
Alibabas retail business is the dominant retail e-commerce platform in China,

with Tmall and Taobao generating over 70% of domestic e-commerce
transactions. Alibaba is also the largest player in the domestic wholesale e-
commerce market, with 1688.com and Alibaba.com accounting for c.50% of
B2B transactions in China.
Within its commerce segment reporting, the company also differentiates

between domestic and overseas businesses, with Taobao Global and Tmall
Global offering international vendors access to domestic buyers, and AliExpress
for overseas consumers to buy products from the companys domestic
platforms. On the wholesale side, Alibaba.com is the companys global
wholesale marketplace. Augmenting these services, Alibaba has also invested in
international platforms, acquiring a controlling stake in Southeast Asian e-
commerce site Lazada in 2016.
Alibaba has also entered the offline commerce markets in recent years, as
growth in online retail gross merchandise value (GMV) has slowed. Intime
Retail (1833 HK) becomes the first to be consolidated into its financial
statement in FY3Q18E. Intime retails (1833 HK) integration through online
&offline price consistency, operating efficiency improvements and QR code
application could be a touchstone for reformed offline retail.
Outside of the companys mainstay commerce businesses, Alibaba provides

cloud computing services under the Aliyun, or Alibaba Cloud brand. The first
and largest public cloud provider in China, Alibaba Cloud derives the bulk of its
revenue from storage and server rental services. Although it contributed just
4% of total revenue in FY16, we see Alibaba Cloud, the largest public cloud
provider in China, as the firms most promising business segment in coming
years.
The companys digital media & entertainment business is comprised primarily

of its investment in domestic online video-sharing platform Youku-Tudou (the
firm completed the acquisition of all public shares in the firm for US$4.4bn in
April 2016). While Youku is still loss-making at present, the greater integration
of the increasingly popular advertising format into Alibabas platform is a key
element of the companys effort to drive future engagement among visitors.
Also within the segment is mobile browser provider UCWeb; StatCounter ranks
the UCWeb browser as the worlds second mobile browser by page view, while
providing Alibabas mobile search service, Shenma, Chinas second-largest
mobile search engine.

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Fig 4: Alibaba service KPIs (PC) Dec-16 Fig 5: Alibaba service KPIs (mobile) Dec-16
PC end Mobile end
MAU Monthly engagement MAU Monthly engagement
Taobao: 325m 559m hours Taobao: 473m 936m hours
Tmall: 224m 191m hours Tmall: 40m 36m hours
Suning: 74m 18m hours Suning: 14m 8m hours
Youku-Tudou: 261m 737m hours Youku Tudou: 326m 3.4bn hours
1688.com: 80m 17m hours UCWeb: 277m 2.0bn hours
Alibaba.com: 12m 4m hours Weibo: 366m 1.8bn hours
Alipay: 411m 4m hours Alipay: 411m 298m hours
Weibo:180m 184m hours DingTalk: 9m 8m hours
AutoNavi: 5m 1m hours AutoNavi: 224m 262m hours

Source:iResearch, SWS Research Source: iResearch, SWS Research
We expect an increasing proportion of revenue to be derived from the

companys cloud, digital media and other businesses in future.
Among its other (non-consolidated) investments, we make special mention of

Ant Financial Services, under which is the Alipay online payment tool that is
central to transactions on Alibaba. Ant Financial Services provides a wide range
of other complementary services to Alibaba merchants and visitors, from credit
to banking and insurance to money market funds as well as a financial platform
as a service (PaaS) product to support other payment tools around the world.
Other non-consolidated firms worthy of note include logistics services firm

Cainiao. Cainiao can be considered a platform to link small logistics firms and
simultaneously a consultant using big data to improve logistics firms efficiency.
Another special mention case is Suning (002024:CH Hold), previously a major
nationwide consumer electronics and home appliances physical stores retail
chain operator that transitioned to an online platform operating in a broad
range of retail products categories. The firm operates an extensive network of
delivery centres, and closely cooperates with Alibaba, yet rather than being
consolidated it contributes a share of profit to the firm. Alibaba also acquired
automobile navigation and mapping services provider AutoNavi to build out its
location-based services (LBS) capability.
Alibaba is essentially a marketing services company, and online transaction

volumes are only one aspect of the firms branding strength. We note, from our
on-the-ground industry discussions, that many reputable brands are positive on
Alibaba services and are willing to extend cooperation in more ways, thanks to
the companys role as a service provider rather than simply a retailing platform
as is the case with JD; we note efforts to improve customer experience through
the widening range of services such as tech support from the Alibaba Cloud or
logistics via Cainiao; deeper data sets; secured transactions through Alipay;
media support through video and live streaming; and more creative marketing

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tools such as its second-floor mobile page, a drag down screen featuring
original video content with heavy advertising of featured items, in addition to
still-growing user engagement, not only organically through its shopping
platforms but through its widening ecosystem of sites such as Youku-Tudou, or
mobile Shenma search. Vendors are also positive on the companys opening up
of new markets, such as offline stores, fast-moving consumer goods (FMCG)
and its development of international sales.
Overall, we see slowing growth in the overall market to result in slower online
GMV growth for Alibaba platforms, but we expect the company to offset this
with higher average revenue per paying user and take rate. We estimate a
blended monetisation rate for Alibabas China commerce retail segment at
2.9% in FY17E, rising to 3.1% in FY18E and 3.2% in FY19E, resulting in revenue
from the segment expanding at a 28% Cagr in the four years to FY20E.
We see the firms international retail segment, its cloud computing segment,
and its digital media and entertainment businesses as contributing more
significantly in coming years. At present, none of the businesses has broken
even; nonetheless, we are positive that not only will revenue contribution
become more meaningful, sharp increases in revenue in coming years will lift
overall growth, while profitability in the various segments will also rise
substantially in the near future. In particular, we highlight the discrepancy
between management statements emphasising international commerce as a
key contributor to Alibaba revenue and its actual contribution at present,
suggesting further acquisitions may be on the horizon.
Fig 6: Major business lines of Alibaba

Business line Segments Brands Concept
Core commerce China retail commerce Tmall (B2C), including Juhuasuan, Tmall Supermarket and Tmall Global; E-commerce
Taobao (C2C), including Taobao Global E-commerce
China wholesale 1688.com E-commerce
International retail AliExpress E-commerce
Lazada E-commerce
International wholesale Alibaba.com E-commerce
Monetisation tool Alimama Advertising; Media
Cloud computing Ali Cloud Cloud
Digital media and entertainment Youku-Tudou Media
UCWeb Browser
Shenma Search Search
Innovation and Others YunOS Operating System Cloud; Mobile; IoT; System
AutoNavi Digital Map; Navigation
DingTalk Communication
Offline reach Suning (Equity method) Appliances
Sanjiang (Equity method) Supermarkets
Intime Retail (Consolidated) Department stores
Bailian (Cooperation) Department stores
Lianhua (Equity method) Supermarkets
Agreement with Ant Financial Finance Alipay Fintech
Yuebao, etc.
Source: Company, SWS Research
Fig 7: Unconsolidated business lines of Alibaba

Investments Ticker Equity interest Industry
Koubei Unlisted 45-50% Restaurant and local services guide
Cainiao Network Unlisted 47% Logistics
Suning 002024 CH 20% Offline shopping center-3C, hold by Taobao
Alibaba Pictures (1060 HK) 1060 HK 49.50% Movie Ticketing
Alibaba Health (0241 HK) 0241 HK 38% Health

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Ele.Me Unlisted 22% Food delivery

Weibo WB US 68.1% of Class A, Media
31.5% of the total
MoMo MOMO US 14% Communication
Groupon GRPN US 5.80% Discounts
Singapore Post S08 SG 10.20% Logistics
AGTech 8279 HK 31.60% Entertainment
Baozun BZUN US 19.3% of total Class A Branding services
17.6% of total
Shiji Information 002153 CH 13.70% IT-catering
Sinosoft Tech 1297 HK 13.30% Software, cloud cooperation
YTO Express Unlisted 11.10% Express
RRS Unlisted but under Haier 34% Large piece express
Haier Multimedia Unlisted but under Haier (600690 CH) 25.30% Color TV platform
Haier Electronics Group 1169 HK 2.00% Appliance
Evergrande Football Club Unlisted 50.00% Entertainment
Best Logistic Unlisted c.20% Logistics
Hema Fresh Food Unlisted n.a. Retail
Didi Dache Unlisted c10% Taxi-hailing app
We forecast revenue of Rmb155bn in FY17E (+53% YoY), Rmb208bn in FY18E

(+34% YoY), and Rmb270bn in FY19E (+30% YoY). We expect margins to narrow,
with operating margin (excluding share-based expenses) to drop c.5ppts YoY in
FY17E due to the acquisition of Lazada and expansion of Tmall supermarket.
We see further margin compression resulting from expansion of Tmall
supermarket and consolidation of Intime in late-2017, but improving margins in
the cloud computing and digital media and entertainment segments may
provide a partial offset. Overall we expect operating margin to fall a further
1ppt YoY in FY18E.
Alibaba uses a non-Gaap adjustment in its financial statements, removing the

effects of the companys share-based compensation and gains (or losses) on its
investments. As the companys spending on investments can fluctuate wildly
from year-to-year, but is typically substantial (exceeding amounts spent on
Capex in recent years), we believe it is reasonable to adopt a similar approach
in our forecasting of Alibabas core performance. We estimate non-Gaap
diluted EPS of Rmb4.4 in FY4Q17E, lower than Bloomberg consensus, based on
the likelihood of an increase in the firms tax rate in the quarter, resulting in
EPS of Rmb23.6 in FY17E (+41% YoY), Rmb29.2 in FY18E (+24% YoY), and
Rmb35.8 in FY19E (+23% YoY). We derive a sum-of-the-parts-based target price
of US$127, representing 30x FY18E PE (based on non-Gaap diluted EPS), 7.4x
FY18E PB, 1.3x PEG, 22.6x EV/Ebitda, and 0.5x P/GMV. With 12% upside, we
initiate coverage with an Outperform rating.
Core commerce
The commerce segment contributed 91% of Alibabas overall revenue in FY16A,
largely composed of advertising revenue. Within its core commerce business,
Alibaba has different platforms for China retail (Taobao, Tmall), China
wholesale (1688.com), international retail (AliExpress, Lazada in SE Asia) and
international wholesale (Alibaba.com).
Although Alibaba charges commission on transactions made on its platforms,

the bulk of its revenue (c.60%) within its core commerce business is generated
from advertising and marketing services, with only 27% generated from

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commissions; Alibaba is essentially an advertising company, with its Alimama

marketing services platform the primary monetisation tool.
Fig 8: Alibaba revenue breakdown by type, FY16
Membership fees
Others
and value-added
8%
services
8%
Commission
27% Online marketing
services-P4P and
display marketing
53%
Online marketing
services-Others
4%
Source: Company data, SWS Research
However, while it is marketing services that directly generates the largest

proportion of the companys core commerce segment income, several other
significant trends play into the companys platforms revenue breakdown and
future outlook, from rapid growth in international transactions compared with
domestic GMV, to the shift in advertising from PC to mobile. We also note a
number of areas in the companys retail commerce platforms coverage of
consumer goods categories, in which we see potential for the company to
improve GMV growth.
Commerce revenue trends: Marketing vs commissions

Monetisation of the core commerce business can be broken down into pay-for-
performance (P4P) advertising revenue, display marketing services revenue,
Taobaoke, placement fees on the Juhuasuan group buying platform, in addition
to the commission charged to vendors on GMV of goods sold on the platforms
and the fees charged to vendors such as membership fees and value-added
services.
Fig 9: Alibaba core commerce segment marketing services

China Commerce Retail Taobao Marketplace (1k margin, no placement fees) Tmall Juhuasuan
Taobao merchants P4P marketing fee Commissions (3%)
Display marketing fees Placement fees
Taobaoke commissions
Storefront fees
Other fees
Tmall merchants P4P marketing fees Commissions Commissions (3%)
Display marketing fees P4P marketing fees Placement fees
Display marketing fees
Taobaoke commissions
China Commerce Wholesale 1688.com
1688 merchants Membership fees
Value-added service fees
Keyword bidding fees
P4P marketing fees
International Commerce Wholesale Alibaba.com
Alibaba.com Membership fees
Value-added service fees
P4P marketing fees
International Commerce Wholesale AliExpress.com
AliExpress sellers Commissions

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Online marketing fees

Fig 10: Alibaba core commerce segment monetisation methods

Monetisation type Model Range
P4P marketing services Cost-per-click (CPC) Rmb0.05-100, varying with bidding activity and popularity of keyword
Cost-per-mille
Display marketing services Cost set through bidding at auction
(CPM)
Commission of 5-50% of on sales by merchants, where TaobaoAlliance (under Alibaba) will subtract
Taobaoke Commission 10-15% of all commissions generated by Taobaoke consultants, typically 11% of Tabaoke's total
commission income
Placement fees Juhuasuan placement fee is standard at 3% for both Tmall and Taobao merchants
Tmall: 0.3-5.0%, vs 5-10% on JD (high frequency commission rate range); Tmall Supermarket charges
Commission
higher rates; Taobao: 0%
Membership fees and value-added services Annual Basic package: Rmb1,688 for wholesale merchants, Rmb3,688 for advanced services package
We highlight several ongoing structural changes in the advertising industry.

Marketing capital is flowing from PC to mobile, and simultaneously moving
from a preference for simple image-based banner ads to more interactive
forms of advertising, such as on e-commerce or video platforms.
Fig 11: Market share within advertising revenue, by advertising type

2013 2014 2015 2016 2017E
Social media 4.0% 4.0% 4.0% 4.0% 3.0%
Video 7.2% 8.0% 8.2% 8.5% 8.8%
Banner ads 21.0% 18.0% 15.0% 15.0% 13.0%
E-commerce 27.0% 26.0% 28.0% 28.0% 29.0%
Search 31.0% 34.0% 33.0% 33.0% 33.0%
Other 9.8% 10.0% 11.8% 11.5% 13.2%
Source: iResearch, SWS Research
By contrast, the firms commission income remains relatively steady; the firm
has kept its commission rate stable for several years at 0.3-5%, depending on
several factors including type of product sold and a vendors GMV history. We
assume GMV growth in the coming years will total Rmb3.8tn in FY17E (+23%
YoY), Rmb4.6tn in FY18E (+21% YoY) and Rmb5.5tn (+20% YoY) with Taobao
marketplace being overtaken as the primary source of GMV by Tmall in FY19E.
Juhuasuan, although periodically still called a group buy site, is somewhat

different, in that it continues to act as a platform for merchants, but one on
which merchants offer special bulk-buy discounts directly to buyers (by contrast,
a typical group buy site acts as middle man, finding deals from cooperating
businesses by filling bulk orders to achieve discounted prices). Juhuasuan
charges merchants a commission rate on sales on the platform of c.3% and a
placement fee.
Taobaoke are third-parties who offer consulting services to help merchants on

Taobao improve sales. Taobaoke, overseen by the Alibaba subsidiary Taobao
Alliance may charge commissions to clients on future sales ranging anywhere
between 5- and 50%, but pay 10-15% of their takings to Alibaba through the
Taoboa Alliance.

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Fig 12: Alibaba marketing services revenue vs commission contribution Fig 13: Alibaba marketing services revenue vs commission % contribution
180,000 (Rmbm) 1.0 100%
160,000 0.9 90%
140,000 0.8 80%

0.7 70%
120,000
0.6 60%
100,000
0.5 50%
80,000
0.4 40%
60,000
0.3 30%
40,000 0.2 20%
20,000 0.1 10%
0 0.0 0%
FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY14 FY15 FY16 FY17E FY18E FY19E FY20E
Online marketing services Commission
Online marketing services revenue Commissions Other
Online marketing services YoY (RHS) Commission YoY (RHS)
Source: Company data, SWS Research Source: Company data, SWS Research
Commerce revenue trends: PC vs mobile

As the second largest advertising platform in China after search engine Baidu,
we believe Alibaba will benefit from growth in the broader mobile advertising
industry. After several years of extremely rapid growth (179% YoY in 2015,
according to iResearch) we expect a slowing of industrial growth to more
reasonable, but still rapid, levels over coming years; we assume the industry
will expand at a 33% Cagr over the four years to 2020E.
Fig 14: 9M16 YoY ad revenue growth by major platforms Fig 15: China mobile advertising sales
80 (US$bn) 80 (US$bn) 80%
14% YoY
70 70 70%
60 60 60%
50 50 50%
40 24% YoY 40 40%
34% YoY
30 30 30%
20 42% YoY 4% YoY 65% YoY 20 20%
59% YoY
10 10 10%
0 0 0%
Tencent Alibaba Baidu China Facebook Google US online 2016 2017E 2018E 2019E 2020E
online ad ad sales
sales
Ad sales YoY (RHS)
9M15 9M16
Source: Company data, Bloomberg, SWS Research Source: Wind, SWS Research
Similarly, we are witnessing a trend in which desktop internet access is

featuring less and less in online retail sales in China compared with purchases
made via mobile devices. We expect this trend to continue in future, with
mobile-based transactions accounting for 84% of overall online retail sales by
2020E (up from 55% in 2015A), a trend we expect to be matched on Alibabas
China retail platforms (88.4% mobile transactions by FY20E, vs 64.8% in FY16A).

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Fig 16: China online retail GMV by user device Fig 17: Alibaba China retail GMV by user device
10.0 (Rmbtn) 600% 6.0 (Rmbtn) 350%
9.0 300%
500% 5.0
8.0
250%
7.0 400%
4.0
6.0 200%
300%
5.0 3.0 150%
4.0 200%
100%
2.0
3.0 100%
50%
2.0
0% 1.0
1.0 0%
0.0 -100% 0.0 -50%

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E FY14 FY15 FY16 FY17E FY18E FY19E FY20E
PC GMV Mobile GMV
PC GMV Mobile GMV PC YoY (RHS) Mobile YoY (RHS)
PC GMV YoY (RHS) Mobile GMV YoY (RHS)
Fig 18: Alibaba China retail revenue breaddown, PC vs mobile Fig 19: Alibaba China mobile monthly active users
100% 600 (m) 45%
90% 40%
80% 500
35%
70%
400 30%
60%
25%
50% 300
20%
40%
200 15%
30%
20% 10%
100
10% 5%
0% 0 0%
FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY1Q17 FY2Q17 FY3Q17 FY4Q17E FY1Q18E FY2Q18E FY3Q18E FY4Q18E
Mobile revenue PC revenue Mobile MAU YoY (RHS) Change QoQ (RHS)
We expect mobile transactions to contribute c.70% of Alibabas retail

commerce revenue in FY17E, reaching over 90% in three to four years.
Although we see the fastest growth in mobile users (as measured by monthly
active users, or MAU) as likely already behind the company, we see steady
quarterly growth at c.3% QoQ translating to 20% YoY in the year ahead.
As a result, we forecast mobile average revenue per paying user (ARPPU)

growth of c.43% YoY in FY17E and c.27% YoY in FY18E.
Fig 20: Alibaba mobile ARPPU

250 90%
80%
200 70%
60%
150
50%
40%
100
30%
50 20%
10%
0 0%
FY1Q17 FY2Q17 FY3Q17 FY4Q17E FY1Q18E FY2Q18E FY3Q18E FY4Q18E
Mobile ARPU Mobile ARPU YoY (RHS) Mobile ARPU QoQ (RHS)

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Commerce revenue trends: retail GMV growth

Chinese retail consumption is undergoing a shift towards more high-end
products as disposable incomes increase and amid the rise of a sizable domestic
and aspirational middle class.
Fig 21: Percentage of people that pursue consumption upgrading Fig 22: Percentage of user that only consume favourite branding products
Sodas 7 90%
Bottled water 15
Frozen foods 80%
17
Beverages 18 70%
Cookies 19 60%
Ice cream 22
Beer 22 50%
Fresh produce 24 40%
Rice 25
30%
Hair care 26
Milk 29 20%
Liquor 36 10%
Cosmetics 45
0%
(20) 0 20 40 60 F&B Personal care Apparel Home appliances &
consumer electronics
Reducing spending Upgrading consumption
2011 2015
Source: McKinsey, SWS Research Source: McKinsey, SWS Research
As a result, demand for more internationally branded products is growing;

simultaneously, buying is shifting from online C2C to online B2C. Tmall only
contributed 39% in Alibabas China retail revenue in FY16, yet we expect it to
grow over the coming years to account for more than half of the firms China
revenue within the next two years.
Fig 23: Import retail transactions

60 (Rmbbn) 120%
50 100%
40 80%
30 60%
20 40%
10 20%
0 0%
2012 2013 2014 2015 2016E 2017E 2018E
Import retail YoY (RHS)
Source: McKinsey, SWS Research
Taobao dominates domestic C2C sales, with a 93% share of the market in 2015,
according to iResearch data. Although we expect the platform to contribute a
smaller share of Alibabas overall revenue in coming years as Tmall growth
outpaces Taobaos growth, we expect Taobao to remain dominant, with a
c.93% market share.

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Fig 24: Taobao GMV
3.0 (Rmbtn) 100%

90%
2.5
80%
70%
2.0
60%
1.5 50%
40%
1.0
30%
20%
0.5
10%
0.0 0%
2011 2012 2013 2014 2015 2016E 2017E 2018E
Taobao GMV YoY (RHS) Market share
Fig 25: China online retail market breakdown, B2C vs C2C Fig 26: Alibaba revenue breakdown, B2C vs C2C
8.0 (Rmbtn) 140% 100%
7.0 90%
120%
80%
6.0
100% 70%
5.0 60%
80%
4.0 50%
60%
3.0 40%
40% 30%
2.0
20%
1.0 20%
10%
0.0 0% 0%
2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E FY14 FY15 FY16 FY17E FY18E FY19E FY20E
B2C GMV C2C GMV B2C YoY (RHS) C2C YoY (RHS) Taobao GMV Tmall GMV
Fig 27: Core commerce revenue segments by GMV
300,000 (Rmbm)
250,000
200,000
150,000
100,000
50,000
0
FY14 FY15 FY16 FY17E FY18E FY19E FY20E
China commerce retail China commerce wholesale
International commerce retail International commerce wholesale
Others
We expect Tmall GMV will continue to dominate the B2C market in China in the
coming years, although we anticipate a mild decline in market share as
competition from JD in the B2C market continues to rise. In the long-run, Tmall
will continue to vastly outscale JD; we see the increase in market share from
platforms such as JD with specific focus as likely to nibble away at Tmalls
market share but with its existing momentum of traffic, we see the Alibaba
platform is likely to remain the largest, generalist player in the market.

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Fig 28: B2C market GMV, platform Fig 29: Tmall GMV
Suning 3.0 (Rmbtn) 100%
4%
90%
JD 2.5
VIPShop 80%
30%
(VIPS:US) 70%
3% 2.0
60%
Gome (493:HK) 1.5 50%
2% 40%
Yihaodian 1.0
30%
Other 1%
20%
5% 0.5
Tmall Amazon China 10%
54% 1% 0.0 0%
2013 2014 2015 2016E 2017E 2018E
Jumei (JMEI:US)
0% Tmall GMV YoY (RHS) Market share
Source: iResearch, SWS Research Source: Company data, SWS Research
Fig 30: Market share forecasts breakdown, by big four players.

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2013 2014 2015 2016E 2017E 2018E
Tmall+Suning in B2C market share JD+Yihaodian in B2C market share
Tmall+Suning+JD+YiHaodian in B2C market share
Tmall is currently focused on three main product categories - apparel,

appliances & consumer electronics and fast-moving consumer goods (FMCG).
Nationwide retail and wholesale data by the official statistics bureau breaks
down domestic wholesale and retail sales as driven primarily by sales of
automobiles and related components, accounting for 12% of all sales by
companies over a minimum size level; catering services account for 11%; food
& beverages sales account for 7%; oil and petroleum products, 6%; apparel at
4%; pharmaceuticals at 2%; and home appliances at 2%. Of these categories,
apparel and home appliances, as well as auto parts, record a 20%-plus online
penetration ratio, while F&B and auto sales (with the exception of auto parts)
have a c.2% online penetration ratio, indicating significant room for expansion
(note that pharmaceuticals and oil products industries, which require
distributors to be licensed, are less likely to record significant increases in
online penetration).
Alibaba has built a network of partners with which it cooperates to increase its
share of the home appliances market, teaming up with firms such as Suning
(002024:CH Hold), and has been acquiring businesses and developing new
models to increase its presence in the catering, FMCG and auto-related sales
categories. Alibaba recorded growth of c.45% YoY in sales of apparel and c.20%
YoY growth in sales of home appliances, according to Analysys.

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Fig 31: Under-penetrated large retail industry like catering, FMCG and auto
Source: SWS Research, based on data from various source incl.but not limited to NBS, 2016 Industry retail research reports
Fig 32: Online penetration of large retail segments

40%
35%
30%
25%
20%
15% average 13%
10%
5% need license
0%
Catering
Beauty Care
Food&Beverage
Auto parts
New car sale&Car
Babies
Oilproducts
Apparel
appliance&3C
Pharmaceuticals
repair&services
Home
Source: SWS Research, based on data from varies source incl.but not limited to NBS, Winshang,etc
Alibabas Tmall platform has accounted for a steady 70%-plus share of the
online B2C apparel market for several years based on Analysys data and
continues to shore up its market share through signing exclusive rights with
brand owners and upgrading tech-driven online stores decoration to provide
better user experience.

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Fig 33: B2C apparel GMV, by platform Fig 34: B2C apparel GMV
300 (Rmbbn) 80%
70%
250
60%
Tmall 200
50%
JD Quarterly, 150 40%

from inner: 4Q15 30%
to outer: 3Q16 100
VIPS
20%
50
Ohters 10%
0 0%
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16
Online B2C apparel sales GMV QoQ (RHS)

Source: Analysys, SWS Research Source: Analysys, SWS Research
Rival e-commerce platform operator JD.com (JD:US N-R) dominates the

market for online sales of home appliances and consumer electronics in China,
accounting for a little over half of the market and continuing to mark growth in
market share in recent quarters. Alibabas partnership with major offline
appliances and consumer electronics Suning provides Alibaba both a
readymade platform and reputation in the category; we estimate that Tmall
and Suning combined may account for 30-40% of the market in the coming 3-5
years.
We assume sales in the segment will expand at a 15-20% Cagr over the period.
Fig 35: B2C appliances & consumer electronics GMV, by platform Fig 36: B2C appliances & consumer electronics GMV
250 (Rmbbn) 80%
70%
200
60%
JD
150 50%
Tmall Quarterly, 40%

from inner: 4Q15 100 30%
Suning to outer: 3Q16
20%
50
Ohters 10%
0 0%
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16
B2C appliances & electronics GMV QoQ (RHS)

Source: Analysys, SWS Research Source: Analysys, SWS Research
Aside from its cooperation with Suning, Alibaba has partnerships with Haier
Electronics (1169:HK N-R), holding a 2% stake directly in the company, as well
as a 34% stake in Haier logistic and services brand RRS. The company also
invested Rmb656m for a 25% stake in Haier Multimedia, the electronics giants
colour TV unit.
Our research finds online sales by top China appliances brands topped 60% YoY
growth in 2016, with growth fuelled largely by the shift from offline to online
sales. RRS, a specialist in large parcel delivery under Haier, recorded c.80% YoY
growth in 2016. At present, online sales for large appliances companies are
dominated by JD, but, according to our channel check, merchants are willing to
cooperate more with Tmall in future, due to higher margins they can book
through sales on Tmall compared with JD.

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JD announced it was opening an offline business with a target of 10k exclusive

shops by 2017 and 1m franchised convenience stores in five years. By contrast,
as of July 2016, Suning had a network of c.80 shopping centres, 1,442 bricks-
and-mortar stores, 1,478 direct sales stations and 2,329 franchised delivery
stations. For both companies, the pace of growth in offline reach is slower than
growth in online sales, although rising online sales feeds back into boosting
offline development via enhanced consumer awareness.
We believe that, despite JDs aggressive strategy of building up offline

appliances and electronics sales, Tmall and Suning will be able to maintain a
30%-plus online share thanks to the more attractive conditions offered to
cooperating brands.
We assume sales in the segment will expand at a 20% Cagr over the period.
FMCG is the third of the three main retail categories on which Tmall focuses,
after apparel and appliances, albeit the one recording the lowest penetration
rate. The platforms FMCG business can be broken down into four parts: Tmall
Beauty (cosmetics), Tmall Mother & Baby, Tmall Fresh, selling fresh produce,
and Tmall Supermarket, which also features channels linking to these sub-
platforms. Through a combination of acquisition, cooperation and investment,
Alibaba has broadened its range of offered products in the FMCG category to a
large degree, from both offline sources (by investing in supermarkets) and its
online platform.
Fig 37: Tmall FMCG business lines

Item URL
Tmall Beauty (cosmetics) https://meizhuang.tmall.com/
Tmall Mother & Baby https://baby.tmall.com/
Tmall Fresh https://miao.tmall.com/
Tmall Supermarket https://chaoshi.tmall.com/
Alibaba integrated fruit retail platform Yiguo into Tmalls FMCG channel
following investment in the firm in 2016, augmenting services provided by the
in-house developed miao.Tmall.com fresh foods channel. Fresh food bought
within the Tmall Supermarket is managed and delivered by Yiguo, with Yiguo
subsidiary ExFresh, cooperating with Alibabas logistics service Cainiao to
provide cold chain logistics.
The domestic e-commerce market for fresh produce is relatively young, and
growing rapidly (Analysys posits a c.50% Cagr in the three years to 2019F).
Within the segment, the main players are Benlai.com, COFCO-invested
Womai.com and JD-invested Fruitday.com. However, we note that JD and Tmall
provide greater traffic flows to their respective fresh produce channels than the
standalone sites can muster.
As of November 2016, Yiguo boasted over 4,000 product listings, with an

average customer order of Rmb150-200. Yiguo has served more than 20m users
to date, in a footprint covering nearly 200 cities. Daily turnover amounted to
more than Rmb10m, resulting in a 2016 GMV of Rmb3.6bn with a gross margin
of 30%-plus, according to management, although the company is not yet
profitable. Yiguo completed a series-C round of financing by end-2016, and lists
Suning among its backers, in addition to Alibaba. We expect Suning to merge its
own produce section on its online marketplace with Yiguo service, which will

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further benefit from Sunings bricks-and-mortar stores and franchised delivery

stations.
Fig 38: Online sales of fresh produce in China, by platform
Other Miao.Tmall.com
20% (incl Yiguo channel)
Yiguo.com (excl 27%
sales through Tmall
channel)
3% Sfbest.com
6%
Benlai.com
6%
JD Daojia
25%
Fruitday.com
Womai.com
7%
6%
Source: Ebrun, SWS Research
Unlike other domestic online supermarkets, such as Wal-mart (WMT:US) and

JD-backed yhd.com (Yihaodian) or JD Supermarket and Alibabas major Tmall
platform, Tmall Supermarket is also a marketplace not a retailer, but features
pricing inclusive of delivery cost.
Due to a low base and high cooperative willingness from merchants, FMCG
sales in Tmall expanded at a triple-digit pace in 2016, according to Alibaba data,
compared to two-digit growth as recorded by JD. We believe Tmall
Supermarket achieved the management GMV target of Rmb20bn in 2016,
which would equate to approximately 1% of total Tmall GMV in 2016. We
believe high growth in the FMCG retail category and merchants interest in
developing offline distribution may bring more marketing service revenue, a
key driver in Alibabas core commerce development in recent years.
We see further opportunities in the catering business, as a significant

component (11%) of retail consumption, but a low penetration in terms of
online sales at c.4%.
In addition to its investment in the countrys largest C2C meal-ordering service

in China, Ele.me, Alibaba and Ant Financial Services invested Rmb6bn in setting
up restaurant reviews site Koubei in mid-2015 to compete with market leading
user reviews and recommendations platform Dianping, backed by Tencent.
Ele.me aims at 20% online penetration ratio in China from the current 4.3%,
and will then expand internationally. Ele.me and Koubei are all incorporated
into the Alipay platform, serving as another two branding sources valuable for
FMCG products. Ele.me and its subsidiary Hummingbird occupy the largest
share of the catering O2O and instant delivery market according to Analysys.
Payment volume on Koubei through Alipay expanded c.50% QoQ and 3x YoY
growth in 3QFY17, according to official data.

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Fig 39: Koubei transactions growth Fig 40: Koubei transactions breakdown 1H16
80 (Rmbbn) 60%
Entertainment
70 & personal
50% services
60 transactions
40% 14%
50 Daily
40 30% necessities
and
In-store
30 convenience
20% transactions
store retail
20 59%
transactions
10%
10 27%
0 0%
FY3Q16 FY4Q16 FY1Q17 FY2Q17 FY3Q17
Transactions on Koubei (via Alipay) QoQ (RHS)
Auto is the largest retail category by GMV but offline experience is vital in auto
sales, resulting in a low penetration ratio below 3% for new auto sales and auto
repairs & services. Alibaba built its car platform www.aliqiche.com and
promotes new car sales on Tmall by cooperating with car brands. Its business
model is creative in integration of online and offline, with customers able to
place a down payment on Tmall and taking cars for test drives from cooperating
dealerships before completing payment, with credit provided by Alipay, or
instalment payments also being trialled. Chairman Jack Ma underscored the
interest in auto sales on the platform, stating that Alibaba had successfully sold
100 Mercedes-Benz autos within 25 seconds in a recent promotion.
Commerce revenue trends: Offline retail

Within the retail businesses experiencing lower rates of online sales
penetration, Alibaba has struck cooperation agreements combining offline and
online resources. Alibabas investments in offline retailers have focused on
targets with extensive distribution networks, displaying weak operations such
as negative revenue growth or even negative earnings. Such investments afford
Alibaba the ability not only to expand its platforms audience reach and
branding but also lift the prospects for greater penetration by Alipay in offline
settings. Furthermore, tie-ups with offline retailers expand the range of
products offered on Alibabas platforms, and extend the companys logistics
and supply chain management strength.
Of the companys investments in offline department stores (Intime and Bailian)

and supermarkets (Lianhua, Sanjiang) to date, Alibaba will consolidate results
only from Intime, in which it holds 74%, in the near-term; the company expects
to forecast Intimes results by October 2017, the third quarter of FY17E. Intime,
which operates 47 high-end department stores, carries over 40m stock-keeping
units (SKUs).

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Fig 41: Alibabas offline integration layout
Intime management stated that it started to adjust label pricing in 2H16 to

bring its pricing in line with online channel pricing, lowering label prices in some
product categories by as much as 20-30%. By working with Alibaba, Intime
intends to streamline and thin the number of intermediaries in its supply chain,
raising operating efficiency and lowering premiums to be more in line with
online pricing.
In addition, the company will introduce QR codes on labels, allowing customers

in Intime stores to compare against Tmall listings. JD has begun a similar
approach in selected superstores operated by 20%-invested Yonghui.
The strategy cooperation with Bailian does not relates to any equity
investments. Bailian ranked 1st by CCFA (China Chain& Franchise Association) in
nationwide department stores in revenue.
Alibaba invested in Sanjiang (601116:CH N-R) and Lianhua Supermarket

Holdings (980:HK N-R); Lianhua holds over 20% in Yiguo, in which Alibaba also
holds a significant stake.
Furthermore, Alibaba launched Lingshoutong under its B2B business segment

as a platform to supply products at wholesale prices to convenience stores, to
help them overcome the supply chain management problems that typically
plague small shops. Lingshoutong aims at building 250 warehouses, covering
2,000 of Chinas 2,800 counties and serving 2m neighbourhood convenience
stores over the next three years. JD developed a similar product, Xintonglu,
which by end-2016 covered 50k stores and aims to cover 500k stores by end-

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2017. While Alibaba can offer the larger number of SKUs and greater B2B
experience, but the competition will also likely focus on fee rates and
cooperation terms.
We highlight Alibabas Hema Fresh Store trial. Hema provides high-end foodstuffs and fresh produce as well as bakery and seafood
among other counters, offering sub-30min delivery to shoppers homes within 5km of its seven locations, taking payment initially via
Alipay.
Hema stores combine shopping, a dining area, bakery, entertainment facilities and online delivery in one location
Source: Hema, SWS Research
The stores, at 5,000-10,000m2 are much larger than traditional fresh produce retail stores, averaging 50m2, and unlike most grocers in
China, incorporates in-house logistics service and an integrated online/offline order management system. In our discussions with
shoppers at Hema, we found largely positive reviews linked to the quality and range of products, the fact that consumers can eat while
they shop, and the convenience. The company recorded daily transaction volume of 10k by mid-2016, with online sales reported to
exceed 50% of sales in some of the stores by July 2016.
We are positive on the progress of the trial, as well as those of other membership supermarkets and those employing QR code-based
electronic tagging, such as JDs Yihaodian, as demonstrating the viability of offline and offline-online integrated retail models. However,
the companys slow expansion of new stores to date limits its potential for impact; we expect Alibaba may seek to cooperate with
traditional supermarket chain partners Sanjiang or Lianhua to introduce elements of the Hema model.
Overall, we see a much broader base of offline integration from Alibaba than JD,
which tends to focus on organic growth compared with Alibabas acquisition-
driven rapid-growth strategy. This may not always be the ideal, as
demonstrated by the experience of Heidian under SF-Express, with large
investment and quick expansion in number of service stations.

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Fig 42: Comparison of offline and online integration in JD and Tmall

Tmall JD
Offline Appliance +3C service station Worked with Suning, which by 1H16 already operates c.80 shopping Aim at 10k in 2017 from zero
centers, 1442 stores, 1478 service station for direct sales and 2329 alliance
service station.
C
Offline stores Investments in Sanjiang; Lianhua; Consolidates Yintai; Cooperates Bailian Walmart; and investments in Yonghui Supermarket
Online (2016)
o No1. market share c.50% market share c.25%
Online supermarkets (2015) r Tmall Supermarket turnover c.10bn No1.JD supermarket turnover c.50bn +yhd.com 20bn
Fresh food (2016) e No1. Miao.Tmall+Yiguo c.30% market share JD Daojia c.25% market share
Catering O2O (2016) No1. Ele.me, 40% None yet. may incubate in JD Daojia
Instant Delivery (2016) No.1 Hummingbird (Ele.me subsidiary) c.26% New dada (23%)
c
Cold Chain Delivery ExFresh New dada
Other delivery
o Cooperates New dada
Source: SWS Research m
m
Commerce revenue trends: International
International retail contributed 5% of Alibabas core commerce revenue in the
most recently full reported quarter, FY3Q17, according to company data,
generated primarily through the AliExpress platform, and the southeast Asian
site Lazada in which Alibaba invested. We expect the company to increase its
investment in the SE Asia e-commerce market.
While AliExpress is the platform connecting global retail buyers to Chinese

vendors, and Alibaba.com connects global buyers with Chinese wholesalers, we
also note that the company has launched channels in its Taobao and Tmall
platforms connecting global vendors with Chinese buyers.
In general in China, online transactions in which one or the other party is

located overseas is accounting for an increasing proportion of the countrys
trade At present, B2B still accounts for the bulk of cross-border commerce at c.
85% in 2015, but we expect this to increase to more than 30% by 2020, or 15%
of Chinas total retail consumption. According to iResearch, import retail
experienced the highest growth in cross-border commerce with 112% in 2015
and c. 55% in 17E.
Fig 43: Import retail grows at a high rate

60 (Rmbbn) 120%
50 100%
40 80%
30 60%
20 40%
10 20%
0 0%
2012 2013 2014 2015 2016E 2017E 2018E
Import retail YoY (RHS)
We see the rapid growth in retail international trade as driven by the same
consumer upgrade demand that is driving more rapid growth in Tmall (B2C)
GMV than Taobao (C2C) GMV.
According to CBNData, Tmall Global is the countrys second largest B2C

platform connecting domestic buyers with international vendors, with an 18.5%

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market share, behind only NetEases (NTES:US N-R) Kaola platform, with a
21.6% share. We note particularly high growth in Tmall Global GMV, with 2016
revenue up c.25x from two years previously 2014.
The number of international merchants on the firms platform broadened 3x

within one year in 2016. Based on iResearch forecasts of growth in the overall
import retail market in China of 55% YoY in the coming two years, we expect
c.80-120% YoY growth for Tmall Global.
Fig 44: Tmall Global scope

Founded in 2014 2014 2015 2016
Tmall Global c.1,000% c.179% 25x 2014
Countries covered 53 63
Brands covered 5400 14500
Categories covered c.2500 3700
Source: CBNData,SWS Research
Based on available data, we estimated Tmall Global will generate GMV of

Rmb72bn in 2016, equaling to approx. 4% of total Tmall GMV in 2016.
Fig 45: Tmall global imports by type Fig 46: Top5 2016 Tmall Global brands source
Darly
necessities Others Australia
5% 7% Beauty care
35%
Decorates German
8%
Korea
Apparel
20% U.S.
Japan
Food
25%
0% 5% 10% 15% 20% 25%
Source: Tmall ,SWS Research Source: Tmall ,SWS Research
While none of the e-commerce giants officially and regularly disclose numbers
of bonded warehouses and ports, we note that, from an interview given by a
Cainiao vice president to wshang.com in 2016, Tmall Global had nine bonded
warehouse facilities and five bonded ports by March 2016. This put it
approximately on a par with JDs logistics facilities, although behind Kaolas.
Fig 47: Bonded warehouse and ports for leading import retail brands
Platform Import Bonded Warehouse/Ports Bonded Warehouse current space
JD Global Guangzhou; Hangzhou; Ningbo; Shanghai;
<100k m2
Zhengzhou
Tmall Global Guangzhou; Hangzhou; Shanghai; Ningbo;
<160k m2
Chongqing
Kaola (NetEase) Hangzhou; Ningbo; Zhengzhou; Chongqing >200k m2
Source: wshang.com, CBNData, SWS Research
Lazada, acquired in 2016, operates in Indonesia, Malaysia, the Philippines,

Singapore, Thailand and Vietnam, six countries with a combined population of
c.560m and c.200m internet users, representing a relatively low online
penetration ratio compared with Chinas 53%; the countries together record
just 3% of retail sales conducted online, pointing to significant upside. Lazada
currently recorded 167%-plus YoY GMV growth in 2015, although it has yet to

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break even. Following consolidation of Lazadas results in 2016, Alibaba has

recognised a share of a loss from Lazada.
Fig 48: Lazada financials prior to consolidation in Alibaba

(US$m) 2014 2015
GMV 383.8 1,024.7
YoY 305% 167%
Revenue 154.3 275
YoY 104% 78%
Mobile penetration 60%
Gross margin 15% 24%
Adjusted Ebitda margin -180%
Cash 75.4 198
Monetisation rate 40% 27%
Source: Rocket Internet Annual Report, SWS Research
Lazada recorded GMV of US$1.0bn in 2015, compared with AliExpress 26% YoY
expansion in GMV to US$5.4bn the same year. After Alibabas acquisition of
Lazada, AliExpress and Lazada together contribute approximately half of the
international commerce segments revenue, or c.4.9% of overall commerce
revenue.
Fig 49: AliExpress financials, before Lazada consolidation

2014 2015
AliExpress GMV settled through Alipay (US$bn) 4.3 5.4
YoY 25.6%
Revenue (Rmbm) 1,768 2,204
YoY 24.7%
Monetisation rate 41% 41%
Although we note rapid growth and potential for Lazada, we note the
emergence of shoppee.com as the largest e-commerce player in the region by
GMV (US$1.8bn) in 2016, according to data from ebrun, thanks to its zero
commission base for merchants.
We also note the room for further investment in regional markets; in particular,
in India, where Alibaba has already invested in the markets second-largest
player, Snapdeal, as well as its largest payment platform, Paytm. However,
Amazons entry to the market came at the expense of Snapdeals market share.
Fig 50: Uncomplete list of Alibabas international investments

Date Nation Industry Comp Investment (US$m)
10-Jun U.S. E-commerce VendioServicesInc n.a.
10-Jun U.S. E-commerce Auctiva n.a.
13-Jun U.S. E-commerce Fanatics 170
13-Oct U.S. Search Engine Quixey*(failed&closed) 50
13-Oct U.S. Logistic ShopRunner 206
14-Jan U.S. Highend luxury web 1stdibs 15
14-Apr U.S. Mobile social Tango 217
14-Apr U.S. Uber competitior Lyft 250
14-Aug U.S. Game developer Kabam 120
Intelligent remote control
Jan-13;Oct-14 U.S. Peel 55
applications
14-May Singapore postal service Singapore Post 249
14-Jun Itali E-commerce Itali enterprises in Tmall n.a.
15-Mar U.S. Mobile social Snapchat 200
15-Apr U.S. E-commerce Jet.com
15-May U.S. E-commerce Zulily 56
15-Jun India Smartphone Micromax 700
15-Oct India E-commerce Snapdeal 125

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16-Jan Global Logistic-shipment WCA Cooperation

16-Feb U.S. AR Magic Leap 793
16-Apr Southeast Asia E-commerce Lazada c.1000
2015-2017/3 India Payment Paytm 177+575
Since 2004 c.209 overseas projects c.28100
For Alibabas international retail segment, we estimate a conservative 34%

revenue Cagr over the coming three years.
Core commerce segment forecasts
We forecast China retail commerce by analysing active users and average

revenue per buyer (Arpu). As mobile Arpu is the main driver of growth in overall
commerce Arpu, we also factor in assumptions as to the distribution between
mobile and PC.
We expect the firms take rate to be 2.9%, 3.1% and 3.2% in FY17E-19E while
we see user engagement (time spent on Alibaba apps or website) rising c.30%
YoY in the first two months of 2017, as a result of China retail growth outpacing
our forecasts of online marketplace GMV.
Fig 51: Alibaba commerce sales vs GMV
7,000 (Rmbbn) 60%
6,000 50%
5,000
40%
4,000
30%
3,000
20%
2,000
1,000 10%
0 0%
China commerce retail GMV China retail YoY (RHS) GMV YoY (RHS)
Fig 52: Alibaba Arpu Fig 53: Alibaba China retail monetisation (take rate), by user device
350 (Rmb) 90% 4.0% 4.0%
80% 3.5% FY19E 3.5%
300 FY18E
70% 3.0% FY17E 3.0%
250 FY15
60%
2.5% FY17E 2.5%
200 FY16 FY18E
50% FY19E
2.0% 2.0%
150 40% FY15
1.5% 1.5%
30%
100
20% 1.0% 1.0%
50 0.5% 0.5%
10%
0 0% 0.0% 0.0%
FY1Q17 FY2Q17 FY3Q17 FY4Q17E FY1Q18E FY2Q18E FY3Q18E FY4Q18E FY15 FY16 FY17E FY18E FY19E
Mobile ARPU Total ARPU Blended monetisation rate Mobile monetisation (RHS)
Mobile ARPU YoY (RHS) Total ARPU YoY (RHS) PC monetisation (RHS)

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Cloud computing
Although Alibaba Cloud currently contributes only 4% of Alibaba revenue, we
see the service, which has a c.50% market share in China according to our
channel checks, as a key tech infrastructure services underpinning not just the
various value-added services on Alibaba but also all Alibaba and Ant Financial
Services partners.
Fig 54: Alicloud will expand its international AZ and covered more regions possible.
AWS:
Availability Zones: 42
Regions: 16 (2 in China)
Azure:
Availability Zones: NA
Regions: 38 (Normal datacentre)
Google Cloud:
Availability Zones: 18 (21 in 2017)
Regions: 6 (8 in 2017)
Alibaba Cloud:
Availability Zones: 14
Regions: 11
Source: Companies, SWS Research

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Alibaba Cloud offers a range of services, from database services to security and
storage & networking. The company also offers end-to-end solutions for a
variety of businesses, including e-commerce businesses as well as gaming and
multimedia services and offers web hosting.
Fig 55: Aliclouds products and basic pricing (partial)

Database Mongo DB
Data transmission Rmb1.04/h
Oceanbase database
RDS Rmb70/m
Table store coming soon
ApsaraDB for Redis
Memcache
ApsaraDB for PetaData
ApsaraDB for Greenplum
Data management in test
Mobile services HTTPDNS Rmb16.8 for 3m
Mobile analytics in test
Alibaba Cloud Mobile Push Rmb498 for 3m
Mobile accelerator in test
Mobile security
Cloud communication Direct mail Rmb90 for 6m
Message services Rmb170 for 6m
Alibaba Cloud Mobile Push Rmb498 for 3m
Short message services
Voice messaging services
Cellular Data Package
Private line service
Elastic computing LBS Rmb0.72/GB
VPC
Block storage
ECS Rmb60/m
Auto scaling
Resource Orchestration
Container services
Alibaba Cloud HPC
Batchcompute
Video Live streaming
Video on demand Rmb2,216
Media transcoding Rmb2,216
OSS&CDN CDN Rmb135
OSS Rmb9.0
NAS
Archive storage
Analytics E-MapReduce
AnalyticsDB Rmb4800
Opensearch
Maxcompute Rmb1500/m or /GB
Network Express Connect
NAT Gateway
Management & Cloud Monitor
Monitoring
Resource Access Management
Action Trail
Key Management Service
Application Log service
Performance testing
API Gateway
IoT package in test
Middleware Enterprise distributed application service
Message Queue
Distributed Relational Database service

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Cloud service bus in test

Application real-time monitoring services in test
The services main source of revenue, as with the public cloud market in
general is storage & server rental, markets that IDC forecasts will expand at a
30% Cagr in the next four years. However, Alibaba Clouds services also include
platform as a service (PaaS) products, one of the most prominent of which is
Ant Financial Cloud.
Fig 56: Storage and server revenue growth

2015 2020 Cagr
IaaS-basic storage revenue (US$bn) 5 21 31%
IaaS-server revenue (US$bn) 7 26 29%
Source: IDC, SWS Research
As of end-2016, the firm counted 765,000 (vs its target of 1m), and we expect
the firm to record a positive adjusted Ebitda in FY18E.
Compared to international public cloud giants, Alibaba Cloud competes by

offering lower pricing and stable performance. Domestically, however, Alibaba
Cloud competes on the basis of performance and its diverse product range
rather than simply price; we note some market concerns that the company has
been discounting aggressively in order to secure market share, although we
believe this is primarily restricted to new or larger customers in a policy similar
to most other major players in the market such as Amazons (AMZN:US) AWS.
Fig 57: Server pricing comparison (4 CPU, 7.5-8GB, Linux, Beijing, annual) Fig 58: Server pricing comparison (4 CPU, 7.5-8GB, Linux, Eastern US, monthly)
8,000 (Rmb) 180 (US$)
7,000 160
140
6,000
120
5,000
100
4,000
80
3,000
60
2,000
40
1,000 20
0 0
AWS China Alibaba Cloud Tencent Cloud Ucloud AWS Azure Google Cloud Alibaba Cloud Intl
Based on IDC data on international cloud and historical China cloud market data,
we estimate domestic Infrastructure as a Service (IaaS) and PaaS markets
combined to grow at a c.60% Cagr in the four years to 2020E, since domestic
usage of public cloud services remains relatively low compared with more
developed markets.

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Fig 59: Alibaba Cloud revenue growth vs China public cloud market
16 (US$bn) 250%
14
200%
12
10 150%
8
6 100%
4
50%
2
0 0%
2015 2016E 2017E 2018E 2019E 2020E
Alibaba Cloud revenue China IaaS & PaaS market size
Alibaba Cloud revenue YoY (RHS) China IaaS marketYoY (RHS)
We note that in the domestic market, Alibaba Cloud scores well against all
competitors in stability reviews, length of experience, and geographical
availability. According to our channel check, government IT systems managers
are beginning to accept the idea of using public cloud services and are exploring
cooperation with Alibaba Cloud. We see an enhanced standing for the service
in China compared with competitors. We forecast a steady expansion in the
number of paying customers in coming years alongside a rising average spend
per customer as the company enlarges the range of PaaS and SaaS products on
its platform.
Fig 60: Alibaba Cloud paying customers Fig 61: Alibaba Cloud average revenue per paying customer (ARPPU)
1,600 ('000) 140% 3,000 (Rmb) 18%
1,400 16%
120% 2,500
1,200 14%
100%
2,000 12%
1,000
80% 10%
800 1,500
60% 8%
600
1,000 6%
40%
400
4%
20% 500
200 2%
0 0% 0 0%
FY1Q17 FY2Q17 FY3Q17 FY4Q17E FY1Q18E FY2Q18E FY3Q18E FY4Q18E FY1Q17 FY2Q17 FY3Q17 FY4Q17E FY1Q18E FY2Q18E FY3Q18E FY4Q18E
Paying customers YoY (RHS) QoQ (RHS) ARPPU YoY (RHS) QoQ (RHS)
In the international arena, Alibaba Cloud has rapidly expanded its geographical
footprint in recent years, offering public cloud services in the US, Singapore,
Japan, Europe, Middle East and Australia.
Although critics point to a technology gap between global market leader AWS
and Alibaba Cloud, as a latecomer to the industry, we highlight the stability of
the services infrastructure given the exceptionally high loads processed each
year on 11 November, the companys annual discount shopping event. To
compete internationally, where AWS, along with Microsofts (MSFT:US) Azure
and Alphabets (GOOG:US) Google Cloud account for 60% of the market,
Alibaba Cloud priced its server and storage services relatively cheaply.

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Taking IDCs forecasts of a 30% Cagr in the international IaaS & PaaS market in
the four years to 2020, we expect the domestic market to feature as
increasingly prominent within the global market, rising from 3% YoY in 2015 to
18% YoY in 2020E, resulting in domestic market revenue expanding at a four-
year Cagr of c.60%.
Fig 62: Global IaaS & PaaS market vs overall public IT cloud spending Fig 63: China share of the global IaaS & PaaS market
250 (US$bn) 50% 100%
45% 90%
200 40% 80%
35% 70%
150 30%
60%
25%
50%
100 20%
40%
15%
30%
50 10%
5% 20%
0 0% 10%
2015 2016 2017 2018 2019 2020 0%
IaaS & PaaS revenue Public IT cloud spending 2015 2016 2017E 2018E 2019E 2020E
IaaS & PaaS revenue YoY (RHS) Public IT cloud spending YoY (RHS) China Global
Source: IDC, SWS Research Source: IDC, SWS Research
At present, the firm accounts for just 2% of the global market in terms of
revenue, due largely to its presence in the China market. With our expectation
of rapid growth in the domestic market as part of the overall global market, and
the firm growing its reputation and competitive pricing, we expect Alibaba
Cloud to increase its share of the global market to 9% by 2020, representing a
four-year revenue Cagr of c.70%.
Fig 64: Global IaaS & PaaS market revenue vs public IT cloud spending
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2015 2016 2017E 2018E 2019E 2020E
AWS, Azure & Google Cloud Alibaba Cloud Others
Source: IDC, SWS Research
We see growth in average revenue per paying customer (Arpu) increasing with
the companys release of new functions and products, expanding at an 11%
Cagr from Rmb8,134 in FY16A to Rmb12,466 in FY20E. As a result of this steady
growth in Arpu on top of rapid growth in new paying customers (a four year
Cagr of 69%), we expect Alibaba Cloud to generate revenue of Rmb6.59bn in
FY17E (+118% YoY), Rmb12.93bn in FY18E (+96% YoY), Rmb23.32bn in FY19E
(+80% YoY) and Rmb37.77bn in FY20E (+62.0% YoY).

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Fig 65: Alibaba Cloud revenue, vs growth in key forecasting components.

40,000 (Rmbm) 1.6
35,000 1.4
30,000 1.2
25,000 1.0
20,000 0.8
15,000 0.6
10,000 0.4
5,000 0.2
0 0.0
Cloud computing Cloud computing rev YoY (RHS)
FY-end paying customers ('000) YoY (RHS) FY-end ARPU YoY (RHS)
Digital media & entertainment

The search category accounted for approximately a third of the overall Chinese
online advertising market in 2016. Alibaba moved to create its own search
advertising platform, and specifically a mobile search functionality, through its
acquisition of mobile browser provider UCWeb in 2014. In addition to its
browser, which was the largest mobile browser in China by pageviews in 2014
according to StatCounter data, the company developed Alibabas mobile search
service, Shenma search. By 3Q16, Shenma Search accounted for an 18% mobile
search market share, according to BigData-Research. The company generates
c.75% of its revenue from advertising.
Alibabas Shenma Search product links advertising resources across Alibaba

products, as the company allows users to bid for keywords across its ecosystem,
from Shenma to Taobao to Tmall.
Fig 66: China mobile search market Fig 67: Mobile search market user numbers
640 (m) 6%
Shenma 620 5%
18%
600
4%
580
Sougou 3%
7% 560
Others
2%
1% 540
520 1%
Baidu 500 0%
74% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16
Mobile search users QoQ (RHS)
Source: BigData-Research, SWS Research Source: iResearch, SWS Research
We also highlight the companys investment in taking the formerly Nasdaq-

listed online video platforms operator Youku-Tudou private in 2015.
Youku-Tudou is the third-largest video provider in China by monthly active

users (MAU) as of January 2017, behind Baidus iQiyi and Tencents Tencent

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Video channel, although we highlight that Youku-Tudou recorded the highest

rate of growth of the three peers recently.
Fig 68: Domestic online video platform comparison, January 2017 data
MAU MAU YoY Monthly user engagement YoY
iQiyi 473 26% 18%
Tencent Video 425 36% 14%
Youku-Tudou 316 38% 40%
Youku-Tudou also derives the majority of its income from advertising; as a

wholly-owned entity under Alibaba, the companys results are consolidated
directly into Alibabas financial statements under digital media and
entertainment segment. Video production is capital-intensive; with Alibabas
financial backing, we see Youku-Tudou contributing not only ad revenue but its
data and technology to incorporate video services in the Tmall and Taobao
platforms.
Fig 69: Online video market Fig 70: Online video market revenue breakdown
16 (Rmbbn) 90% 100%
14 80% 90%
70% 80%
12
70%
60%
10 60%
50%
8 50%
40%
6 40%
30%
30%
4 20% 20%
2 10% 10%
0 0% 0%
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
Online video market size YoY (RHS) Advertising Copyright distribution Subscription fees Other
Source: iResearch, SWS Research Source: iResearch, SWS Research
We note rising subscription fees as an increasingly important component of

online video revenue, according to iResearch, a trend corroborated by our on-
the-ground talks with online video companies, as viewers are increasingly
willing to pay for high-quality content. With the rise in contribution from VIP
subscribers and video ads, we expect Youku-Tudou revenue growth to remain
strong at a four-year Cagr of 34% to 2020E, although we also note that the
company is still not profitable, guiding a narrowly negative margin for the
coming year.

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Fig 71: Youku-Tudou revenue
25,000 (Rmbm) 70%
60%
20,000
50%
15,000 40%
10,000 30%
20%
5,000
10%
0 0%
2013 2014 2015E 2016E 2017E 2018E 2019E
Youku-Tudou revenue YoY (RHS)
While our model suggests a slowdown in growth in digital media segment

revenue from 141% YoY in FY17E to 30% YoY in FY19E, we highlight that the
strong growth in FY17E is due to the rapid ramp-up in contribution from Youku-
Tudou following the firms consolidation into Alibaba results; on a quarterly
basis we see revenue contribution expanding at a steady 6-7% QoQ.
Taobao and Tmall have set up business units developing live streaming, video
and augmented reality (AR) applications, based on Youkus platform, to allow
customers to embed video-based marketing campaigns in their storefronts. We
note that increasing numbers of merchants are decorating their storefronts
with embedded video that provides better and vivid introduction to users. Both
Tmall and Taobao has set up a direct live streaming section with its app. By
liking broadcasts, customers can become fans of stores and broadening the
stores audience reach.
We highlight the successful example of a video marketing campaign by Taobao, 1001 nights, launched August 2016. According to our
channel check, the advertising-laden video shorts, released nightly, attracted a substantial volume of views. Stores that advertised
through this channel reported a significant increase in fans and soaring sales in the first week.
Taobao 1001 Pages second floor page
Source: Taobao, SWS Research
The videos were created in-house with support from Youku-Tudou production teams, and hosted on Taobaos second floor, a channel
that is only open at selected times on weekday nights hosting media & entertainment content. The company followed 1001 nights
with the launch of a new series, Playground at night. in early 2017.

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More recently, Youkus production unit was merged into Alibaba Pictures
(1060:HK N-R). We believe the offline integration will also help in providing
more possible channels and creative grounds for Alibabas video streaming and
AR in different forms.
In the first three quarters of FY17, Alibaba recorded continued rapid growth in
revenue from the digtal media segment; we forecast revenue of Rmb15bn in
FY17E (+280% YoY), Rmb20bn in FY18E (+35% YoY).
Ant Financial Services

Ant Financial Services is the holding company for Alibabas financial services,
primarily Alipay; as of end-2016, the service counted 450m users around the
world. Ant Financial Services expanded its role from Alipay to include analysis
of user data and product sales data, financial planning and credit-related
products, underpinning supporting financial services for both personal users
and merchants.
Alipay was at the centre of controversy in 2011 when Alibaba Group, invested
by foreign firms Yahoo (YHOO:US) and Softbank (9984:JP), transferred Alipay to
a company largely controlled by Alibaba chairman Jack Ma, ostensibly in order
to get around Chinese government rules on foreign ownership of third-party
online payment services. To date, the two firms continue to be held separately,
with Ant Financial Services committed to provide payment services on Alibaba
platforms, and contribute a 37.5% share of its pre-tax profit to Alibaba until it
IPOs, at which point Alibaba may take a 33% equity interest in Ant Financial
Services. The terms of the deal notwithstanding, the regulatory conditions
allowing Alibaba to secure ownership of a significant equity interest in Ant
Financial Services continue to remain unclear, although we note that the China
Securities Regulatory Commission (CSRC) has, in public statements, included
Ant Financial Services in lists of potential fast-track IPO approvals for the A-
share market. We see a dual-listing of Ant Financial Services stock in both a
mainland market and in Hong Kong as also feasible, given the firms need for
international branding and expansion and statements by Hong Kong Exchanges
& Clearing that it may loosen class structure rules for selected companies. In
our models, we assume such an IPO may take place in 2018.
Ant Financial Services offers online payments, financial planning services,

banking, insurance & securities services, as well as consumer credit, asset
management, crowd funding and cloud-based financial IT services. In FY17, we
expect Ant Financial Services to contribute Rmb3.2bn in profit to Alibaba.
Fig 72: Ant Financial Services business scope overview

Business Line Brands owned
Payment Alipay
Loan MicroCredit Ant checklater
Financial Planning Yu'e Bao Zhaocai Bao Ant Fortune
Bank Mybank
Insurance Zhongan Insurance Cathay Insurance
Securities Tebao Securities
Credit Sesame credit
Asset management Tianhong Asset Management Fund123.cn Tebon Fund
Crowdfunding Antsdaq Taobao izhongchou 36Kr
PaaS Cloud Ant Financial Cloud

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Fig 73: Equity interest and structure of Ant Financial

Consolidated Equity
Alipay 100%
Ant Fortune 100%
Sesema Credit 100%
Ant Financial Cloud 100%
Other investments
Mybank 30%
Tianhong Asset Management 51%
Cathay Insurance 51%
Tebon securities c.75%
Koubei 40-50%
Suntime 20%
Elema 28%
Hundsun (600570:CH) 21%
Zhongan Insurance 20%
36Kr c.25%
Alipay is Ant Financial Services main source of revenue. The payment tool
charges an official transaction fee of 0.6%, in line with its major competitors in
China, but it varies by transaction party and different scenarios; in addition the
company offers privilege terms for strategic partners. The effective average
transaction fee charged by Alipay is significantly lower than 0.6%, vs 2.9% for
US-based transactions via PayPal.
Fig 74: Alipay transaction fees, vs domestic and US peers

Major player Transaction fee for business transaction Withdraw, personal
Alipay 0.60% 0.1% (over Rmb1k,each time at least Rmb0.1)
WeChat Pay 0.60% 0.1% (over Rmb20k,each time at least Rmb0.1)
99Bill 0.1% (minimum Rmb5/transaction, maximum
0.3-0.8%
Rmb50/transaction)
PayPal 2.9%
According to iResearch, Alipay accounted for 43% of online payments in China

in 2016, and 51% of mobile payments in China. We are skeptical on the third-
party data source as Alipay reported Rmb4.8tn in TTM payment volume in
Alibabas Sep 2014 F-1 filing, which would suggest just a c.24% share of total
third-party transactions in the corresponding period.
We estimate Alipay processes a payment volume of Rmb25tn in 2016E, rising to

Rmb38tn in 2017E, based on our projected payment volume per user and
steady growth in the number of registered users. By applying a 37% payment
volume Cagr over the three years to 2019E, as well as a 0.3% average
transaction fee and a 10% pre-tax margin (based on a discount to PayPals 16%
pre-tax margin), and a 30x 17E after-tax profit multiple, we derive a valuation
of c.US$40bn for Alipay, vs PayPals market cap of c.US$520bn.

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Fig 75: Growth in Alipay active user Fig 76: Alipay average transaction per user
900 (m) 90,000 (Rmb) 60%
800 80,000
50%
700 70,000
600 60,000 40%
500 50,000
30%
400 40,000
300 30,000 20%
200 20,000
10%
100 10,000
0 0 0%
Oct 2014 May 2015 Dec 2016 2017E 2018E 2019E 2014 2015E 2016E 2017E 2018E 2019E
Average transaction volume per user YoY (RHS)
Tencent claimed internally that, as of early 2017, its own online payment tool,
WeChat, has already exceeded Alipay in terms of offline payment volumes
processed. Although no official data has been released, we believe this to be
possible, given the high frequency use experienced by Wechat and the
popularity of WeChat campaigns, such as virtual red envelopes at Chinese New
Year, mimicking money-giving traditions seen at that time of year. However, we
remain confident that Alipay will continue to dominate the mobile and third
party payment market in China given both its stronger professional tool focus
(featuring credit assessment and guarantees) and stronger analytics. By
contrast, WeChat Pay is primarily used as a means of transferring small-volume
funds between existing acquaintances on the social networking and instant
messaging service.
Merchants accessing Alipays analytics get a view of the structure of their sales,
frequency, user preferences and behaviour. For personal users, the analytics
offered are also attractive; providing monthly statements and spending habits
analysis, enhancing user engagement.
Furthermore, even though wide application of QR code-based payments

benefits both Alipay and Wechat Pay in offline senarios, we see Alipays
strength as a professional payment tool vs the convenience of WeChat Pay is
likely to stand out, thanks to its credit guarantee feature between unfamiliar
parties, which enables vast transactions for expensive items and services.
We also highlight Ant Financial Services foray into money management, with
its launch of Yue Bao, a money market fund linked to Alipay allowing
instantaneous settlement of funds. Users get a daily return based on dynamic
annual return; the fund currently offers c.3.9%, vs 0.35% for demand deposits
at a commercial bank. Yue Bao is managed by Tianhong Asset Management, in
which Ant Financial Services holds a 51% equity interest. Yue Bao assets under
management (AUM) reached Rmb808bn by end-2016, up 30% YoY. While
Tianhong has attempted to introduce other funds, Yue Bao continues to
account for 95%-plus of Tianhongs AUM. Tianhong generates an average
c.0.5% as revenue from managing Yue Bao, taking account of all fees charged.
Yue Baos rapid growth is due to the combination of convenience of payment
and withdrawal compared with other funds, while offering a competitive fund
product; given the lack of rivals to offer both aspects to date, we see continued
room for growth in Yue Bao AUM. Based on our assumptions of Tianhong
overall AUM of Rmb845bn in 16E (+25% YoY), Rmb905bn in 17E (+7% YoY),

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Rmb995bn in 18E (+10% YoY) and Rmb1.1bn in 19E (+7% YoY), and assuming a
25% net profit margin, we forecast Tianhong will contribute (based on Ant
Financials 51% holding) Rmb807m in 16E (+41% YoY), Rmb951m in 17E (+18%
YoY), Rmb1.2bn in 18E (+25% YoY) and Rmb1.3bn in 19E (+7% YoY).
Fig 77: Yue Bao AUM, Tianhong fees Fig 78: Tianhong contribution to Ant Financial Services
1,200 (Rmbbn) 0.7% 1,600 (Rmbm) 30%
0.6% 1,400
1,000 25%
1,200
0.5%
800 20%
1,000
0.4%
600 800 15%
0.3%
600
400 10%
0.2%
400
200 0.1% 5%
200
0 0.0% 0 0%
2013 2014 2015 2016 2017E 2018E 2019E 2013 2014 2015 2016E 2017E 2018E
Yu'e Bao AUM TianhongAsset Management profit
Profit due Ant Financial Services' 51% equity interest
Average fee rate charged by Tianhong (RHS)
TianhongAsset Management profit margin (RHS)
Ant Financial Services also offers personal finance, based on an in-house credit
system, the best known of which, Sesame Credit, combines credit rating with
voluntary participation and social networking elements. Sesame scores users on
five key characteristics; identity, behaviour, social connections, credit history
and contractual capacity. The score is updated every month, and thanks to its
support from large datasets, has quickly secured support from major
commercial banks, credit ratings businesses and even government bodies.
Fig 79: Sesame Credit system
Identity characteristics
Behavior Contractual capability
Connection Credit history
My Credit Rating
Bad Fair Good Great Excellent
Source: Alipay,SWS Research

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Users scoring high Sesame Scores can access Ant Check Later virtual credit card
services with 100m users by end-2016, and the Borrowing Ants personal loan
platform with a minimum one day borrowing period and daily interest rate
floor of c.0.035%; limits vary with a users Sesame Score and usage history. By
contrast, WeChat Pays minimum borrowing rate is 0.05%. By 2016, and
Borrowing Ants recorded 1.2m-plus users and outstanding loans of Rmb30bn.
The companys Microloans business is designed for small- to medium-sized

enterprises (SMEs), and developed to face institutional investors with various
products under its invested bank Mybank since mid-2015. By 2016, microloan
has served c.5m enterprises with over Rmb800bn accumulated loans according
to Cnbeta data. We estimate revenue from microloan by assuming average of
c.6% interest spread earned. The business pays 2.5% of its loans outstanding to
Alibaba. In our modelling, we calculate this at c.Rmb1.1bn for 16E and we make
the conservative assumption of a flat payment each year to 2019.
With broaden of personal finance and institutional finance, we see the a

strategy move that Ant Financial leads in setting up an internet banking,
Mybank, where Ant Financial takes the largest c.30% of equity stake. We
believe with the development of above features, Ant financial will incorporate
those into Mybank, the first batch of private-operated banks approved by China
Banking Regulatory Commission, and makes Mybank professionally open to
personal and institutional investors in a more convenient way compared to
traditional banking.
In terms of its financial IT services, the most prominent client to date is Indias
largest online payment tool, Paytm, which is based on the same tech
foundation as Alipay. We see exports of the companys technology as a basis
for future cooperation for the overall group with affiliated platforms overseas,
thanks to the access provided to substantial local market data.
Ant Financial aims at covering 2bn users globally in 10 years, and expects 60%
of its users mix from overseas. Ant Financial international mainly focus on three
aspects, cross-border offline payment, global online commerce payment and
global partnership in population of quick payment access.
According to government statistics, overseas spending by Chinese amounted to

Rmb1.5tn by 2015, nearly half of the size of online retail in China. The cross-
border offline payment business line will follow the increasing demand of
Chinese overseas travel and consumption. We see airports, merchants in
various nations are willing to accept Alipay. In 2016 global double 12 festival,
Ant Checklater provide Chinese users up to Rmb30k temporary credit line in
overseas consumption, a great convenience for users and a lighted up the
sentiments.
Fig 80: Alipay Global offline access lists (not complete)

7-11; Recruit; Lawson; Rakuten Global Market; Yahoo; Emoda; Felissimo; shopjbp; >30k convenience
Japan
store and >4k merchants gain access to Alipay
Germany Wirecard; Bodyguard Apotheke; Windeln.de
Macy; First Data; Verifone; Iherb; Skinstore; Allbeauty; Neimanmarcus; Saksfifthavenue; Revolve;
US
Luisaviaroma; Diapers; GNC; Carter's; Ashford
Europe Ingenico; Concardis; Lookfantastic; Felunique; Hqhair
Britain Zapper; Unineed; Coggles
Korea Kicc; Gmarket;Mediheal;Stylenanda;Naning9;Nain;Fayewoo
Thailand Counter Service convenience stores; Paysbuy
Australia Amcal; Parmacy Online; Roy Young Chemist; Chemist Direct

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Taiwan Pinkol; Bgo; Myhuo

Global online commerce payment mainly aims at facilitating the development

of global e-commerce, and will grow with cross-border commerce transaction
coverage.
The global partnership in population of quick payment access penetrates

through cooperation with local payment players, to help and upgrading
payment methods in other countries by providing funding supports, backstage
technique supports, including but not limited to cloud and data supports.
For payment function alone, we see Ant financial has investments and
cooperates in Phillipines, Korea, Tailand, U.S., and India. Unlike the dilemma
faced by Snapdeal in India which Alibaba has invested in, Paytm has achieved
great success in its users coverage, and offline payment scenario extension, and
now holding the largest market share in India QR code and mobile payment.
Ant Financial has cooperated with Paytm for almost three years since first
investments in 2015, and now the largest shareholder of Paytm combining
Alibabashare and its stakes in One97 Communications. By referring to the
population of QR code payment in China and technical and strategy help from
Ant Financial team, they developed the their own QR code payment in India,
quickly expanding its active users from c.0.2bn to c.1.4bn, aiming to cover 5bn
people in India in two years. Paytm uses the same backstage platform that
Alipay enjoys by Ant Financial cloud platform. We see Ant Financial role as a
strategic partner, financial investor and technique provider. As Ant Financial is
the innovator in mobile payment, it could enjoy the leading position even
worldwide, and we believe Ant Financial will leverage its advantage in deepen
its cooperation in more nations for a win-win results.
Fig 81: Ant financial global cooperates

Holding company Partners Nation Main business
201704 Ant Financial MoneyGram U.S. Remittance
201702 Ant Financial Korea Kaokao pay Payment
201702 Ant Financial Mynt Phillipines Payment
201611 Ant Financial Ascend Money Tailand Payment
201604 Ant Financial K-Bank Korea Internet Banking
201506 Ant Financial Paytm India Payment
201502 Ant Financial One97 Communications India Payment
201609 Ant Financial EyeVerify U.S. Bio-tech verify startup
201411 Ant Financial V-key Singapore Security and encryption tech
201311 Ant Financial Cybersource U.S. Payment security
We forecast Ant Financial Services pre-tax income of Rmb8.5bn in FY17E,

Rmb13.6bn in FY18E (+60% YoY) and Rmb18.4bn in FY19E (+35% YoY), based
primarily on contribution from Alipay.
Other businesses
Of the companys other consolidated businesses, Cainiao, Alibabas smart
logistics platform, underpins the firms offline-online and cross-border
integration. Although styled as a logistics firm, it is actually a tech company that
works with express delivery companies, with self-run warehouses. Cainiao sees

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to consolidate express delivery resources from around the region or even world,
to achieve more efficient delivery at the lowest cost possible.
Alibaba holds a 47% equity interest in Cainiao; in addition, the five major
express delivery companies in China ZTO, YTO, STO, Yunda, and SF each
invested c.1% in establishing Cainiao. The firm offers tech-driven warehouses
and last-mile logistics services comprise its offline logistics network, while its
express delivery platform and data tracking service, supported by Alibaba-
invested satellite navigation firm AutoNavi form Cainiaos online logistic
network. Cooperation with partners has given Cainiao access to consumer data,
as well as a sorting and distribution centre network, thus allowing it to provide
smarter services.
Fig 82: Cainiao service lines

Offline logistic network Self-run share economy and tech-driven warehouses
Last mail solved by delivery station alliance
Online logistic network Express platform, cooperates with as many as express companies as possible
Data and navigation tracking supported by AutoNavi
Cainiao has already extended its reach into specialist logistics services such as
cold chain logistics, large parcel logistics, highway transportation, worldwide
shipment and sharing offline retail inventory channels backed by smart
warehouse and location datasets.
Fig 83: Cainiao business scope extension

Aspects Company Equity interest Value added
Smart warehouse management ALOG 2nd Shareholder ALOG Warehouse Management System
Navigation & data AutoNavi 100% Navigation data tracking
Domestic Express RRS under Haier Alibaba holds 34% Large parcel
Suning express Alibaba holds 19.9%
ExFresh Parentco of Yiguo (investments from Ali) Cold Chain Logistics
Hummingbird Subsidiary under Ele.me
Best Logistic Alibaba and Cainiao hold combined c.20%
ZTO <1% in Cainiao
YTO Alibaba holds 11.1% of YTO; YTO has <1% in Cainiao
STO <1% in Cainiao
Yunda <1% in Cainiao
SF <1% in Cainiao
International Express Lazada express Consolidated into Alibaba financials Southeast Asia express
WCA 0% World largest shipment express
Singapore Post 10% Singapore
Offline stores (real estate resource) Suning Alibaba hold19.9%
Sanjiang Alibaba holds 32%
Yintai Alibaba holds 74%
Bailian 0% Strategic cooperation
Highway transport KXTX Cainiaos 2nd largest shareholder Chinas largest highway transport
Cainiao boasts delivery services in every country on Earth, all 2,800 domestic
counties, with access to a network of more than 14,000 delivery stations
nationwide, delivering 57m packages per day. The company offers same-day
delivery in 37 cities, next-day delivery to 162 cities and digital waybill
penetration of 74%. The firm recorded a 229% YoY expansion in revenue in
2015 and we forecast a 120% YoY revenue growth in 2016E, generated from a
combination of consultancy fees charged to delivery firms for data-based
efficiency improvements, and delivery fees charged to Tmall Supermarket
vendors or customers for returned packages. At present, it operates at a net

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loss. Cainiao finished round-A financing in 2016, giving it a valuation of

c.Rmb50bn.
Fig 84: Revenue growth of Cainiao
60,000 (Rmbm) 2.5
50,000
2.0
40,000
1.5
30,000
1.0
20,000
0.5
10,000
0 0.0
2014 2015 2016E 2017E 2018E 2019E 2020E
Revenue YoY (RHS)
Earnings outlook and financial position

In the first three quarters of FY17, Alibaba recorded continued rapid growth in
revenue, underpinning a 53% YoY increase in FY17 revenue, and a 43% YoY
increase in non-Gaap net profit. The slower pace of bottom-line growth is
attributable primarily to the acquisition of (loss-making) Lazada and expansion
of the Tmall Supermarket, weighing on gross and operating margins. For the
coming three years, we forecast net profit will expand at a c.20% Cagr.
Based on our expectations of strong growth in commerce revenue driven by

steady growth in user numbers and a rise in Arpu as more buyers shift to
making purchases via mobile, we forecast FY17E revenue of Rmb155bn (+53%
YoY), Rmb208bn in FY18E (+34% YoY), and Rmb270 in FY19E (+30% YoY).
Specifically, we anticipate revenue of Rmb35bn in 4Q17E (+45% YoY), Rmb43bn
in 1Q18E (+34% YoY), Rmb46bn in 2Q18E (+35% YoY), Rmb71bn in 3Q18E
(+33% YoY) and Rmb47bn in 4Q18E (+34% YoY).
Fig 85: Alibaba revenue (annual) Fig 86: Alibaba revenue (quarterly)
400 (Rmbbn) 60% 100 (Rmbbn) 70%
90
350 60%
50% 80
300 70 50%
40% 60
250 40%
50
200 30% 30%
40
150 30 20%
20%
20
100 10%
10
10%
50 0 0%
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17E
1QFY18E
2QFY18E
3QFY18E
4QFY18E
1QFY19E
2QFY19E
3QFY19E
4QFY19E
0 0%
Revenue YoY (RHS) Revenue QoQ (RHS)

China commerce retail contributes c.70% of total revenue, and will gradually
give away to other high growth segments like cloud and digital media and
entertainment.

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Fig 87: Revenue structure

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY16 FY17E 1Q18E 2Q18E 3Q18E 4Q18E FY18E
China commerce retail China commerce wholesale
International commerce retail International commerce wholesale
Others Cloud computing
Digital media and entertainment Innovation initiatives and others
While we expect the China commerce retail segment to continue to post steady
25%-plus YoY growth each quarter in the year ahead, we highlight that the
companys non-commerce businesses will grow at a relatively fast rate,
increasing in importance to overall revenue.
Similarly, on the longer-term, our projections suggest annual in the China

commerce retail segment revenue will stay above 20% for the next three years
(dipping to 17% YoY in FY20E, resulting in a four-year Cagr at a still strong
27.7%), underpinning substantial expansion in overall revenue. We expect
China wholesale revenue to grow steadily to Rmb5.6bn in FY17E (+30% YoY),
Rmb7.0bn in FY18E (+26% YoY), Rmb8.7bn in FY19E (+25% YoY) and Rmb10.6bn
in FY20E (+21% YoY). Within the broader commerce business, slow growth in
international wholesale (four-year Cagr of 9%) is offset by strong performance
in international retail (four-year Cagr of 62%), although we highlight that, on
the scale of things, neither segment does more than knock a percentage point
or two off the overall commerce segment growth rate over the four years.
Outside of the commerce business, we highlight our expectations of rapid

growth from Alibaba Cloud revenue over the coming four years, expanding at a
four-year Cagr of 88%, from Rmb3.02bn in FY16A (accounting for 3% of overall
revenue) to Rmb37.8bn in FY20E (accounting for 11% of overall revenue).
Fig 88: Growth for each segment

200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
China commerce retail
Total core commerce
Cloud computing
Others
International commerce
International commerce
Total revenue
Innovation initiatives
China commerce
Digital media and

entertainment
wholesale
and others
wholesale
retail
FY16 FY17E 1Q18E 2Q18E 3Q18E 4Q18E FY18E


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We expect gross margin to decline from 66% in FY16 to 62% in FY17E to 60% in
FY18E
We expect overall operating margin (excluding share-based expenses) to drop

c.5% YoY in FY17E due to the acquisition of Lazada and expansion of Tmall
Supermarket. We expect a continued similar further drag on operating margin
from the ongoing expansion of the Tmall Supermarket and consolidation of
Intime Retail results in late-CY2017, but we see the negative impact from these
to be partially offset by enlarged contribution from higher-margin segments
such as cloud computing and digital media & entertainment.
Fig 89: Alibaba expenses breakdown (excl.share-based compensation), % over rev) Fig 90: Alibaba adjusted Ebitda margins by segment
70% 100%
60% 50%
50% 0%
40% -50%
30%
-100%
20%
-150%
10%
-200%
0%
FY14 FY15 FY16 FY17E FY18E FY19E FY20E -250%
Cost of revenue Product development expenses FY1Q16 FY2Q16 FY1Q17 FY2Q17 FY3Q17
Sales and marketing expenses General & administrative expenses Core commerce Cloud computing
Amortisation of intangible assets Digital media and entertainment Innovation initiatives and others
We note the narrowing negative Alibaba Cloud adjusted Ebitda margin,

approaching zero in recent quarters, although expanding slightly from -4% in
2QFY17 to -5% in FY3Q17.
Paying customers amounted to 765k by 3QFY17A. The company stated

previously that it aims to reach 1m paying customers before begins to focus
more on profitability; a target we expect the company to reach in FY18E. We
assume, based on current trends, that the firm will record a positive adjusted
Ebitda margin in its cloud computing segment in FY18E.
Fig 91: Margin trends, FY14-FY20E

80%
70%
60%
50%
40%
30%
20%
10%
0%
GPM adj. operating adj.EBIT margin adj.EBITDA adj.net profit GAAP net profit
margin margin margin margin
We estimate non-Gaap diluted EPS of Rmb23.6 in FY17E (+41% YoY), Rmb29.2

in FY18E (+24% YoY), and Rmb35.8 in FY19E (+23% YoY).

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Fig 92: Bottom line projection

FY14 FY15 FY16 FY17E FY18E FY19E
Non-Gaap net income attributable to ordinary shareholders for computing non-GAAAP diluted EPS (Rmbm) 28,186 34,922 42,912 61,389 75,258 92,053
% growth 24% 23% 43% 23% 22%
Non-Gaap diluted EPS (Rmb) 12.1 14.0 16.7 23.6 29.2 35.8
% growth 16% 20% 41% 24% 23%
Fig 93: Dupont analysis

FY14 FY15 FY16 FY17E FY18E FY19E
ROE 36% 21% 22% 24% 25% 25%
Net profit margin 46% 42% 40% 36% 34% 33%
Turnover rate of total assets 0.3 0.3 0.4 0.4 0.5 0.5
Assets/Equity 1.6 1.5 1.5 1.5 1.5 1.5
Thanks to Alibabas marketing service revenue, the company has abundant cash
and rich operating cash flow. For years to come, we expect higher investment
cash outflow due to its market expansion to offline and international.
Fig 94: Cash flow and cash on hand
250,000 (Rmbm)
200,000
150,000
100,000
50,000
(50,000)
(100,000)
Net cash flows from operating activities Net cash flows used in investing activities
Net cash flows from financing activities Cash and cash equivalents at end of year
Alibaba held Rmb58bn in debt as of FY16 composed largely of long-term

unsecured borrowings. Given the size of its cash reserves, however, the firm is
in a net cash position. As of end-FY16A, the firm was sitting on a cash pile of
Rmb107bn, sufficient to pay down its overall borrowings almost twice over, and
compared with full-year revenue of Rmb101bn the same year.
Its borrowings are largely denominated in US dollars. Although in general the

company has hedged its exposure to US dollar volatility, its effective interest
rate dipped sharply in FY16 to 3.5%. Given the prospect of higher rates in the
US over the coming year, we expect Alibabas borrowing rate to increase mildly,
to c.4%, in coming years, lifting interest expense from Rmb2bn to Rmb3bn.

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Fig 95: Interest expense and effective interest rate
3,500 (Rmbm) 7%
3,000 6%
2,500 5%
2,000 4%
1,500 3%
1,000 2%
500 1%
0 0%
Interest expense (Rmbm) Effective interest rate
Fig 96: Debt structure

90,000 (Rmbm)
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Current borrowings (Interest bearing) Non-current borrowings (Interest bearing)
Secured borrowings Unsecrued borrowings
Fig 97: Liquidity and efficiency ratios

Current Ratio 1.8 3.6 2.6 1.9 1.7 1.7 1.8
Quick Ratio 1.2 3.1 2.1 1.6 1.3 1.3 1.5
AP turnover -1.5 -1.5 -1.7 -1.6 -1.6 -1.6
AP days -243 -251 -221 -234 -232 -234
AR turnover 10.6 11.1 12 11.5 11.3 11.1
AR days 34.5 32.9 30.4 31.9 32.3 32.8
Cash conversion cycle 277 283 251 266 264 267
Turnover rate of net assets 1.7 0.5 0.4 0.5 0.6 0.7 0.7
Turnover rate of total assets 0.5 0.3 0.3 0.4 0.4 0.5 0.5
Operating cash flow/adj.NI 0.9 1.2 1.3 1.1 1 1.1 1
Valuation
We note an increase in concerns among the investment community that, while
Alibabas position as the largest platform connecting buyers and sellers in the
huge market that is China is relatively secure, slowing growth in the broader
domestic e-commerce market sales may dampen the companys growth
prospects. Alibaba benefited and was instrumental to rapid growth in the
popularity of online retail in China, but its ability to sustain the rapid growth of
the last ten years will diminish without efforts to evolve its business. In this
regard, we believe Alibabas efforts to develop next-stage growth by developing

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an ecosystem of connected services, opening new markets and exploring new

business models, are undervalued by the market.
Primarily we are positive on the firms efforts to combine complementary

businesses to find synergies: its Alibaba Cloud tech platform underpinning its
online services, payments and data analytics, as well as helping it support
partners; Ant Financial Services providing both merchants and vendors with the
tools they need to optimize spending and access credit; its Cainiao platform
linking logistics services and through data crunching helping them increase
efficiency and lower cost to improve customer service; and its Digital Media
services, raising user engagement and providing advertising clients a wider
variety of more interactive marketing options. As these synergies manifest, we
see continued but slower growth in GMV, while metrics for user engagement
will become more key in illustrating the companys new growth driver: rising
monetisation of visitors pushing up the average revenue per paying user (Arpu).
In particular, we are positive on the companys attempt to incorporate the

advantages of offline retail to its business. At a time when offline sales are
slowing as more people shop more online, this may seem a counter-intuitive
strategy, yet we believe Alibaba will be able to introduce efficiencies to the
older offline model gleaned from its experience with online sales; applying data
analytics to ensure better supply chain management, while offering convenient
payment tools and ease of comparison to elevate the experience for shoppers.
Ultimately, we may see offline retail, offering higher take-rates than online
channels, as likely to boost the companys overall Arpu.
We also highlight the companys efforts to increase its footprint within the
domestic market to areas which are less naturally suited to the e-commerce
model than the initial low-hanging fruit of the apparel and electronics. In
particular, Alibaba is looking to expand the share of sales of FMCG and autos
made online the latter based on the credit and financing advantages offered
by Alipay.
Internationally we see the company making strides; we are positive on its

acquisition of Lazada in SE Asia, and also its cooperation with Indian platforms,
not least the deepening ties between local payment tool Paytm, based on the
same tech platform as Alipay. However we see the greatest growth in being in a
position to benefit from the increasingly wealthy and aspirational Chinese
consumer looking beyond Chinas borders for the goods they want to fit their
desired lifestyle.
We employ a sum-of-the-parts (SOTP) model, as the best reflection of the

companys current value given the scale of the change it is trying to effect,
reducing longer-term visibility. On this basis, we derive a target price for
Alibaba of US$127.
Although Alibaba breaks down its business into commerce segments and cloud
in its reporting, we believe its core commerce, cloud computing, digital media
& entertainment, and financial services businesses should be valued
individually to reflect the diverse nature of the businesses.
For its core commerce segment, generating stable earnings, we examined PE

multiples among comparable firms and EV/Ebitda multiples, both turns out a
contribution of c.US$88 per share for Alibaba.

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Fig 98: Core commerce valuation assumptions

(PE) FY18E value
Revenue (Rmbm) 165,628
Adj. Ebitda (Rmbm) 102,690 Applying stable 62% adj. Ebitda margin, based on historical
Adj. Ebit (Rmbm) 90,268 Applying stable 62% adj. Ebit margin, based on historical
Approx. Interest expense (Rmbm) -2,000 Stable historically
Adj. EBT (Rmbm) 88,268
Adj. net income (Rmbm) 70,614
Target valuation (x) 22 20% discount to 28% core commerce growth
Price per share (US$) 88
(EV/Ebitda) FY18E value
Adj. Ebitda (Rmbm) 102,690
Target valuation (x) 15 25% premium on 12x industry average
EV 1,540,345
Price per share 87
*Exchange rate (CHN/USD) at 6.91
Source: SWS Research
For the cloud computing and digital media & entertainment segments, as
neither has yet achieved profitability, we use PS multiples. We apply a 5x PS
multiple to Alibaba Cloud, in line with the average of listed cloud services
providers to derive a US$11/shr target price, while for the digital media
segment, we derive a US$7/shr valuation based on a 6x PS ratio, with reference
to domestic online business valuations.
Fig 99: Cloud and Media segment valuation assumptions

Cloud computing FY20E values Detail
Revenue (US$bn) 7.7 Cagr of c.70%
Alibaba Cloud valuation (US$bn) 38 Apply industry average of 5.0x PS
WACC 10.7% Assume same as Alibaba
Alibaba Cloud valuation, 2017E (US$bn) 28.7
Price per share 11
Digital media & entertainment FY18E values
Valuation 122,714 Apply Chinese internet industry average of 6.0x P/S
Price per share 7
Although Ant Financial Services is accounted for using the equity method, and
thus contributes only a share of its profit to Alibaba, we see the company and
its services as integral to Alibabas overall valuation, and thus include the
business within our SOTP-based valuation alongside consolidated businesses.
We derived a c.US$40bn equity value for Alipay, which compares to Paypals
market cap of c.US$520bn. To this we add equity valuation estimates for
remaining Ant Financial Services businesses, including US$4.4bn the microloans
business, based on a 20x 17E PE multiple, and a US$1.4bn valuation for Yue
Bao fund manager Tianhong based on a 10x forward PE, as well as US$3.5bn for
Sesame Credit on the basis of a 15% discount to US mortgage rating scores
provider Fair Isaac Corps (FICO:US) US$4.1bn valuation. Finally, we apply a
synergy premium of 10% and reach a valuation of US$69.8bn for Ant Financial.
On the basis of Alibabas option to acquire 33% in Ant Financial Services in the
event of an IPO, we derive a target share price of Alibabas interest in Ant
Financial Services of US$8.96.
Fig 100: Ant Financial valuation

SOTP valuation

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PE
Brand 17E profit (Rmbm) (non-Gaap Valuation (US$bn) Comparable
basis)
Alipay (incl. Koubei) 9,193 30 40 Apply 10% net profit margin compared to 16% of Paypal;
Valuation is compared to US$52bn of Paypal
Microloan (Merchants &Institution) 1515 20 4
Tianhong Asset Management 951 10 1
Sesema Credit 4 15% discount to Fair Isaac valuation at US$4.1bn
Personal Finance (Ant Checklater 2
Ant to borrow etc)
Ant Financial International 3
Mybank 4 20% discount to Webank's valuation of US$5.0bn
Zhongan Insurance 2
Ant Financial Cloud 1
Elema 1
Others (Cathay Insurance, Tebon 1
securities, Suntime, 36Kr, Hudson)
SOTP valuation for Ant Financial before 63
synergy
Synergy Premium 10%
SOTP valuation for Ant Financial 69.8
Alibaba's equity interest share option 33%
Ant Financial valuation option to 20.9
Alibaba (US$bn)
Valuation of option per share (US$) 8.96
In addition to the core income-contributing businesses, Alibaba has a

substantial number of investments for which it uses the equity method,
including Suning, Cainiao and Koubei as well as listed platforms Alibaba Pictures
or Alibaba Health. We discount the combined value of these companies to
Alibaba at 40% to reflect their lower visibility as less tested models and adjust
for distortion from the high valuations of stocks listed on the A-share market.
Fig 101: Unconsolidated investments valuation

Equity interest based on Value attributable to
Investments Ticker Currency Value (bn) Exchange rate
disclosure or estimates Alibaba (Rmbbn)
Koubei Unlisted 45% USD 8 6.91 25
Cainiao Network Unlisted, IPO planned 47% RMB 50 1 24
Suning 002024 CH 20% RMB 105.8 1 21
Alibaba Pictures (1060 HK) 1060 HK 49.50% HKD 32.8 0.88 14
Alibaba Health (0241 HK) 241 HK 37.98% HKD 27.9 0.88 9
Ele.Me Unlisted 22% USD 4.1 6.91 6
Weibo WB US 31.50% USD 10.7 6.91 23
MoMo MOMO US 14.00% USD 5.2 6.91 5
Groupon GRPN US 5.75% USD 2.4 6.91 1
Singapoore post S08 SG 10.18% SGD 3.2 4.89 2
AGTech 8279 HK 31.63% HKD 16.9 0.88 5
Baozun BZUN US 17.60% USD 0.76 6.91 1
Shiji Information 002153 CH 13.70% RMB 25.3 1 3
Sinosoft Tech 1297 HK 13.32% HKD 2.8 0.88 0
YTO Express Unlisted 11.10% RMB 17.5 1 2
RRS Unlisted but under Haier RMB 3 1 0
Haier Multimedia Unlisted but under Haier (600690 CH) RMB 0
Haier Electronics Group 1169 HK RMB 0
Evergrande Football Club Unlisted RMB 1.2 1 0
Best Logistics Unlisted 20.00% USD 2.7 6.91 4
Hema Fresh Food Unlisted USD 0.15 6.91 0
Didi Dache Unlisted 10.00% USD 30 6.91 21
International investments overall n.a. USD 20 6.91 0
Total nominal value attributable
166
to Alibaba
Assume 40% discount on value for 60%

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unmature business model and A-

share market
Total real value attributable to
100
Alibaba
Price per share 6
Adding in the companys cash holdings, we derive a total target price of US$127
per share for FY18E, representing 30x FY18E PE (based on non-Gaap diluted
EPS), 7.4x FY18E PB, 1.3x PEG, 22.6x EV/Ebitda, and 0.5x P/GMV.
Fig 102: Alibaba SOTP Valuation

SOTP Price per share
Core commerce 88
Cloud computing 11
Digital media and entertainment 7
Ant Financial 9
Other investments 6
Cash and cash equivalents 7
Total 127
We use a discounted cash flow model to provide a more standalone sense of

the firms value. We derive a weighted average cost of capital (WACC) using
3.5% as the risk-free rate with reference to current money market fund return,
and a 10.2% market risk premium based on Bloomberg Hong Kong market risk
premium as well as a 4.0% cost of debt. We use an adjusted beta of 1.2 for
Alibaba as a reference for its future performance based on the assumption that
the company makes no material shift in the nature of its business. Our assumed
terminal growth rate is 5%, Under these assumptions, we find a present value
of US$139 per share for Alibaba in FY18E, representing 33x FY18E PE (non-
Gaap diluted EPS), 8x FY18E PB, 1.4x PEG, 24.6x EV/Ebitda, and 0.5x P/GMV.
We believe the stock is currently undervalued. With 12% upside, we initiate

coverage with an Outperform rating.
In terms of upcoming catalysts, we see an announcement regarding the timing

of a mooted IPO by Ant Financial Services as likely to bring the earnings
potential for Alipay back into focus for investors in Alibaba; as such we would
expect a surge in interest in Alibaba stock in response to a clearer listing
schedule for the payment tool.
We also see further acquisitions as likely, particularly as the company seeks to

expand outside of China, where growth is seen as slowing; international
acquisitions may be interpreted in the short-term as not just earnings accretive,
but help sustain growth. Similarly, we see an announcement from Intime of a
turnaround in efficiency or profitability as likely to be greeted as a positive
signal of both an improving environment for retailers of all stripes and Alibabas
successful crossover into a comprehensive online & offline retailer.
Finally, quarterly results of adjusted Ebitda margin for Alibaba Cloud turning
positive, which we expect to occur in mid- to late-FY18E, will likely signal to
investors the emergence of the firms newest earnings driver.
We believe 20% YoY growth in Alibabas domestic retail commerce segment

revenue represents a significant psychological cut-off point for investors; sub-

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20% growth in any of the quarterly reports in the coming 12 months may
trigger a sell-off in Alibaba stock.
A change in the governments attitude towards Alibabas ability, as a foreign-

domiciled and invested entity, to take a substantial equity stake in Ant Financial
Services, as owner of an online payment tool (a business model in which China
does not permit foreign ownership), upon Ant Financials IPO, would force
investors to recast their valuations of Alibaba stock.
Fig 103: Alibaba forward PE
Fig 104: Alibaba forward PB

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Fig 105: Alibaba forward PEG
Fig 106: Peer comparison

Trading Market Latest
Peer comparison Company name PER (16,x) PER (17,x) PBR (16,x) PBR (17,x) PEG (17,x)
currency cap( bn) close price
China E-commerce
BABA US Equity ALIBABA GROUP HOLDING-SP ADR USD 262.2 107.25 30.3 24.5 6.6 5.3 1.1
JD US Equity JD.COM INC-ADR USD 43.3 31.72 n.a. 156.4 8.4 7.1 n.a.
JMEI US Equity JUMEI INTERNATIONAL-ADR USD 0.5 3.79 7.2 5.6 n.a. n.a. n.a.
VIPS US EQUITY VIPSHOP HOLDINGS LTD - ADR USD 8.0 14.27 20.2 16.7 8.9 6.0 0.3
Average 19.2 50.8 8.0 6.1 0.7
US E-commerce
AMZN US EQUITY AMAZON.COM INC USD 402.4 856.97 84.9 65.8 22.2 16.1 1.2
EBAY US EQUITY EBAY INC USD 36.1 33.81 17.7 16.5 3.5 2.5 1.6
GRPN US Equity GROUPON INC USD 2.2 4.03 n.a. 37.5 6.2 6.8 1.0
Average 51.3 39.9 10.6 8.5 1.3
Chinese Internet
Companies
BIDU US EQUITY BAIDU INC - SPON ADR USD 59.5 176.13 36.3 30.8 4.4 3.8 0.9
700 HK Equity TENCENT HOLDINGS LTD HKD 2122.9 228.8 41.6 32.6 12.0 9.1 1.1
NTES US Equity NETEASE INC-ADR USD 37.5 294.12 21.4 17.2 6.8 5.1 0.7
WUBA US Equity 58.COM INC-ADR USD 5.4 37.8 n.a. 79.3 2.0 2.0 n.a.
SINA US Equity SINA CORP USD 4.9 71.93 50.7 31.7 1.7 1.6 n.a.
WB US Equity WEIBO CORP-SPON ADR USD 10.2 50.72 65.1 36.0 13.3 9.8 0.5
YY US Equity YY INC-ADR USD 2.6 49.65 12.4 9.9 4.6 3.0 1.2
SOHU US Equity SOHU.COM INC USD 1.6 42.04 n.a. n.a. 1.4 1.6 n.a.
BITA US Equity BITAUTO HOLDINGS LTD-ADR USD 1.7 25.27 36.5 19.5 1.0 1.1 n.a.
ATHM US Equity AUTOHOME INC-ADR USD 3.7 33.94 19.7 16.1 4.2 3.2 n.a.
Average 35.5 30.4 5.1 4.0 0.9

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Appendix 1: Ownership structure

Alibaba Group is a Cayman Islands-registered holding company, established in
1999. As foreign ownership and investment in value-added telecom services in
China, including the operation of Internet Content Providers (ICPs), Alibaba
operates its internet businesses through wholly-foreign owned enterprises,
majority-owned entities and variable interest entities (VIEs).
Fig 107: Post IPO shareholder structure Fig 108: Shareholder structure by mid-2016
Others
38%
Softbank Yahoo
28% 15%
Jack Ma
Ma Yun 8%
Yahoo (Jack Ma)
16% 8% Joseph Tsai
3%
Joseph Tsai
3%
Other mgmt. Others

SoftBank holdings 45% Suning
33% 2% 1%
Source: SWS Research Source: SWS Research
Fig 109: Alibaba corporate structure
Source: Company ,SWS Research
These VIEs hold the ICP licenses and operate the companys internet business.
Each VIE, other than Zhejiang Taobao Network, is 80%-owned by Jack Ma and
20%-owned by Simon Xie. The Zhejiang Taobao Network is 90%-owned by Jack
Ma and 10%-owned by Simon Xie. Alibaba exercises effective control over the

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VIEs and includes the VIEs financial results in its consolidated financial
statements.
Fig 110: Alibaba VIE structure
Source: Company ,SWS Research
Alibabas board nominations are made by a partnership of 34 members,

the Lakeside Partners, formed in July 2010. Lakeside Partners vote on a
one-partner-one-vote basis. The partnership elects new partners
annually after a nomination process; the election requires at least 75%
approval from all the existing partners.
Fig 111: Partners of the Alibaba Partnership by FY16

Name Age Gender Year joined Alibaba Group Current position with Alibaba or related/affiliated companies
Jingxian Cai 39 M 2000 Principal engineer
Li Cheng 41 M 2005 CTO, Ant Financial Services
Trudy Shan Dai 39 F 1999 Chief customer officer
Luyuan Fan 43 M 2007 President, payment business, Ant Financial Services
Yongxin Fang 42 M 2000 Director, human resources
Simon Xiaoming Hu 46 M 2005 President, Alibaba Cloud Computing
Fang Jiang 42 F 1999 Chief people officer
Peng Jiang 42 M 2000 Senior vice president
Jianhang Jin 46 M 1999 President
Eric Xiandong Jing 43 M 2007 President, Ant Financial Services
Zhenfei Liu 44 M 2006 Chief risk officer
Jonathan Zhaoxi Lu 46 M 2000 Vice chairman
Jack Yun Ma 51 M 1999 Executive chairman
Xingjun Ni 38 M 2003 Principal engineer, Ant Financial Services
Lucy Lei Peng 42 F 1999 CEO, Ant Financial Services
Sabrina Yijie Peng 37 F 2000 General manager, international, Ant Financial Services
Xiaofeng Shao 50 M 2005 Senior vice president, director, office of the chairman
Timothy Steinert 56 M 2007 General counsel and secretary
Lijun Sun 39 M 2002 General manager, rural Taobao
Judy Wenhong Tong 45 F 2000 Chief Executive Officer, Cainiao Network
Joseph Tsai 52 M 1999 Executive vice chairman
Jian WANG 53 M 2008 Chairman, technology committee
Shuai WANG 41 M 2003 Senior vice president
Sophie Minzhi Wu 40 F 2000 President, wholesale marketplaces
Maggie Wei Wu 48 F 2007 CFO
Eddie Yongming Wu 41 M 1999 Chairman, Alibaba Health
Sara Siying Yu 41 F 2005 Associate general counsel, China
Yongfu Yu 39 M 2014 President, mobile internet and Alimama

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Ming Zeng 46 M 2006 Executive vice president

Jeff Jianfeng Zhang 42 M 2004 CTO
Daniel Yong Zhang 44 M 2007 CEO
Yu Zhang 46 F 2004 Vice president, corporate development
Ying Zhao 42 F 2005 Vice president, Ant Financial Services
Jessie Junfang Zheng 42 F 2010 Chief platform governance officer and deputy CFO
Source: Company SWS Research
Fig 112: Alibaba Management Team by FY16

Name Age Position/Title
Jack Yun Ma 51 Executive chairman
Joseph C. TSAI 52 Executive vice chairman
Jonothan Zhaoxi LU 46 Vice chairman
Daniel Yong ZHANG 44 Director and CEO
j.Michael EVANS 58 Director and president
Masayoshi SON 58 Director
Chee Hwa TUNG 79 Independent director
Walter The Ming KWAUK 63 Independent director
Jerry YANG 47 Independent director
Borje E.EKHOLM 53 Independent director
Wan Ling MARTELLO 58 Independent director
Maffie Wei WU 48 CFO
Jane Fang JIANG 42 Chief people officer
Jeff Jianfeng ZHANG 42 Chief technology officer
Zhenfei LIU 44 Chief risk officer
Trudy Shan DAI 39 Chief customer officer
Timothy A.STEINERT 56 General counsel and secretary
Jianhan JIN 46 President
Chris Pen-hung TUNG 46 Chief marketing officer
Yongfu Yu 39 President, mobile internet and Alimama
Simon Xiaoming HU 46 President, Alibaba Cloud Computing
Sophie Minzhi WU 40 President, wholesale marketplaces
Jessie Junfang ZHENG 42 Chief platform governance officer and deputy CFO
Jack Ma is Alibabas founder and chairman, also serving as CEO from founding in
1999 to May 2013. Ma serves on the board of major Alibaba shareholder
SoftBank. He is a member of the Foundation Board of the World Economic Forum,
a member of the UK government's Business Advisory Group, chairman of the
Zhejiang Chamber of Commerce, as well as chairman of the China Entrepreneur
Club. Ma graduated from Hangzhou Teacher's Institute with a major in English
language education.
Joseph Tsai, a member of the Alibaba founding team, has served as executive
vice chairman since May 2013 and a nonexecutive director of Alibaba Health
since September 2015. Tsai previously also served as company CFO. Prior to
joining Alibaba, he oversaw Asian private equity investments for the Wallenburg
familys Investor fund, served as vice president and general counsel for New
York-based management buyout firm Rosecliff, and an associate attorney at
Sullivan & Cromwell. Tsai received his bachelor's degree in Economics and East
Asian Studies from Yale College and a juris doctor degree from Yale Law School.
Jonathan Zhaoxi Lu served as CEO from February 2011 to 2012 and again from
May 2013 to May 2015 after which he was appointed vice chairman. Lu also
served previously served as chief data officer and also oversaw the YunOS
division. Lu led the effort to establish Alipay, and served as Taobao CEO from
January 2010 to June 2011. Prior to joining Alibaba, Lu founded a network
communications company. Lu received a graduate certificate in hotel
management from Guangzhou University and a master's degree in business
administration from China Europe International Business School.

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Daniel Yong Zhang has been Alibabas CEO since May 2015 and a director since
September 2014. Prior to his current role, he served as COO from September
2013 to May 2015. Zhang joined the firm in August 2007 as Taobao CFO, in
addition to general manager of Tmall.com from August 2008, before being
appointed Tmall president in June 2011. Prior to joining Alibaba, Zhang served as
Nasdaq-listed Shanda Interactive Entertainments CFO. Zhang is also Intime Retail
chairman, and serves on the boards of Haier (1169:HK N-R), and Weibo (WB:US
N-R). Zhang graduated with a bachelor's degree in finance from Shanghai
University of Finance and Economics.

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Appendix 2: Ant Financial Services agreement

Fig 113: Ant Financial Agreement
2011 Framework Agreement 2014 SAPA
(and related agreements) (and related agreements)
Liquidity event payment:
- Alibaba is entitled to 37.5% of the equity value of Alipay in the event of IPO, a - Upon a qualified IPO of Ant Financial Services Company or Alipay, Alibaba is
sale or certain transfers of interests in Alipay. entitled to elect to receive a payment equal to 37.5% of the equity value of Ant
Financial Services Company until a full 33% equity interest acquired.
- At Alibaba's option and subject to regulatory approvals, in lieu of the liquidity
event payment, Alibaba may choose to continue to receive the 37.5% profit share
in perpetuity until Alibaba receives a full 33% equity interest.
- This payment had a minimum floor price of US$2.0bn and was capped at - The liquidity event payment is not capped; given the US$25bn equity value
US$6.0bn, subject to certain gradual increases over time if no liquidity event requirement of a qualified IPO, the minimum liquidity event payment (assuming
occurs. no reduction for equity issuances) is effectively US$9.375bn
Profit sharing:
- Alibaba receives 49.9% of the consolidated pre-tax income of Alipay and its - Alibaba will receive 37.5% of the consolidated pre-tax income of Ant Financial
consolidated subsidiaries until a liquidity event at Alipay occurs. Services Company and its subsidiaries (including Alipay).
- Upon a qualified IPO of Ant Financial Services Company or Alipay, Alibaba may
elect either to receive a liquidity event payment or, subject to regulatory approvals
(including under applicable stock exchange listing rules), to continue to receive the
profit share payments in perpetuity.
Preferential terms under Alipay commercial agreement:
- Payment and escrow services provided to our marketplaces on preferential - Economic terms of the Alipay commercial agreement remain unchanged.
terms.
- 50-year contract term, renewable for additional 50-year periods at Alibaba's
option.
Payment stream related to the SME loan business:
N/A - Alibaba will receive an annual fee equal to 2.5% of the average daily balance of
SME loans in each of the three calendar years from 2015-17.
- Fixed fee in each of the four calendar years from 2018-21 equal to the annual fee
to be paid in calendar year 2017.
Potential equity interest:
- No potential to receive a direct equity interest - Alibaba is entitled to acquire up to a 33% equity interest in Ant Financial Services
Company (with preemptive rights to maintain such percentage equity interest
prior to a qualified IPO of Small and Micro Financial Services Company), if Ant
Financial Services Company applies for and receives the applicable PRC regulatory
approvals.
- In the event Alibaba acquires the full 33% equity interest, rights to profit sharing
and a liquidity event payment will automatically terminate, or in the event of any
equity interest less than 33%, such rights will reduce proportionately.
- Equity issuances up to the full 33% equity interest and exercises of preemptive
rights that do not exceed US$1.5bn will be funded by certain payments to be paid
to us by Ant Finance Services Company, resulting in the receipt of such equity
interests with no cash impact to Alibaba, subject to applicable taxes
Source: Company

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Appendix 3: Financial statements

Consolidated Income Statement
Rmbm 2015 2016 2017E 2018E 2019E
Revenue 76,204 101,143 154,790 207,689 270,407

Cost of Sales -23,834 -34,355 -59,371 -83,500 -113,623
Gross Profit 52,370 66,788 95,419 124,189 156,785
Other Income 2,486 2,058 7,283 6,690 8,495
Product development
expenses -10,658 -13,788 -16,900 -20,384 -26,302
SG&A expenses -16,313 -20,512 -27,340 -34,811 -43,530
adj. EBITDA 40,753 52,340 72,440 97,990 121,354
adj. EBIT 36,338 45,639 62,321 81,610 100,687
Finance Costs -2,750 -1,946 -2,543 -2,905 -2,945
Profit before tax 32,326 81,468 53,488 70,014 88,156
Income tax expense -6,416 -8,449 -11,844 -14,123 -17,631
Minority interests -59 171 2,204 2,200 2,200
adj.Profit attributable 34,922 42,912 60,629 75,137 92,052
Consolidated Cash Flow Statement

Rmbm 2015 2016 2017E 2018E 2019E
Profit before taxation 32,326 81,468 53,488 70,014 88,156

PlusDepr. and amortisation 4,415 6,701 10,119 16,380 20,667
Finance cost 2,750 1,946 2,543 2,905 2,945
Losses from investments 2,171 4,038 0 0 0
Change in working capital 1,854 7,792 19,742 13,278 17,072
Others -2,299 -45,109 -19,471 -25,028 -30,576
CF from operating activities 41,217 56,836 66,421 77,550 98,264
CAPEX -7,705 -10,845 -13,000 -13,000 -13,000
Other CF from investing activities -33,512 -45,991 -53,421 -64,550 -85,264
CF from investing activities -41,217 -56,836 -66,421 -77,550 -98,264
Equity financing 61,438 -19,102 0 0 0
Net change in liabilities 26,044 2,478 11,600 6,531 -4,548
Dividend and interest paid -61 -3 0 0 0
Other CF from financing activities 76 781 0 0 0
CF from financing activities 87,497 -15,846 11,600 6,531 -4,548
Net cash flow 75,148 -1,375 21 11,082 30,716
SourceSWS Research

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Consolidated Balance Sheet

Rmbm 2015 2016 2017E 2018E 2019E
Current Assets 142,109 134,070 139,725 163,915 206,014

Bank balances and cash 108,193 106,818 106,839 117,921 148,637
Trade and other receivables 14,648 17,028 19,662 29,771 38,153
Inventories 0 0 0 0 0
Other current assets 19,268 10,224 13,224 16,224 19,224
Long-term investment 51,593 123,729 161,729 199,729 237,729
PP&E 9,139 13,629 30,547 36,332 29,412
Intangible and other assets 52,593 93,022 102,985 112,819 121,072
Total Assets 255,434 364,450 434,986 512,796 594,228
Current Liabilities 39,672 52,039 73,580 97,293 122,521
Borrowings 1,990 4,304 3,469 3,795 3,568
Trade and other payables 27,748 37,631 60,008 83,394 108,849
Other current liabilities 9,934 10,104 10,104 10,104 10,104
Long-term liabilities 58,349 62,872 75,307 81,512 77,192
Total Liabilities 98,021 114,911 148,888 178,806 199,712
Minority Interests 11,974 32,552 30,348 28,148 25,948
Shareholder Equity 145,439 216,987 255,750 305,842 368,567
Share Capital 117,143 132,207 132,207 132,207 132,207
Reserves 24,842 78,752 117,515 167,607 230,332
Equity attributable 145,439 216,987 255,750 305,842 368,567
Total Liabilities and equity 255,434 364,450 434,986 512,796 594,228
Key Financial Ratios

2015 2016 2017E 2018E 2019E
Ratios per share (Rmb)

Earnings per share 14.9 17.5 24.5 30.3 37.2
Diluted earnings per share 14.0 16.7 23.6 29.2 35.8
Operating CF per share 16.5 22.2 25.9 30.2 38.2
Dividend per share 0.0 0.0 0.0 0.0 0.0
Net assets per share 58.2 84.7 99.6 119.1 143.5
Key Operating Ratios (%)
ROIC 19.42 14.03 14.64 17.02 18.40
ROE 39.96 23.68 25.65 26.76 27.30
Gross profit margin 68.72 66.03 61.64 59.80 57.98
Ebitda margin 53.48 51.75 46.80 47.18 44.88
Ebit margin 47.69 45.12 40.26 39.29 37.24
Growth rate of Revenue(YoY) 45.14 32.73 53.04 34.17 30.20
Growth rate of Profit(YoY) 23.90 22.88 41.29 23.93 22.51
Debt-to-asset ratio 38.37 31.53 34.23 34.87 33.61
Turnover rate of net assets 48.41 40.53 54.10 62.18 68.54
Turnover rate of total assets 29.83 27.75 35.59 40.50 45.51
Effective tax rate (%) (24.78) (20.48) (22.14) (20.17) (20.00)
Dividend yield (%) 0.00 0.00 0.00 0.00 0.00
Valuation Ratios (x)
P/E 55.9 46.6 33.1 26.7 21.8
P/B 13.4 9.2 7.8 6.6 5.4
EV/Sale 24.9 19.3 12.7 9.5 7.1
EV/Ebitda 46.5 37.3 27.2 20.0 15.9

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Information Disclosure
The views expressed in this report accurately reflect the personal views of the analyst. The analyst declares that neither he/she nor his/her associate
serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the analyst. None of the listed corporations reviewed
or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analyst, the Company
or the group company(ies). A group company(ies) of the Company confirm that they, whether individually or as a group (i) are not involved in any market
making activities for any of the listed corporation reviewed; or (ii) do not have any individual employed by or associated with any group company(ies) of
the Company serving as an officer of any of the listed corporation reviewed; or (iii) do not have any financial interest in relation to the listed corporation
reviewed or (iv) do not, presently or within the last 12 months, have any investment banking relationship with the listed corporation reviewed.
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I (We) am (are) conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China and have registered
as the Securities Analyst. I hereby issue this report independently and objectively with due diligence, professional and prudent research methods and only
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compensated directly or indirectly in any form for the specific recommendations or opinions herein.
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The Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact compliance@swsresearch.com for the relevant
disclosure materials or log into www.swsresearch.com for the analysts' qualificationsthe arrangement of the quiet period and the affiliates
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Introduction of Share Investment Rating

Security Investment Rating
When measuring the difference between the markup of the security and that of the markets benchmark within six months after the release of this report,
we define the terms as follows:
Trading BUY: Share price performance is expected to generate more than 20% upside over a 6-month period.
BUY: Share price performance is expected to generate more than 20% upside over a 12-month period.
Outperform: Share price performance is expected to generate between 10-20% upside over a 12-month period.
Hold: Share price performance is expected to generate between 10% downside to 10% upside over a 12-month period.
Underperform: Share price performance is expected to generate between 10-20% downside over a 12-month period.
SELL: Share price performance is expected to generate more than 20% downside over a 12-month period.
Industry Investment Rating:
When measuring the difference between the markup of the industry index and that of the markets benchmark within six months after the release of the
report, we define the terms as follows:
OverweightIndustry performs better than that of the whole market
Equal weight Industry performs about the same as that of the whole market
UnderweightIndustry performs worse than that of the whole market.
We would like to remind you that different security research institutions adopt different rating terminologies and rating standards. We adopt the relative
rating method to recommend the relative weightings of investment. The clients decisions to buy or sell securities shall be based on their actual situation,
such as their portfolio structures and other necessary factors. The clients shall read through the whole report so as to obtain the complete opinions and
information and shall not rely solely on the investment ratings to reach a conclusion. The Company employs its own industry classification system. The
industry classification is available at our sales personnel if you are interested.
HSCEI is the benchmark employed in this report.

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Disclaimer
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Internet Software& Services | Company Bringing China to the World

Internet Software& Services | Company Bringing China to the World

Please refer to the last page for important disclosures Page 1

Fig 1: Revenue breakdown, by reporting segment

Its retail business consists of its customer-to-customer (C2C) sales platform

Alimama is a marketing service subsidiary, a major monetisation tool for the

Please refer to the last page for important disclosures Page 2

Alibabas retail business is the dominant retail e-commerce platform in China,

Within its commerce segment reporting, the company also differentiates

Outside of the companys mainstay commerce businesses, Alibaba provides

The companys digital media & entertainment business is comprised primarily

Please refer to the last page for important disclosures Page 3

PC end Mobile end

MAU Monthly engagement MAU Monthly engagement

Taobao: 325m 559m hours Taobao: 473m 936m hours

Tmall: 224m 191m hours Tmall: 40m 36m hours

Suning: 74m 18m hours Suning: 14m 8m hours

Youku-Tudou: 261m 737m hours Youku Tudou: 326m 3.4bn hours

1688.com: 80m 17m hours UCWeb: 277m 2.0bn hours

Alibaba.com: 12m 4m hours Weibo: 366m 1.8bn hours

Alipay: 411m 4m hours Alipay: 411m 298m hours

Weibo:180m 184m hours DingTalk: 9m 8m hours

AutoNavi: 5m 1m hours AutoNavi: 224m 262m hours

We expect an increasing proportion of revenue to be derived from the

Among its other (non-consolidated) investments, we make special mention of

Other non-consolidated firms worthy of note include logistics services firm

Alibaba is essentially a marketing services company, and online transaction

Please refer to the last page for important disclosures Page 4

Fig 6: Major business lines of Alibaba

Fig 7: Unconsolidated business lines of Alibaba

Please refer to the last page for important disclosures Page 5

Ele.Me Unlisted 22% Food delivery

We forecast revenue of Rmb155bn in FY17E (+53% YoY), Rmb208bn in FY18E

Alibaba uses a non-Gaap adjustment in its financial statements, removing the

Although Alibaba charges commission on transactions made on its platforms,

Please refer to the last page for important disclosures Page 6

commissions; Alibaba is essentially an advertising company, with its Alimama

Fig 8: Alibaba revenue breakdown by type, FY16

However, while it is marketing services that directly generates the largest

Commerce revenue trends: Marketing vs commissions

Fig 9: Alibaba core commerce segment marketing services

Please refer to the last page for important disclosures Page 7

Online marketing fees

Fig 10: Alibaba core commerce segment monetisation methods

We highlight several ongoing structural changes in the advertising industry.

Fig 11: Market share within advertising revenue, by advertising type

Juhuasuan, although periodically still called a group buy site, is somewhat

Taobaoke are third-parties who offer consulting services to help merchants on

Please refer to the last page for important disclosures Page 8

140,000 0.8 80%

Commerce revenue trends: PC vs mobile

Similarly, we are witnessing a trend in which desktop internet access is

Please refer to the last page for important disclosures Page 9

0.0 -100% 0.0 -50%

We expect mobile transactions to contribute c.70% of Alibabas retail

As a result, we forecast mobile average revenue per paying user (ARPPU)

Fig 20: Alibaba mobile ARPPU

Please refer to the last page for important disclosures Page 10

Commerce revenue trends: retail GMV growth

As a result, demand for more internationally branded products is growing;

Fig 23: Import retail transactions