Will Alibaba Overtake GOOGLE?

WILL ALIBABA OVERTAKE

GOOGLE?

Table of Contents

•  Executive Summary

•  Industry Overview

•  Company Considerations

•  Trade Idea

•  Appendix

Executive Summary

In this presentation, we will address the following questions: •  Where does Alibaba generate its profits from? •  What are the different stream of revenue?

•  How does Alibaba’s potential market differ from Google? •  What is Alibaba’s current growth strategy?

•  Is there a higher emphasis on organic or inorganic growth? •  What are the further industries Alibaba will venture into?

•  How essential is Alibaba to the Chinese retail market?

INDUSTRY OVERVIEW

International e-Commerce Industry Overview •  Global B2C sales are rapidly increasing with

a CAGR of 12%

•  Alibaba’s GMV was ahead of its closest competitor by 114%

•  Alipay transacted 73% of Chinese third party payments in FY13

Comparison of leading third party payment services in FY13

Leading global e-Commerce players ranked by GMV in FY13

1058 1233

1471 1700

1922 2145

2356

2012A 2013A 2014E 2015E 2016E 2017E 2018E

248

116 88

21 10 10

Alibaba Amazon eBay JD.com Staples Walmart

B2C e-Commerce sales worldwide from FY12-FY18

800

143 200

519

180

8

Alipay PayPal TenPay

No. of registered accounts (mn)

Total payment volume (USD, bn)

Chinese e-Commerce Market Overview

•  Alibaba currently holds more than 80% of the Chinese gross merchandise volume (GMV) market share

•  Chinese online retail sales market is growing at CAGR of 45%

•  Percentage of business-to-customer online retail sales is rapidly growing

Chinese online retail sales (FY07-FY18)

Chinese e-Commerce market share distribution (FY13)

56 128 263 461 785 1187 1892

2760 3780

4772 5634

6493

2007A 2018E

RMB, bn

Alibaba

JD.com

Others

China’s online B2C vs. C2C sales (FY08-FY18)

0

50

100

2008A 2018E C2C B2C

Competitive Landscape: Google vs Alibaba Google and Alibaba are leaders in their home geographies, yet they have different specializations:

Baidu Amazon Google Average Alibaba

EV/Sales 2.8x 1.8x 5.8x 3.5x 13.5x

EV/EBITDA 6.5x 33.4x 19.4x 14.8x 36.0x

P/E 40.3x n/a 26.4x 33.3x 50.3x

Alibaba

Specialization: internet and mobile commerce, data, logistics, finance Key geography: China Established: 1999 IPO: 2014

Google Specialization: online advertising, search engine, cloud software Key geography: North America, EMEA Established: 1998 IPO: 2004

COMPANY CONSIDERATIONS

Business Model

Alibaba Group

Platform

Logistics

Data

Finance

Platform Taobao – C2C

Tmall – B2C Juhuasuan – intl. C2C

1688 – B2B Aliexpress – intl. B2B/B2C

Alibaba – intl. B2B

Logistics Cainao – supply chain/warehousing

Data Aliyun – cloud computing Alimama – marketing

Finance Alipay – third party payments Alibaba Financial Services – SME loans

Key Company Considerations

•  Unique market position –  largest Chinese e-commerce player –  cross-divisional growth opportunities

–  in 10 years, half of China’s population will be shopping on Alibaba’s platforms

•  Impact of mobile monetisation –  accelerating accessibility of smartphones in Chinese market

–  Alipay currently holds 49% of China’s third-party online payment market share

–  enhancement of mobile products through acquisitions, alliances and investment

–  targeted mobile advertising and targeted promotional growth

Key Growth Considerations

•  Domestic Chinese market –  potential for further penetration of lower-tier Chinese cities and rural areas –  broadening demographics, especially high growth in the 30+ age bracket

–  mobile commerce will account for nearly one-third of total GMV in FY15

•  In International markets –  growing cross border e-commerce e.g. Alibaba.com for international C2C

sales –  launch of ePass payment service which allows US retailers to reach Chinese

online shoppers through Alibaba B2C and C2C platforms

FY13 Operating Trends

Demographics Chinese population: 1.35bn

Chinese internet users: 618mn

Chinese internet shoppers: 302mn

Alibaba annual active buyers: 231 mn

Logistics Packages delivered by UPS globally:

4.3bn

Packages delivered by Alibaba:

5.0bn

133 145 160 172 185 202

231

FY12Q2 FY12Q3 FY12Q4 FY13Q1 FY13Q2 FY13Q3 FY13Q4

Active Buyers, mn

4.6% 5.6% 7.4% 10.7% 12.0% 14.7%

19.7%

FY12Q2 FY12Q3 FY12Q4 FY13Q1 FY13Q2 FY13Q3 FY13Q4

Mobile GMV as % of GMV, RMB bn

FY13 Operational Trends

Marketplace 11.3bn annual orders

23mn annual active buyers

Average of 49 annual orders per user

Alibaba total GMV: $248 bn

Scale and Size 190+ buyer geographies

3.6mn transaction/min processing

capability

$519bn total Alipay payment volume

Mobile Chinese mobile internet users: 500m

$37bn mobile GMV

Alibaba represents 76.2% of total

mobile retail GMV in China

Market Potential Chinese retail consumption: 37% GDP

US retail consumption: 67% GDP

Chinese online shopping expected to

grow at CAGR of 27% from FY13-16

Financial Forecasts EBIT & Margin (FY14-FY18)

Profit & Margin (FY14-FY18) Sales & Growth (FY14-FY18)

54 79

219

137

171

55% 48%

38%

25% 25%

0%

10%

20%

30%

40%

50%

60%

0

50

100

150

200

250

2014E 2015E 2016E 2017E 2018E

Sales Growth (%)

19

32

49

68

94

35% 40%

45% 50%

55%

0%

10%

20%

30%

40%

50%

60%

0

20

40

60

80

100

2014E 2015E 2016E 2017E 2018E

EBIT Margin (%) •  Sales are forecasted to grow by 26% y-o-y

between FY14 and FY18

•  Access to new markets within China and inorganic growth will see EBIT margin expansion to 55% in FY18

•  This will translate into higher profit margins as capital structure will remain constant

16

27

42

59

81

29% 34%

38% 43%

47%

0%

10%

20%

30%

40%

50%

0

10

20

30

40

50

60

70

80

90

2014E 2015E 2016E 2017E 2018E

Key Financial Metrics - Liquidity

Payables Days Receivables Days

71

86 77 73 69 66

55

2012A 2013A 2014E 2015E 2016E 2017E 2018E

•  The company overall has been improving liquidity metrics over the forecast period

•  Payables days increase and eventually stabilize from FY14 onwards

•  Receivables days are managed and declining

259

337 341 338 334 330 335

2012A 2013A 2014E 2015E 2016E 2017E 2018E

Inorganic Growth History •  Since January 2013, investment and acquisitions in 12 key businesses who share a total

worth of more than $34 billion USD

•  Key sectors: mobile, O2O services, digital media and logistics services

•  Alibaba’s acquisition and investment strategy is centered around user base expansion through the integration of complementary products and technology

•  More than $2.5 billion USD in 30 further companies

Technology •  development of user

base through mapping technology

•  targeted marketing opportunities

•  healthcare sector ventures e.g. “Future Hospital” initiative

Media and

Entertainment

•  Product expansion •  Enhance digital

entertainment strategy with video communication, games, music, etc.

•  Marketing access to millions of football fans

Logistics

•  Increased delivery efficiency

•  Creation of logistics hubs

•  potential to support 100mn packages/day

•  24 hour delivery •  Leverage experience

in tier 3 and 4 cities

Mobile

•  enhance mobile commerce

•  access vast user bases

•  behavioural data integration

•  expansion to overseas markets

Alibaba F-1 Statement, May 2014

VALUATION

Valuation Commentary

•  Key financial assumptions: –  WACC: 11.5% –  Terminal growth rate: 3%

–  Tax rate: 15%

•  Chinese policy benefits sustained growth

•  Revenue growth projected at a CAGR of 26%

•  Low operational costs due to lack of inventories

•  Risks: –  limited structural ability to influence corporate matters

–  conflict of interest arising with foreign shareholders

–  internal problems e.g. potential counterfeit goods sold on marketplaces

–  dilution of quality with too many new verticals e.g. healthcare

Financial Year (Dec. Year end) 2013 2014 2015 2016 2017 2018 Terminal Period

Total Turnover 35 54 79 109 137 171

growth (%) 55.0% 48.0% 38.0% 25.0% 25.0%

EBIT 11 19 32 49 68 94

margin (%) 31.1% 35.0% 40.0% 45.0% 50.0% 55.0%

Depreciation & Amortisation 0.8 1.3 2.8 3.8 5.7 7.8

Tax @ 15.0% (1.6) (2.8) (4.8) (7.4) (10.2) (14.1)

Capital Expenditure 2.5 4.5 6.7 9.3 11.6 14.5

Capex/Sales (%) -7.3% -8.5% -8.5% -8.5% -8.5% -8.5%

Change in Working Capital 0.0 (3.5) 3.1 4.1 4.4 9.3

Working Capital / Sales (%) 0.0% 6.5% -3.9% -3.7% -3.2% -5.4%

Free Cash Flow 7 9 26 40 57 82 82

Discount Factor 0.90 0.80 0.72 0.65 0.58 0.58

Terminal Value 999

Present Value 8.3 21.0 29.2 36.6 47.8 580

Enterprise Value (RMB, bn) 722

Net Debt as at (Dec 2013) -4.776

Market Capitalisation (RMB, bn) 727

No. Shares (bn) 2

Share Price (RMB) 304.4

Discounted Cash Flow Analysis

Valuation Summary

198

304

182

304

203

309

187

309

150 200 250 300 350

EV/Sales - Trading

EV/EBITDA - Trading

P/E - Trading

DCF

Share price, RMB

Curren

t share price: 677 RMB

APPENDIX

Inorganic Growth History

Company Date Description Potential Strategy

UCWeb June 2014 Mobile web browser developer

•  Enhance mobile commerce •  Access UCWeb’s vast user base and offer

additional mobile solutions

Weibo April 2014 Social media platform •  Potential for social commerce model development

•  Behavioral data integration •  Integration benefits from user data base

TangoMe April 2014 Mobile messaging service based in the US

•  Improve mobile messaging technology •  Expand to overseas market

Mobile


Inorganic Growth History Technology

Intime Retail

July 2014 China’s leading department store operators

•  Potential for an offline-to-online multi channel retail model

Retail

Company Date Description Strategy

Autonavi July 2014 Digital map content, navigation and location-

based solutions

•  Development of Alibaba’s m-commerce user base through mapping technology

•  Targeted marketing opportunity

CITIC 21CN April 2014 Product identification, authentication and tracking

system developer

•  Create opportunities in healthcare sector •  “Future Hospital” initiative e.g. app that allows

verification of drug authenticity through Alibaba cloud computing and big data technology and CITIC 21CN drug data


Inorganic Growth History


ChinaVision June 2014 Film and television program producer

•  Product expansion into digital media entertainment sector

Wasu Media April 2014

Digital media broadcasting and

distribution

•  Enhance digital entertainment strategy with video communication, games music, etc.

Youku Tudou May 2014 Chinese online video company (500mn unique

visitors monthly)

•  Advance Alibaba’s digital media vision to be available anywhere at anytime

•  Improve targeted marketing

Evergrande FC

July 2014 Popular Chinese football team, first ever winner of

Asian Football Confederation

Champions League Cup

•  Marketing access to millions of football fans

Media & Entertainment


Inorganic Growth History Logistics


Zeijing Cainao

May 2013 Nationwide operator of logistics infrastructure

and information systems

•  Enhance user experience through efficient delivery service

•  Create key logistics hubs, distribution centres, warehouses with potential to support processing of over 100mn packages per day and 24 hour delivery anywhere across China

Haier Electronics

March 2014 Electrical appliance research, development,

manufacturing and sales firm

•  Logistic JV specializing in delivery, installation and servicing of large format goods

•  Developing higher quality after-sale service

•  Leverage Haier’s industry experience and expertise in China’s tier 3 and 4 cities


Income Statement Alibaba Income Statement 2012A 2013A 2014E 2015E 2016E 2017E 2018E

Net Sales 20.025 34.517 53.5 79.2 109.3 136.6 170.7

COGS 6.554 9.719 16.1 23.8 32.8 41.0 51.2

SG&A 8.456 14.047 18.7 23.8 27.3 27.3 25.6

EBIT 5.0 10.8 18.7 31.7 49.2 68.3 93.9

Depreciation & Amortization 0.715 0.805 1.3 2.8 3.8 5.7 7.8

0.0 0.0 0.0 0.0 0.0

EBITDA 20.1 34.5 53.0 74.0 101.7

Other income 0.3 0.9 0.0 0.0 0.0 0.0 0.0

Interest Income 0.258 0.039 0.3 0.4 0.7 1.1 1.8

Interest Expense 0.068 1.572 0.5 0.4 0.4 0.4 0.4

Profit before taxes 5.5 10.1 18.5 31.6 49.4 69.0 95.3

Taxes 0.842 1.463 2.8 4.7 7.4 10.3 14.3

Profit after tax 4.690 8.649 15.7 26.9 42.0 58.6 81.0

Net income 4.7 8.6 15.7 26.9 42.0 58.6 81.0

`

Shareholder information

Diluted weighted average shares outstanding 2.5 2.4 2.4 2.4 2.4 2.4 2.4

Diluted earnings per share $1.86 $3.62 $6.55 $11.20 $17.50 $24.43 $33.74

Dividends per share $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Dividends 0.0 0.0 0.0 0.0 0.0

Balance Sheet Alibaba Balance Sheet 2012A 2013A 2014E 2015E 2016E 2017E 2018E Assets Current assets

Cash and cash equivalents 21.744 32.686 40.8 67.9 110.1 168.3 255.0 Accounts receivable 3.893 8.113 11.2 15.8 20.8 24.6 25.6 Prepaid expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other current assets 2.3 2.4 4.3 6.3 8.7 10.9 13.7

Total current assets 27.9 43.2 56.3 90.1 139.6 203.8 294.3

Non-current assets Net PP&E 2.463 3.808 7.0 10.9 16.4 22.3 29.0 Goodwill 11.436 11.294 11.3 11.3 11.3 11.3 11.3 Other intangibles 0.4 0.3 0.3 0.3 0.3 0.3 0.3 Other assets 5.1 5.2 10.7 15.8 21.9 27.3 34.1

Total assets 47.210 63.8 85.7 128.5 189.5 265.0 369.0

Liabilities Current liabilities

Short term debt 1.3 5.4 0.0 0.0 0.0 0.0 0.0 Accounts payable and accruals 4.7 9.0 15.0 22.0 30.0 37.0 47.0 Other payables 1.5 4.7 0.2 0.4 0.6 0.8 1.1 Deferred Revenues 4.4 4.9 16.1 23.8 32.8 41.0 51.2 Total current liabilities 11.751 23.995 31.3 46.1 63.4 78.8 99.4

Non-current liabilities Total long-term debt 0.0 22.5 22.5 22.5 22.5 22.5 22.5 Other long-term liabilities 1.0 6.3 8.0 11.9 16.4 20.5 25.6

Total liabilities 12.8 52.7 61.8 80.5 102.2 121.8 147.4

Equity Common stock 31.5 11.0 11.0 11.0 11.0 11.0 11.0 Retained earnings 0.0 0.0 15.8 42.8 85.0 143.8 225.0 Treasury stock 2.9 0.0 (2.9) (5.8) (8.7) (11.6) (14.5) Total equity 34.413 11.0 23.9 48.0 87.3 143.2 221.6 Total Liab.& Equity 47.210 63.8 85.7 128.5 189.5 265.0 369.0

Cashflow Statement Alibaba Cash Flow Statement 2013A 2014E 2015E 2016E 2017E 2018E

Net Income 15.7 26.9 42.0 58.6 81.0

Depreciation 1.3 2.8 3.8 5.7 7.8

Amortisation 0.0 0.0 0.0 0.0 0.0

Change in OWC (3.5) 3.1 4.1 4.4 9.3

Change in other assets (5.5) (5.1) (6.0) (5.5) (6.8)

Change in other liabilities 1.7 3.9 4.5 4.1 5.1

Cash from Operating Activities 9.8 31.5 48.4 67.4 96.3

Capex 4.5 6.7 9.3 11.6 14.5

Cash from Investing Activities -4.5 -6.7 -9.3 -11.6 -14.5

Change in Common Stock 0.0 0.0 0.0 0.0 0.0

Change in Treasury Stock (2.9) (2.9) (2.9) (2.9) (2.9)

Dividends 0.0 0.0 0.0 0.0 0.0

Long Term Debt Repayment 0.0 0.0 0.0 0.0 0.0

Cash from Financing Activities (2.9) (2.9) (2.9) (2.9) (2.9)

Net Cash Flow 2.4 21.8 36.2 52.9 78.9

Beginning Cash 27.2 29.6 51.5 87.7 140.6

Ending Cash 27.2 29.6 51.5 87.7 140.6 219.5

Financial Assumptions Alibaba Financial Assumptions 2013A 2014E 2015E 2016E 2017E 2018E Income statement

Sales growth % 72.4% 55.0% 48.0% 38.0% 25.0% 25.0% COGS as % of sales 28.2% 30.0% 30.0% 30.0% 30.0% 30.0% Annual depr. as % of previous PPE 32.7% 35.0% 40.0% 35.0% 35.0% 35.0% SG&A as % of sales 40.7% 35.0% 30.0% 25.0% 20.0% 15.0% Amortization of other intangibles amount 0.0 0.0 0.0 0.0 0.0 0.0 Non-recurring items amount 0.9 0.0 0.0 0.0 0.0 0.0 Effective tax rate 15.0% 15.0% 15.0% 15.0% 15.0%

Shareholder info Diluted weighted average shares outstanding (m) 2.389 2.4 2.4 2.4 2.4 2.4 Dividend per share growth rate 0.0% 0.0% 0.0% 0.0% 0.0%

Balance sheet: current assets Accounts receivable as % of sales 23.5% 21.0% 20.0% 19.0% 18.0% 15.0% Inventories % of COGS 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other current assets % of sales 6.8% 8.0% 8.0% 8.0% 8.0% 8.0%

Balance sheet: non-current assets Capital expenditures % of sales 7.3% 8.5% 8.5% 8.5% 8.5% 8.5% Other assets % of sales 15.0% 20.0% 20.0% 20.0% 20.0% 20.0%

Balance sheet: liabilities Accounts payable and accruals % of COGS 26.0% 24.0% 23.0% 23.0% 23.0% 22.0% Accrued expenses as % sales 5.9% 8.0% 8.0% 8.0% 8.0% 8.0% Deferred Revenues as % of sales 14.3% 30.0% 30.0% 30.0% 30.0% 30.0% Other long-term liabilities % of sales 18.2% 15.0% 15.0% 15.0% 15.0% 15.0%

Balance sheet: equity Common stock amount 11.0 11.0 11.0 11.0 11.0 11.0 Share repurchases $ amount (show as positive) 2.9 2.9 2.9 2.9 2.9 2.9

Debt (£/$ amount) Loans due for repayment 0.0 0.0 0.0 0.0 0.0 0.0 Other long-term debt repayment 0.0 0.0 0.0 0.0 0.0 0.0

Interest Rate (%) Short term debt 3.00% 3.00% 3.00% 3.00% 3.00% Loans due for repayment 2.00% 2.00% 2.00% 2.00% 2.00% Other long-term debt repayment 0.00% 0.00% 0.00% 0.00% 0.00% Cash 1.00% 1.00% 1.00% 1.00% 1.00%

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Will Alibaba Overtake GOOGLE?