Alibaba Group (BABA)

Analysts: Weifeng Liang,Bowen Wu

Sector: Technology Current Price: $92.99(As of Nov 12)

Market Cap: 232.48B EPS: $4.33 52 Week High: $ 109.87 52 Week Low: $ 59.25

General Information

83%

4% 11% 2%

% of Revenue in September Quarter 2016

Core Commerce

Cloud computing

Digital media and entertainment

Innovation initiatives and others

Investment Thesis

New Retail Model

Cloud Computing

Recommendation: Strong Buy Target Price: $267 MOS: 65%

Rural Taobao

Investment Thesis 1

NEW Retail Model

Digital Medias &

Entertainment Platforms

Rural Taobao

O2O Services

VR Shopping

Big Data

Cainiao Logistics

INTELLIGENCE INTERACTION

DIVERSIFICATION

ECOSYSTEM

Urban Customer Base

Investment Thesis 2

Blue Ocean: Rural Taobao

(In Trillions CNY)  2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

China Retail GMV

30.15 34.58 37.18 39.96 42.96 46.18 48.95 51.89 55.00 58.30 61.80 65.51

YOY% 15% 7.5% 7.5% 7.5% 7.5% 6% 6% 6% 6% 6% 6%

% of Online Market 12.70% 15.10% 16.59% 18.08% 19.57% 21.06% 22.55% 24.04% 25.53% 27.02% 28.51% 30.00%

Online Market GMV 3.83 5.22 6.17 7.23 8.41 9.73 11.04 12.47 14.04 15.75 17.62 19.65

(In Trillions CNY)  FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026

Alibaba Retail GMV 3.09 4.04 4.76 5.57 6.47 7.44 8.44 9.53 10.71 12.01 13.42

 (In Millions CNY)  FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026China Retail

Revenue 80,033 101,027 119,048 139,205 161,715 186,096 210,965 238,149 267,835 300,225 335,539

YOY% 26% 18% 17% 16% 15% 13% 13% 12% 12% 12%

Alibaba’s Market Share: 74%

Revenue/GMV=2.5%

New Retail Model Blooms Alibaba’s Revenue From Retail Market

Investment Thesis 3

Cloud Computing

Society Governance Business

Commercial Behaviors

Financial Services

Digital Medias &

Entertainment Logistics

Information Infrastructure Supplier

Data Pool

Applications

263 326 448 550 828 1431 2351 3108

4644

7880

0 2000 4000 6000 8000

10000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

AWS Revenue

Amazon AWS Revenue(In Millions USD)

Geometric Average Growth Rate: 45.9%

24% 37%

23%

51%

73% 64%

32% 49%

70%

2007 2008 2009 2010 2011 2012 2013 2014 2015

YOY%

(In Millions CNY)   FY2013 FY2014FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025FY2026

Cloud Computing

650 773 1,271 3,019 4,830 7,729 12,366 19,785 31,657 45,902 66,558 96,509 139,938 202,910

YOY% 19% 64% 138% 60% 60% 60% 60% 60% 45% 45% 45% 45% 45%

Wide Applications & High Growth Momentum Drive the Revenue

DCF Analysis

(In Millions CNY) FY2013FY2014FY2015FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026

China Retail Revenue

34,517 52,504 76,204 80,033 101,027 119,048 139,205 161,715 186,096 210,965 238,149 267,835 300,225 335,539 YOY% 59% 39% 34% 26% 18% 17% 16% 15% 13% 13% 12% 12% 12%

China Wholesale

2,197 2,300 3,205 4,288 5,856 7,379 9,297 11,714 14,760 17,417 20,552 24,251 28,617 33,768 YOY% 5% 39% 34% 26% 26% 26% 26% 26% 18% 18% 18% 18% 18%

International Retail

392 938 1,768 2,204 2,535 2,915 3,352 3,855 4,433 4,876 5,364 5,900 6,490 7,139 YOY% 139% 88% 25% 15% 15% 15% 15% 15% 10% 10% 10% 10% 10%

International Wholesale

3,768 3,913 4,718 5,425 6,130 6,927 7,828 8,845 9,995 10,795 11,658 12,591 13,598 14,686 YOY% 4% 21% 15% 13% 13% 13% 13% 13% 8% 8% 8% 8% 8%

Cloud Computing

650 773 1,271 3,019 4,830 7,729 12366 19,785 31,657 45,902 6,6558 96,509 139,938 20,2910 YOY% 19% 64% 138% 60% 60% 60% 60% 60% 45% 45% 45% 45% 45%

Entertainment &

Innovations

540 1,748 5,510 6,174 15,952 19,142 22,971 27,565 33,078 38,040 43,746 50,308 57,854 66,532

YOY% 224% 215% 12% 158% 20% 20% 20% 20% 15% 15% 15% 15% 15%

  FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026

Total Revenue

(In Millions CNY)

101,143 136,330 163,140 195,018 233,480 280,019 327,996 386,027 457,394 546,722 660,574

Total Revenue

(In Millions USD)

15,686 21,143 25,301 30,245 36,210 43,427 50,868 59,868 70,936 84,790 102,447

  YOY% 35% 20% 20% 20% 20% 17% 18% 18% 20% 21%

Future Revenue Breakdown Analysis

DCF Results

Current Price: $92.99 Target Price: $267 MOS: 65%

Assumption: Revenue Growth Rate: 20.85% Constant Growth rate: 4% Discount Rate: 11%

16.85% 28.85% 20.85% 22.85% 24.85%

10.00% 61% 67% 71% 75% 79%

10.50% 57% 63% 68% 72% 76%

11.00% 53% 60% 65% 70% 74%

11.50% 49% 56% 62% 67% 71%

12.00% 45% 53% 59% 64% 69%

MOS Sensitivity Analysis

Growth Rate

WACC

Relative Valuation

Key Ratios Comparison

  P/E P/B ROE ROA Finl Lev Revenue (in million)

Profit Margin

Gross Profit

Margin

Alibaba 66.65 5.80 34.50% 22.63% 1.71 15,686 70.00% 66.00%

Amazon 180.51 23.78 4.97% 1.00% 4.97 107,006 0.56% 33.04%

Industry Average 69.31 12.52 18.93% 6.38% 3.36 27,864 18.37% 34.93%

0

40

80

120

160

200

P/E P/B Finl Lev

Alibaba Amazon Industry Average

0.00%

20.00%

40.00%

60.00%

80.00%

ROE ROA Profit Margin

Gross Profit Margin

Alibaba Amazon Industry Average

P/B P/E Beta ROA(%) Log Revenue

Alibaba 11.5 111.17 1.189216 22.63 10.20171

Industry 12.57 53.38 1.226547 6.38 10.04093

Regression Analysis

0

20

40

60

80

100

120

P/B P/E Beta ROA Log Revenue

Alibaba Industry

Scenario Median Multiple Implied Price Margin of Safety

Price/Free Cash Flow 22.807 419.5667 0.78

EV/EBITDA 38.28732 593.9992 0.84

Price/Sales 3.406661 137.824 0.325

Median Implied Price 419.5667 0.78

Precedent Transactions

Valuation Spread

Margin of Safety Number of Valuations

40% > MOS 1 40% > MOS > 50% 3 50% > MOS > 60% 7

MOS > 60% 20 Total 31

Risks and Hedging Strategy

•  SEC’s Investigation On Accounting Practices and Sales Figures on Singles' Day ü  Increased Transparency on New Business Affiliates ü  Change of Accounting Method won’t Hurt Alibaba’s Business Model & Profitability •  China’s Potential Downward GDP Growth ü  Booming Middle Class ü  Rural Market Expansion and Increased Income •  Trump’s Potential Policies to Disrupt Trade with China ü  Small Revenue Contribution from International Commerce and Growing Presence in

Southeast Asia

Conclusion

² Advanced New Retail Model ² Rural Taobao’s Expansion ² Cloud Computing’s Wide Applications

² Excellent Profitability and Operating Efficiency

Recommendation: Strong Buy Target Price: $267

MOS: 65%