Alibaba Jeffrries

RMB Prev. 2014A Prev. 2015E Prev. 2016E Prev. 2017E

Rev. (MM) -- 52,504.0 -- 76,812.0 -- 105,040.0 -- 132,115.0

Chg (% YoY) -- 52.1% -- 46.3% -- 36.7% -- 25.8%

Operating Profit -- 29,392.0 -- 34,486.0 -- 46,382.0 -- 58,467.0

EBITDA (MM) -- 30,731.0 -- 36,242.0 -- 48,850.0 -- 61,855.0

Net Profit Non-GAAP

-- 27,610.0 -- 31,489.0 -- 45,060.0 -- 58,541.0

BV/Share -- 17.50 -- 53.00 -- 70.25 -- 93.20

EPS Growth -- 103.9% -- 7.9% -- 41.6% -- 29.9%

EPS

FY Dec -- $1.90 -- $2.06 -- $2.92 -- $3.79

FY P/E 50.4x 46.5x 32.8x 25.3x

Price Performance

SEP-14 OCT-14

100

95

90

85

80

COMPANY NOTE

Initiating Coverage

CHN | Technology | Internet 27 October 2014

Alibaba (BABA)The Powerful E-Commerce EcosystemConnecting Half of China; Initiate at Buy

EQU

ITY R

ESEARC

H C

HIN

A

BUYPrice target $118.00

Price $95.76

Financial SummaryBook Value (MM): Rmb40,818.0Book Value/Share: Rmb17.50Net Debt (MM): (Rmb2,557)Return on Avg. Equity: 106.5%Long-Term Debt (MM): Rmb30,711.0Cash & ST Invest. (MM): Rmb43,632.0

Market Data52 Week Range: $99.70 - $82.81Total Entprs. Value (MM): $238,140.2Market Cap. (MM): $238,557.3Insider Ownership: 12.8%Institutional Ownership: 54.6%Shares Out. (MM): 2,491.2Float (MM): NAAvg. Daily Vol.: NA

Cynthia Meng *Equity Analyst

+852 3743 8033 [email protected] Pitz §

Equity Analyst(212) 336-7413 [email protected]

Brian Fitzgerald §Equity Analyst

(212) 284-2491 [email protected] Chan *

Equity Associate+852 3743 8017 [email protected]

Nick Wang *Equity Associate

+852 3743 8059 [email protected] Wang *

Equity Associate+852 3743 8016 [email protected]

* Jefferies Hong Kong Limited § Jefferies LLC

Key Takeaway

China's changing Internet user demographics and mobile developmentsupport our favorable view on e-Commerce for the next decade. Alibaba is thelargest Chinese ecommerce player, with 80%+ GMV market share, but is onlyselling to less than 25% of the population now. We estimate well over half ofChinese population will be shopping on Alibaba’s platforms in 10 years. Initiatewith Buy; PT USD118.

Changing demographics & mobile support ecommerce in the next decade. Asdiscussed in our sector note, "A Taste of Domestic Consumption: The Unleashing of China'sE-Commerce Power" published on Sept 19, 2014, China’s e-Commerce growth for thenext decade benefit from: 1) changing Internet user demographics towards 30+ year oldage groups; 2) accelerating structural shift to online from traditional retail; 3) Chinesegovernment’s massive support for urbanization and domestic consumption; 4) proliferationof affordable smart devices; 5) improving wireless and transport infrastructures in lowertier and rural markets, and 6) rising consumer demand for better quality, design & fashion,authenticity and timely delivery.

Growth driven by mix shift towards Tmall, and improving mobile monetization.We expect Alibaba, as the largest e-Commerce player, to sell to well over half of theChinese population in 10 years, up from less than 25% now. We estimate FY14-17E revenueCAGR of 36%, driven by continued commission revenues from Tmall. Alibaba’s mobileGMV accounted for 32.8% of total GMV in FY1Q15, +21pcpt YoY. We expect the mobilemonetization rate to narrow the gap with that of PC.

Cross-border e-Commerce provides upside for long-term growth. Addressing thegrowing appetite for foreign brands among Chinese consumers, Tmall Global lowers thecost, delivery time and language barriers in cross-border online shopping, which is expectedto reach an RMB1trn market size by 2018. Our scenario analysis shows a 5-12% upside toour CY16 revenue estimate. Its recently launched ePass payment service allows U.S. retailersto reach Chinese online shoppers.

Valuation/RisksOur PT of USD118 is derived from 10-year DCF based on a long-term EBIT margin of 43%,terminal growth rate of 5.5% and WACC of 10.2%, implying a CY16 P/E of 32.5x, 1.4%premium to global e-Commerce peer average of 32x, 20.4% premium to China e-Commercepeer group. Risks: limited ability to influence corporate matters by individual shareholdersand potential conflict of interest arising from the company’s corporate structure.

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have aconflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investmentdecision. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 126 to130 of this report.

Long Term Financial Model Drivers

LT Earnings CAGR 28%

Organic Revenue Growth 36%

Acquisition Contribution 0%

Operating Margin Expansion -12%

Note: our LT earnings CAGR & organic revenue

growth is annualised growth from FY14-17E.

Operating margin expansion calculated from

FY14-17E.

Other Considerations

China’s online retail sales market is

expected to reach RMB2.8trn in 2014,

+45.8% YoY, according to iResearch. We

estimate the market size to further grow to

RMB6.5trn in 2018, with a 2013-2018

CAGR of 28%, based on which, e-

Commerce sales is expected to account

for 10.4% of total retail sales in 2014 and

16.6% in 2018.

1 Year Forward P/E

Source: Bloomberg, Jefferies

70

75

80

85

90

95

100

Share price

38x

36x

34x

32x

30x

Founded in 1999, Alibaba is the largest online and mobile commerce company in the

world in terms of GMV in 2013, according to IDC. The company operates its marketplaces

as a platform for third parties, and does not engage in direct sales, compete with its

merchants or hold inventory. Alibaba operates Taobao Marketplace and Tmall, the no.1

C2C and B2C platform in China by GMV respectively, according to iResearch.

Stronger-than-expected mobile

monetization

Successful execution of cross-border e-

Commerce business

Deepening lower-tier city/rural

penetration

Economic benefits from growing

Internet finance business of Small and

Micro Financial Services Company

Catalysts

Target Investment Thesis

GMV continues to grow strongly,

particularly on Tmall, driven by

continued active customer acquisition

Mobile growth continues to outpace

that of PC

Maintain leadership in China’s e-

Commerce market

PT of USD118 derived from DCF based

on WACC of 10.2%, terminal growth

rate of 5.5% and long-term EBIT margin

of 43%

Upside Scenario

Stronger-than-expected GMV growth

driven by successful execution of

lower-tier city penetration and cross-

border business

M-Commerce shows stronger-than-

expected growth.


on WACC of 10%, terminal growth rate

of 6% and long-term EBIT margin of

47.3%

Downside Scenario

GMV growth slows down as a result of

market share loss to competitors

Execution of cross-border business and

mobile e-Commerce growth are below

expectation.


on WACC of 11.5%, terminal growth

rate of 4% and long-term EBIT margin

of 37.8%

Long Term Analysis

Scenarios

Group CY15 P/E

Source: Bloomberg, Jefferies.

35.3x40.1x

82.1x

16.0x

0x

10x

20x

30x

40x

50x

60x

70x

80x

90x

Alibaba Vipshop Amazon eBay

Earnings Growth vs P/E

Source: Bloomberg, Jefferies.

Alibaba

Vipshop

eBay

Amazon

0%

50%

100%

150%

0.0x 20.0x 40.0x 60.0x 80.0x 100.0x

Recommendation / Price Target

Ticker Rec. PT

BABA US Buy USD118

VIPS US Buy USD280

JD US Buy USD38

AMZN US Buy USD380

EBAY US Hold USD55 N.A. N.A.

Company Description

THE LO

NG

VIE

W

Peer Group

Alibaba Group

BUY: USD118 Price Target

BABA

Initiating Coverage

27 October 2014

page 2 of 130 , Equity Analyst, +852 3743 8033, [email protected] Meng

Please see important disclosure information on pages 126 - 130 of this report.

Table of Contents

Investment Summary p.5

Valuation and Risks p.6

Changing Demographics and Mobile Support E-Commerce in the Next Decade p.11

Alibaba - The Powerful E-Commerce Ecosystem Connecting Half of China p.25

Business Model and Segment Revenue p.27

A Strong Self-reinforcing Network Effect p.33

Extending Mobile Leadership p.53

Building the Largest Ecosystem p.63

Expanding Cross-Border E-Commerce p.83

Company Background p.91

Corporate & Shareholding Structure p.92

Partnership System p.94

Small and Micro Financial Services Company p.98

Management Team p.100

Financial Statements p.102

Appendix p.116

FY2Q15 Results Preview p.117

M&A Investment Summary p.120

BABA

Initiating Coverage

27 October 2014



This page is intentionally kept blank

BABA

Initiating Coverage

27 October 2014



Alibaba Group Investment Summary We are initiating coverage of Alibaba at Buy, with a price target of USD118.

China’s changing Internet user demographics and mobile development

support our favorable view on e-Commerce for the next decade. Alibaba is the

largest Chinese ecommerce player with 80%+ GMV market share, but is only

selling to less than 25% of the population now. We estimate well over half of

the Chinese population will be shopping on Alibaba’s platforms in 10 years.

Alibaba is the largest online and mobile commerce company in the world by GMV in 2013,

according to IDC. Its no.1 C2C and B2C platforms in China, Taobao and Tmall, in

aggregate generated a GMV of RMB1,833bn (USD296bn) in the twelve months ended

June 30, 2014.

Key Points to Highlight

Changing demographics & mobile support ecommerce in the next decade

As discussed in our sector note, "A Taste of Domestic Consumption: The Unleashing of

China's E-Commerce Power," published on Sept 19, 2014, China’s e-Commerce growth

for the next decade should benefit from: 1) changing Internet user demographics towards

30+ year old age groups; 2) accelerating structural shift to online from traditional retail; 3)

the Chinese government’s massive support for urbanization and domestic consumption;

4) proliferation of affordable smart devices; 5) improving wireless and transport

infrastructures in lower tier and rural markets, and 6) rising consumer demand for better

quality, design & fashion, authenticity and timely delivery.

A powerful ecosystem with strong self-reinforcing network effect

We expect Alibaba, as the largest e-Commerce player with 80%+ GMV market share as of

1H14, to sell to well over half of Chinese population in ten years, up from less than 25%

now. We expect increasing GMV contribution from Tmall given its higher listing priority

and rising consumer demand for quality goods. We estimate FY14-17E revenue CAGR of

36%, driven by continued commission revenues from Tmall.

Improving monetization with extended mobile leadership

Driven by its diversified portfolio of mobile apps, including Alipay Wallet, and mobile-

targeted promotional efforts, Alibaba’s mobile GMV accounted for 32.8% of total GMV in

FY1Q15, +21pcpt YoY. We expect mobile monetization rate to narrow the gap with that of

PC as Alibaba enhances its mobile ads products and increases both paid clicks and CTR,

eventually closing the CPC gap across mobile and PC platforms.

Closing the loop with logistics support, Internet finance and banking

Alibaba’s large and growing ecosystem is supported by its expanding logistics platform

and Alipay which accounted for 48.8% of China’s third-party online payment market

share in 2Q14, according to iResearch. Leveraging on the data accumulated from its

online platforms, Alibaba entered into Internet finance including wealth management,

SME loan and Internet banking to further enhance user engagement within its ecosystem.

Cross-border e-Commerce may drive upside for long-term growth

Addressing the growing appetite for foreign brands among Chinese consumers, Tmall

Global lowers the cost, delivery time and language barriers in cross-border online

shopping which is expected to reach an RMB1trn market size by 2018. Our scenario

analysis shows a 5-12% upside to our CY16 revenue estimate. Its recently launched ePass

payment service allows U.S. retailers to reach to Chinese online shoppers.

BABA

Initiating Coverage

27 October 2014



Valuation Our price target of USD118 is derived from a 10-year DCF analysis based on long-term

non-GAAP EBIT margin estimate of 43%, a terminal growth rate of 5.5% and a WACC of

10.2%. This is equivalent to a market cap of USD292.9bn, implying a FY17 P/E multiple of

31x or CY16 P/E of 32.5x, 1.4% premium to global e-Commerce peer average of 32x,

20.4% premium to China e-Commerce peer average of 27x, and 62.2% premium to China

Internet peer group average of 20x. We do not see a direct comparable to Alibaba among

China’s e-Commerce players given that JD.com operates an online direct sales model

while Vipshop focuses on a niche flash sales market. Among China’s Internet subsectors,

we see e-Commerce as the most favorable sector (followed by mobile games, and online

travel) benefitting from the shift in Internet user demographics towards the more mature

30+ year old users who have higher consumption power and will shop online. Companies

in other subsectors such as portal and PC games generally trade at a lower multiple. Based

on Bloomberg consensus, U.S. e-Commerce players, including Amazon, Ebay and Zulily,

on average trade at a 73% and 10% premium to Internet average in FY15 and FY16 P/E

respectively.

At the current price of USD95.8, Alibaba is trading at 25.3x FY17 P/E or 26.5x CY16 P/E.

Our PT of USD118 represents 23% upside to last closing price. Near-term potential

catalysts of the stock include the upcoming Nov 11th Singles Day sales and FY2Q15

earnings results to be released on Nov 4th.

Year-to-date share price performance compared to peers

As of Oct 24, 2014, Alibaba has traded up 40.8% since IPO. China’s e-Commerce names

have fared well with JD.com up 26.4% since its IPO in May and Vipshop up 155.2% YTD.

On the other hand, U.S. e-Commerce players such as Amazon and Ebay have traded down

28% and 6.8%, respectively, YTD. The average share price of China’s brick-and-mortar

department store names, including Parkson, Intime Retail, Golden Eagle Retail, Lifestyle

International and Springland International, declined 7.5% YTD on a weighted average

basis.

BABA

Initiating Coverage

27 October 2014



Chart 1: DCF Analysis

Source: Jefferies estimates

Pursuant to the 2014 share and asset purchase agreement signed in Aug 2014, Alibaba is

entitled to acquire up to 33% equity interest in Small and Micro Financial Services

Company which has the legal ownership of Alipay and SME loan business. Paypal’s 2016

EV/S multiple is estimated at 3.6x, according to Jefferies U.S. Internet team. Assuming a

range of 20% discount and 20% premium to Paypal’s EV/S and our estimated Small and

Micro Financial Services Company’s revenue of USD15.1bn in 2016, we estimate EV of

Small and Micro Financial Services Company to be in the range of USD43.4bn and

USD65bn. Acquiring 33% equity interest will provide 4.9-7.3% upside to our current

target market cap of Alibaba.

2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Revenue (in RMB mn) 76,812 105,040 132,115 161,715 193,170 225,734 258,603 292,029 327,119 363,403 400,313

% Y/Y Growth 46.3% 36.7% 25.8% 22.4% 19.5% 16.9% 14.6% 12.9% 12.0% 11.1% 10.2%

D&A 1,755 2,468 3,388 4,451 5,658 7,000 8,459 10,012 11,644 13,359 15,153

Depr % revenue 2.3% 2.3% 2.6% 2.8% 2.9% 3.1% 3.3% 3.4% 3.6% 3.7% 3.8%

EBIT 34,486 46,382 58,467 71,566 85,100 99,446 114,185 128,068 142,475 157,188 171,953

% Margin 44.9% 44.2% 44.3% 44.3% 44.1% 44.1% 44.2% 43.9% 43.6% 43.3% 43.0%

% Y/Y Growth 17.3% 34.5% 26.1% 22.4% 18.9% 16.9% 14.8% 12.2% 11.2% 10.3% 9.4%

EBIT*(1-tax) 29,919 39,425 49,697 60,831 72,335 84,529 97,057 108,858 121,104 133,610 146,160

Implied Taxes on Operations (4,567) (6,957) (8,770) (10,735) (12,765) (14,917) (17,128) (19,210) (21,371) (23,578) (25,793)

% Effective Tax Rate 13.2% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%

Capital Expenditures (9,526) (10,564) (11,965) (14,323) (16,915) (19,654) (22,386) (25,134) (27,990) (30,914) (33,853)

% of sales 12.4% 10.1% 9.1% 8.9% 8.8% 8.7% 8.7% 8.6% 8.6% 8.5% 8.5%

Change in Net Working Capital 21,068 10,659 10,180 11,327 12,045 12,464 12,575 12,810 13,448 13,906 14,146

% of sales 27.4% 10.1% 7.7% 7.0% 6.2% 5.5% 4.9% 4.4% 4.1% 3.8% 3.5%

Unlevered Free Cash Flow 43,217 41,988 51,299 62,287 73,124 84,339 95,705 106,546 118,206 129,962 141,606

Fiscal Year

Perpetuity Growth Rate / Terminal Value at 10.2% WACC Implied Terminal Value / Terminal EBITDA Multiple

4.5% 5.0% 5.5% 6.0% 6.5% 19.3x 21.2x 23.4x 26.2x 29.8x

2,749,245 3,014,883 3,337,344 3,737,045 4,245,514 2,749,245 3,014,883 3,337,344 3,737,045 4,245,514

Median DCF Valuation WACC Equity Value per Share

NPV of Cash Flows and Terminal Value 1,734,447 8.2% 161.6 180.4 206.1 243.7 303.6

Plus: Net Cash (est. as of Mar 31, 2015) 81,486 9.2% 126.5 136.7 149.8 167.0 190.5

Implied Equity Value (RMB mn) 1,815,933 10.2% 103.7 110.0 117.6 127.0 139.0

Implied Equity Value (USD mn) 292,892 11.2% 87.8 91.9 96.7 102.5 109.5

No. of ADS outstanding (mn) 2,491 12.2% 76.1 78.9 82.2 85.9 90.3

Implied Equity Value per Share (RMB) 729.0

Spot Exchange Rate 0.16

Implied Equity Value per Share (US$) $117.6

WACC Calculation

Target Debt/Total Cap. Ratio 28.0% Cost of equity (Re) 13.1%

(CAPM: Re= Rf + βadj x ERP)

10-year T-bond yield 2.2% Weighted average yield of debt (Rd) 3%

Risk-free rate (Rf) 2.2%

Effective tax rate (Tc) 15%

Applied Beta 1.2

Equity risk premium (ERP) 9.0% Rwacc = [Re x E/V] + [(1-Tc) x Rd x D/V]

= 10.2%

BABA

Initiating Coverage

27 October 2014



Chart 2: Upside to valuation assuming Alibaba to acquire 33% equity interest

of Small and Micro Financial Services Company in 2016

Note: (1) Paypal’s 2016 EV/S ratio is based on the mean of estimated enterprise value

range and revenue of Paypal published by Jefferies U.S. Internet team on Sept 30, 2014;

(2) assuming equity value is equal to enterprise value with zero net cash; (3) Pursuant to

the 2014 share and asset purchase agreement in Aug 2014, Alibaba is entitled to acquire

up to a 33% equity interest in Small and Micro Financial Services Company

Source: Jefferies estimates

Key Risks

Limited ability to influence corporate matters by individual shareholders

The Alibaba Partnership, consisting of members of management, has the right to

nominate majority of the members in the board of directors. Alibaba’s two major

shareholders, SoftBank and Yahoo, have also agreed to vote their shares in favor of the

partnership’s nominees at each annual general shareholders meeting. This limits the

ability of individual shareholders in influencing corporate matters.

Corporate structure may impose conflict of interest

Alibaba Group conducts the operation of its marketplaces through variable interest

entities which are substantially owned by Jack Ma, the lead founder and executive

chairman of Alibaba. This may impose conflict of interest due to his dual roles as directors

and equity holders of the variable interest entities and as directors of Alibaba Group.

Alibaba does not control Alipay, its payment and escrow service provider, or its parent

entity, Small and Micro Financial Services Company, over which Jack Ma controls majority

of the voting interests. Potential conflicts of interest may arise due to his dual role as

executive chairman of Alibaba and through his voting control over and his economic

interest in Small and Micro Financial Services Company. Alipay handled 78.6% of

Alibaba’s China commerce retail GMV in FY14. Alipay may also be subject to potential

regulatory risks as regulators in China may increase their focus on online and mobile

payment services.

Potential counterfeit goods sold on marketplace

Although Alibaba has adopted measures to monitor authenticity of products sold on its

marketplaces, the risk of merchants selling counterfeit or infringing products is unlikely to

be eliminated given that Taobao is a C2C platform. This may result in regulatory or legal

action and cause damage to Alibaba’s reputation.

Scenario #1 #2 #3 #4 #5

Paypal's estimated 2016 EV/S ratio (1)

Premium/(Discount) to Paypal -20% -10% 0% 10% 20%

Estimated revenue of Small and Micro Financial Services

Co. (USD mn)

EV/S assumption 2.9x 3.2x 3.6x 3.9x 4.3x

EV of Small and Micro Financial Services Co. (USD mn) (2) 43,382 48,805 54,227 59,650 65,073

Equity interest to be acquired by Alibaba (3)

Incremental equity value to Alibaba (USD mn) 14,316 16,105 17,895 19,684 21,474

Alibaba's current target market cap (USD mn)

Upside with 33% equity interest of Small and Micro

Financial Services Company4.9% 5.5% 6.1% 6.7% 7.3%

3.6x

33%

292,892

15,132

BABA

Initiating Coverage

27 October 2014



Chart 3: Alibaba forward P/E band

Source: Bloomberg, Jefferies

BABA

Initiating Coverage

27 October 2014



Chart 4: Peer Comparison Table

Note: Alibaba’s valuation multiples in the above table are based on calendar year estimates for apple-to-apple comparison against peers

Source: Company data, Bloomberg closing price as of Oct 24, 2014, Jefferies

FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16

BABA US Alibaba USD 95.8 238,553 46.2 35.3 26.5 19.3 13.8 10.2 19.8 15.0 11.6 2.6 1.1 0.8 44.9% 24.2% 23.4% Buy

JD US JD.com USD 24.0 32,837 n.a. n.a. 76.6 1.3 0.9 0.7 1.5 1.1 0.8 n.a. n.a. n.a. n.a. n.a. 0.5% Buy

VIPS US Vipshop USD 213.6 12,071 66.6 40.1 25.3 3.2 2.0 1.3 3.3 2.1 1.5 0.4 0.6 0.4 30.6% 34.8% 36.3% Buy

JMEI US Jumei USD 22.0 3,150 39.4 21.9 14.5 3.8 2.5 1.7 4.7 3.4 2.5 0.6 0.3 0.2 18.3% 22.8% 26.0% NC

DANG US Dangdang USD 12.2 994 60.6 20.7 11.2 0.6 0.5 0.3 0.7 0.6 0.5 2.0 0.7 0.4 15.2% 37.8% 40.7% NC

2280 HK HC International HKD 9.9 849 20.9 12.8 7.7 3.6 2.1 1.0 4.7 3.3 2.2 0.4 0.2 0.1 23.0% 29.1% 34.7% Buy

46.8 26.1 27.0 5.3 3.6 2.5 5.8 4.2 3.2 1.2 0.6 0.4 26.4% 29.7% 26.9%

AMZN US Amazon USD 287.1 132,911 135.8 82.1 52.0 1.5 1.2 1.0 1.5 1.2 1.0 n.a. 1.3 0.9 9.6% 15.0% 21.5% Buy

EBAY US eBay USD 51.1 63,510 17.2 16.0 14.1 3.2 2.8 2.5 3.5 3.1 2.8 3.7 1.8 1.0 16.7% 17.4% 16.5% Hold

ZU US Zulily USD 37.1 4,636 175.9 80.3 43.9 3.8 2.6 1.9 3.8 2.5 1.8 2.7 1.2 0.7 7.1% n.a. n.a. NC

YOOX EU Yoox S.p.A. EUR 14.6 1,104 54.1 37.6 27.9 1.6 1.3 1.1 1.6 1.3 1.1 1.7 1.2 0.9 12.0% 14.8% 17.0% NC

MELI US MercadoLibre USD 112.2 4,952 49.6 37.3 31.1 9.4 7.9 6.3 9.7 8.3 6.8 2.5 1.8 1.5 27.9% 30.3% 29.4% NC

4755 JP Rakuten JPY 1,176.0 14,447 28.4 21.8 17.7 2.8 2.5 2.1 2.7 2.4 2.1 1.7 1.3 1.0 16.3% 18.9% 19.8% Hold

ASC LN ASOS GBP 2,107.0 2,825 51.6 48.0 37.6 1.7 1.5 1.2 1.8 1.5 1.2 2.3 2.1 1.7 19.4% 16.8% 18.3% Buy

56.1 46.2 32.0 3.4 2.8 2.3 3.5 2.9 2.4 2.4 1.5 1.1 15.6% 18.9% 20.4%

700 HK Tencent HKD 119.5 144,285 35.3 25.0 19.0 10.3 8.4 6.9 10.8 8.9 7.3 0.9 0.6 0.6 29.4% 30.6% 29.8% Buy

3888 HK Kingsoft HKD 17.0 2,596 21.8 15.1 10.2 3.0 1.8 1.1 4.9 3.4 2.4 n.a. n.a. n.a. 16.7% 19.6% 27.1% NC

NTES US Netease USD 92.7 12,119 15.0 13.2 11.7 4.6 3.8 3.0 6.7 5.7 5.0 1.0 0.9 0.8 22.1% 20.9% 19.7% NC

PWRD US Perfect world USD 21.4 1,061 9.5 8.4 7.8 1.3 1.0 0.8 1.7 1.4 1.3 n.a. n.a. n.a. 13.5% 14.8% 14.6% NC

CYOU US Changyou USD 18.2 978 n.a. 13.7 6.4 1.1 1.0 0.8 1.3 1.2 1.1 n.a. n.a. n.a. n.a. 8.1% 13.0% NC

777 HK NetDragon HKD 13.4 879 16.5 14.9 13.5 n.a. n.a. n.a. 5.6 4.8 4.3 n.a. n.a. n.a. 6.7% 7.3% 7.7% NC

434 HK Boyaa HKD 7.2 700 14.2 10.5 7.7 3.1 1.9 1.1 4.5 3.3 2.5 n.a. n.a. n.a. 22.2% 25.3% 25.7% NC

8002 HK IGG HKD 3.4 596 8.2 6.3 4.6 1.9 1.2 0.5 2.9 2.3 1.9 n.a. n.a. n.a. 33.9% 30.9% 32.2% NC

6899 HK Ourgame HKD 4.1 414 15.0 10.3 6.9 2.8 1.9 1.1 4.3 3.1 2.2 0.0 0.2 0.1 16.6% 21.7% 24.7% Buy

16.9 13.0 9.8 3.5 2.6 1.9 4.7 3.8 3.1 0.7 0.6 0.5 20.1% 19.9% 21.6%

BABA US Alibaba USD 95.8 238,553 46.2 35.3 26.5 19.3 13.8 10.2 19.8 15.0 11.6 2.6 1.1 0.8 44.9% 24.2% 23.4% Buy

700 HK Tencent HKD 119.5 144,285 35.3 25.0 19.0 10.3 8.4 6.9 10.8 8.9 7.3 0.9 0.6 0.6 29.4% 30.6% 29.8% Buy

NTES US Netease USD 92.7 12,119 15.0 13.2 11.7 4.6 3.8 3.0 6.7 5.7 5.0 1.0 0.9 0.8 22.1% 20.9% 19.7% NC

SINA US Sina USD 39.8 2,655 40.4 30.8 16.3 1.1 0.9 0.6 3.4 2.9 2.4 n.a. 1.0 0.2 2.7% 3.4% 6.1% Hold

BIDU US Baidu USD 222.6 78,028 37.9 25.8 18.9 9.2 5.8 4.2 9.8 6.6 5.0 n.a. 0.6 0.5 24.3% 26.0% 26.2% Buy

SOHU US Sohu USD 44.0 1,694 n.a. n.a. 29.0 0.7 0.6 0.5 1.0 0.8 0.7 n.a. n.a. 1.3 n.a. n.a. 2.1% NC

RENN US Renren USD 3.4 1,356 n.a. n.a. n.a. 5.6 6.2 5.6 15.6 14.3 11.2 n.a. n.a. 1.0 n.a. n.a. n.a. Underperform

YOKU US Youku USD 18.8 3,914 n.a. 216.4 30.6 3.7 2.7 1.8 6.0 4.4 3.3 n.a. n.a. n.a. n.a. 0.4% 5.2% NC

QIHU US Qihoo 360 USD 68.2 8,587 28.6 17.7 11.1 6.0 3.9 2.6 6.6 4.5 3.3 0.7 0.3 0.2 30.3% 33.1% 34.5% Buy

SFUN.US Soufun USD 10.0 4,099 15.3 11.8 9.7 5.1 3.8 2.8 5.6 4.6 3.8 1.2 1.0 0.8 51.6% 42.9% 35.7% NC

ATHM US Autohome USD 49.9 5,251 48.2 35.4 25.7 16.0 11.0 8.0 16.7 11.9 9.0 1.2 0.9 0.6 28.0% 27.2% 27.7% NC

BITA US BitAuto USD 80.0 3,524 46.5 29.8 22.4 9.7 6.9 5.4 10.3 7.6 6.2 0.8 0.5 0.4 19.2% 21.5% 22.3% NC

AMCN US Air media USD 2.2 131 n.a. 32.6 16.5 0.3 0.3 0.2 0.5 0.5 0.4 n.a. n.a. n.a. n.a. -0.2% 1.1% NC

WUBA US 58.com USD 38.1 3,339 634.2 158.5 20.2 11.8 7.8 5.2 13.3 8.8 6.1 n.a. n.a. n.a. 3.8% 9.8% 25.7% NC

CMCM US Cheetah Mobile USD 16.7 2,334 59.6 21.1 9.0 7.8 3.7 1.7 8.5 4.3 2.4 0.5 0.2 0.1 20.2% 38.3% 52.0% NC

CTRP US Ctrip USD 57.1 7,392 53.7 33.1 22.3 5.5 3.9 2.7 6.1 4.6 3.4 1.8 1.1 0.7 8.5% 13.4% 17.2% NC

QUNR US Qunar USD 26.8 3,175 n.a. n.a. 97.7 11.1 6.7 4.2 11.4 6.6 4.2 n.a. n.a. n.a. n.a. n.a. n.a. NC

LONG US Elong USD 19.4 685 118.3 45.5 24.7 n.a. n.a. n.a. 3.3 2.7 2.4 n.a. n.a. n.a. n.a. n.a. n.a. NC

2280 HK HC International HKD 9.9 849 20.9 12.8 7.7 3.6 2.1 1.0 4.7 3.3 2.2 0.4 0.2 0.1 23.0% 29.1% 34.7% Buy

DANG US Dangdang USD 12.2 994 60.6 20.7 11.2 0.6 0.5 0.3 0.7 0.6 0.5 2.0 0.7 0.4 15.2% 37.8% 40.7% NC

JD US JD.com USD 24.0 32,837 n.a. n.a. 76.6 1.3 0.9 0.7 1.5 1.1 0.8 n.a. n.a. n.a. n.a. n.a. 0.5% Buy

VIPS US Vipshop USD 213.6 12,071 66.6 40.1 25.3 3.2 2.0 1.3 3.3 2.1 1.5 0.4 0.6 0.4 30.6% 34.8% 36.3% Buy

JMEI US Jumei USD 22.0 3,150 39.4 21.9 14.5 3.8 2.5 1.7 4.7 3.4 2.5 0.6 0.3 0.2 18.3% 22.8% 26.0% NC

VISN US Vision China USD 11.6 59 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. NC

CCIH US ChinaCache USD 11.8 300 147.1 53.5 357.6 1.0 0.8 0.6 1.2 0.9 0.7 n.a. n.a. n.a. 3.7% 6.6% 10.9% NC

EDU US New oriental USD 22.4 3,540 14.7 14.8 12.8 2.2 2.0 1.7 3.0 2.6 2.2 0.3 2.2 0.8 25.0% 23.1% 22.3% Hold

1980 HK Tian Ge HKD 4.9 803 14.5 14.7 11.9 2.9 2.6 1.8 6.0 5.4 4.4 0.4 0.9 0.5 24.7% 12.9% 14.0% Buy

YY US YY USD 81.9 4,580 29.9 20.8 14.4 7.3 4.6 3.1 8.0 5.4 3.9 0.3 0.2 0.1 39.8% 39.4% 35.4% NC

JOBS US 51job USD 30.2 1,795 18.5 15.6 12.6 4.8 4.0 3.2 6.0 5.2 4.4 n.a. n.a. n.a. 14.3% 16.6% 16.8% NC

36.4 26.0 20.0 4.9 4.2 3.0 5.7 5.2 4.0 0.9 0.7 0.5 22.8% 22.4% 22.7%

30.6 22.2 19.6 4.7 3.5 2.7 6.0 4.5 3.7 0.9 0.7 0.5 22.1% 21.7% 22.4%

Rating PE EV/Sales Price to Sales PEG ROE

Ticker Company FX Last Close Market Cap

USD mn

China e-Commerce Average

Global e-Commerce Average (ex Zulily FY14 P/E)

China Game Average

Internet/New Media Avg (excl. P/E ratio >80, EV/S and P/S >15)

Internet overall (excl. P/E ratio >80, EV/S and P/S >15)

BABA

Initiating Coverage

27 October 2014



Changing Demographics and Mobile Support E-Commerce in the Next Decade

China’s e-Commerce market is forecast to grow at a 2013-2018 CAGR of 28%, accounting

for 10.4% of total retail sales in 2014. As discussed in our sector note, “A Taste of

Domestic Consumption: The Unleashing of China’s E-Commerce Power” published on

Sept 19, 2014, China’s e-Commerce growth is driven by secular trends including

urbanization and increasing household income, rising smartphone and Internet

penetration, the mix shift towards more mature Internet user demographics, as well as

improving communications and transportation infrastructure.

In this section, we discuss the following:

1. Favorable government policy and increasing urbanization drives domestic

consumption as household income rises.

2. Our analysis shows that China's Internet users aged 30+ years will account for

54% of total Internet users by 2018, up from 33% in 2008, and 81% of the

240mn new incremental Internet users will be 30+ years old. Internet

demographics mix shift to more 30+ year old age groups indicates huge

opportunities in e-Commerce as these users adopt online shopping.

3. China’s relatively low penetration of consumption, Internet, e-Commerce and

online shoppers compared to developed countries suggests ample room for

growth.

4. Given the proliferation of affordable smart devices, improving wireless 3G and

4G coverage and user experience, expected further data pricing declines due to

LTE promotions by the telcos, we believe that m-Commerce is still at very early

stage of monetization.

5. Accelerating structural shift to online from traditional retail. According to

linkshop.cn’s 1H14 survey, the revenues of 73 surveyed offline retailers showed

only moderate YoY growth. In the department store category, 34 out of the 54

surveyed stores posted revenue decline with average sales down by 2% YoY in

1H14.

BABA

Initiating Coverage

27 October 2014



Changing Demographics and Mobile Support E-Commerce in the Next Decade

China’s online retail sales market is expected to reach RMB2.8trn in 2014, +45.8% YoY,

accounting for 10.4% of total retail sales. We estimate the market size to further grow to

RMB6.5trn in 2018, with a 2013-2018 CAGR of 28%. In our view, China’s e-Commerce

growth is driven by secular trends including urbanization and increasing household

income, the mix shift towards more mature Internet user demographics, rising

smartphone and Internet penetration as well as improving communications and

transportation infrastructure. This leads to accelerating structural shift to online from

traditional retail.

Chart 5: China online retail sales (2007A-2018E)

Source: iResearch (2007A-2017E) as of Jul 2014, Jefferies estimates (2018E)

Chart 6: China online retail sales structure (2008A-2018E)

Source: iResearch (2008A-2017E) as of Jul 2014, Jefferies estimates (2018E)

China’s online retail sales market is

expected to reach RMB2.8trn in

2014, +45.8% YoY, accounting for

10.4% of total retail sales.

We estimate the market size to

further grow to RMB6.5trn in 2018,

with a 2013-2018 CAGR of 28%.

B2C market is estimated to account

for 48% of total online retail sales in

2014 and 62% in 2018.

BABA

Initiating Coverage

27 October 2014



Urbanization leads to increasing household income

The “National New-type Urbanization Plan (2014-2020)” released on March 16, 2014,

demonstrates the Chinese government’s determination to speed up urbanization for

economic growth expansion through further build-out of transport networks, urban

infrastructure and residential real estate. According to the National Bureau of Statistics,

China’s urban population grew from 459.1mn in 2000 to 731.1mn in 2013, accounting

for 54% of total population. The government aims to raise the urbanization rate to 60%

by 2020 and further to 70%, implying an urban population of 1B+ by 2030.

Chart 7: China’s population and urbanization rate

Source: CEIC, National Bureau of Statistics

Disposable income of the Chinese has been increasing steadily over the past decade

driven by urbanization and economic progression. According to the National Bureau of

Statistics, disposable income per capita of urban residents reached RMB26,955

(US$4,348) in 2013, with a nominal growth rate of 9.7% YoY or real price-adjusted

growth rate of 7% YoY.

Chart 8: China’s disposable income per capita of urban residents

Source: National Bureau of Statistics of China as of March 2014, Jefferies

The middle income class, which generally devotes one-third of income for discretionary

spending, experienced the strongest growth in household income over the past years. The

rise of the middle class and increase in purchasing power has also enabled Chinese

consumers to pursue a higher quality of life, which creates huge retail opportunities.

Disposable income per capita of

urban residents reached RMB26,955

(US$4,348) in 2013, with a nominal

growth rate of 9.7% YoY or real

price-adjusted growth rate of 7%

YoY.

According to the National Bureau of

Statistics, China’s urban population

grew from 459.1mn in 2000 to

731.1mn in 2013, accounting for

54% of total population.

The government aims to raise the

urbanization rate to 60% by 2020

and further to 70%, implying an

urban population of 1B+ by 2030.

BABA

Initiating Coverage

27 October 2014



Chart 9: China’s urban household distribution by annual income

Source: National Bureau of Statistics of China, Jefferies

More mature Internet user demographics drives higher consumption power

We estimate 54% of total Internet users will be aged 30+ by 2018, compared to 43% in

2013 and 33% in 2008, given the aging population trend in China and increasing Internet

penetration among the older generations, as discussed in our “China Internet: Long Term

Demographic Changes Bear Far Reaching Implications” published in Jan 2013. Unlike the

past several years, we will see China’s Internet user mix to be more balanced, matching

the general demographics of Chinese population as Internet penetration rises. Our

estimates also indicate that 81% of the 240mn new Internet users between 2013-2018 to

be mostly in the older age groups of 30+ years of age.

Chart 10: Chinese Internet user by age group

Source: CNNIC as of Jan 2014, Jefferies estimates

We believe more mature Internet user demographics and higher consumption power will

drive online shopping sales per ticket. Average spending per online buyer is expected to

grow 23% YoY to reach RMB7,704 in 2014 and further to RMB11,154 in 2018, with a

2013-18 CAGR of 12%.

2005 2006 2007 2008 2009 2010 2011 2011 vs. 2005

<RMB10,000 4.9% 3.3% 2.1% 1.5% 0.9% 0.7% 0.4% -4.5%

RMB10-20K 23.7% 19.2% 13.4% 9.9% 7.6% 5.5% 3.6% -20.1%

RMB20-30K 26.8% 25.3% 21.9% 17.7% 14.8% 11.8% 8.4% -18.4%

RMB30-40K 18.3% 19.8% 20.2% 18.3% 17.0% 15.5% 12.8% -5.4%

RMB40-50K 10.7% 12.3% 14.4% 15.0% 15.5% 15.3% 13.8% 3.1%

RMB50-60K 5.9% 7.3% 9.5% 10.8% 11.7% 12.5% 12.8% 6.9%

RMB60-70K 3.5% 4.3% 6.1% 7.8% 8.9% 9.6% 10.7% 7.3%

RMB70-80K 2.0% 2.7% 3.9% 5.3% 6.5% 7.4% 8.3% 6.3%

RMB80-90K 1.3% 1.7% 2.5% 3.7% 4.5% 5.4% 6.3% 5.0%

RMB90-100K 0.9% 1.1% 1.6% 2.6% 3.1% 4.1% 4.7% 3.8%

% of household with annual

income between RMB50-100K 13.6% 17.1% 23.6% 30.1% 34.8% 39.0% 42.9% 29.3%

The middle income class

experienced the strongest growth in

household income over the past

years.

Percentage of household with

annual income between RMB50K

and 100K increased by 29.3pcpt

from 13.6% in 2005 to 42.9% in

2011.

We estimate 54% of total Internet

users will be aged 30+ by 2018,

compared to 43% in 2013 and 33%

in 2008, given the aging population

trend in China and increasing

Internet penetration among the

older generations.

BABA

Initiating Coverage

27 October 2014



Chart 11: Average spending per online shopper in China

Source: iResearch as of Jul 2014, CNNIC as of Jan 2014, Jefferies estimates

Low penetration of Internet, consumption, e-Commerce and online shoppers

China’s relatively low penetration of Internet, consumption, e-Commerce and online

shoppers compared to developed countries suggests ample room for growth. China’s

total Internet users were 618mn by the end of 2013, +9.5% YoY. As of June, 2014, total

Internet users in China reached 632mn, representing a 46.9% penetration rate, according

to CNNIC. China’s Internet penetration rate is still relatively low compared to 84.2% in US

and 86.3% in Japan in 2013, according to the World Bank. We expect Chinese Internet

users to reach 858mn by 2018, accounting for 62% of total population.

Chart 12: Number of Chinese Internet users and penetration

Source: CNNIC as of Jan 2014, US Census, Jefferies estimates

China’s household consumption expenditure represented only 36% of GDP in 2013,

significantly lower than 67% of the U.S, according to OECD and National Bureau of

Statistics. The Chinese government has been emphasizing on stimulating domestic

consumption by improving social welfare network, promoting urbanization, etc. We see

this as positive for e-Commerce development as the economy gradually transforms from

investment-driven to consumption-driven.

Average spending per online buyer

is expected to grow 23% YoY to

reach RMB7,704 in 2014 and further

to RMB11,154 in 2018, with a 2013-

18 CAGR of 12%.

China’s Internet penetration rate is

still relatively low compared to

84.2% in US and 86.3% in Japan in

2013, according to the World Bank.

We expect Chinese Internet users to

reach 858mn by 2018, accounting

for 62% of total population.

BABA

Initiating Coverage

27 October 2014



Chart 13: China’s household consumption expenditure

growth (2003-2013)

Source: National Bureau of Statistics, Jefferies

Note: The household consumption refers to the market value of

goods and services purchased by households including both real

and imputed consumption expenses, according to China’s National

Bureau of Statistics.

Chart 14: Comparison of household consumption

expenditure in China Vs. US (2003-2013)

Source: National Bureau of Statistics, OECD, Jefferies

Note: US data refers to OECD. The household consumption data

refers to market value of all goods and services purchased by

households, including durable products, imputed rent for owner-

occupied dwellings and payments and fees to governments to

obtain permits and licenses.

China surpassed the U.S. to be the largest e-Commerce market by GMV in 2013,

according to iResearch and eMarketer estimates, with China’s online penetration of retail

sales reaching 10.1% in 2Q14. China’s e-Commerce market growth is expected to

continue outpace that of the U.S. We estimate China’s e-Commerce to account for 10.4%

of total retail sales by YE2014, compared to 6.4% in the U.S. as estimated by eMarketer.

Chart 15: Online penetration of retail sales – China vs. U.S.

Source: eMarketer as of Apr 2014, US Census, iResearch, Jefferies

The number of online shoppers in China reached 302mn in 2013, accounting for 49% of

Internet users and 22% of total population, according to CNNIC. We estimate the growing

number of online shoppers to reach 358mn in 2014, representing 54% of Internet users,

and further to 582mn in 2018, 68% of total Internet population.

China surpassed the U.S. to be the

largest e-Commerce market by GMV

in 2013, according to iResearch and

eMarketer estimates, with China’s

online penetration of retail sales

reaching 10.1% in 2Q14.

China’s e-Commerce market growth

is expected to continue outpace that

of the U.S. We estimate China’s e-

Commerce to account for 10.4% of

total retail sales by YE2014,

compared to 6.4% in the U.S. as

estimated by eMarketer.

BABA

Initiating Coverage

27 October 2014



Chart 16: E-Commerce penetration of population and Internet users

Source: CNNIC (2007A-2013A) as of Jan 2014, Jefferies estimates (2014E-2018E)

Chart 17: Summary of key penetration statistics in China

Source: Company data, MIIT, iResearch, National Bureau of Statistics, CNNIC, Jefferies

Penetration 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E

Fixed broadband (% of household) 30.2% 34.3% 39.6% 42.3% 44.9% 47.3% 49.7% 52.0% 54.2%

Wireless (% of population) 64.4% 73.6% 82.6% 91.1% 95.4% 101.2% 105.4% 108.3% 110.0%

3G/4G (% of total mobile subs) 5.6% 13.1% 21.0% 33.8% 46.1% 61.5% 73.1% 80.6% 87.1%

Smartphone (% of total mobile subs) NA 13.3% 30.0% 42.1% 49.7% 58.9% 67.5% 71.9% 76.4%

E-Commerce (% of total retail sales) 2.9% 4.3% 5.6% 8.0% 10.4% 12.6% 14.5% 15.7% 16.6%

Online shoppers (% of Internet users) 35.1% 37.8% 42.9% 48.9% 53.9% 57.9% 61.4% 64.9% 67.9%

Online shoppers (% of population) 12.1% 14.5% 18.0% 22.4% 26.4% 30.3% 34.1% 38.3% 42.3%

Internet penetration (% of population) 34.4% 38.4% 42.0% 45.8% 49.0% 52.4% 55.6% 59.0% 62.3%

YoY%

Fixed broadband 4.0% 5.4% 2.7% 2.6% 2.5% 2.4% 2.3% 2.2%

Wireless 9.2% 9.0% 8.5% 4.3% 5.8% 4.2% 2.9% 1.6%

3G/4G 7.5% 8.0% 12.8% 12.3% 15.4% 11.6% 7.5% 6.5%

Smartphone 16.7% 12.1% 7.6% 9.2% 8.6% 4.5% 4.4%

E-Commerce 1.3% 1.4% 2.3% 2.4% 2.2% 1.9% 1.2% 0.9%

Online shoppers (% of Internet users) 2.7% 5.1% 6.0% 5.0% 4.0% 3.5% 3.5% 3.0%

Online shoppers (% of population) 2.4% 3.5% 4.4% 4.1% 3.9% 3.8% 4.2% 4.0%

Internet penetration 4.0% 3.6% 3.8% 3.3% 3.3% 3.3% 3.4% 3.2%

The number of online shoppers in

China reached 302mn in 2013,

accounting for 49% of Internet users

and 22% of total population,

according to CNNIC.

We estimate the growing number of

online shoppers to reach 358mn in

2014, representing 54% of Internet

users, and further to 582mn in 2018,

68% of the total Internet population.

BABA

Initiating Coverage

27 October 2014



Smartphone adoption driving m-Commerce growth

Strong Internet user growth in China is largely driven by mobile Internet user adds, with

73% of newly added Internet users adopting mobile devices, according to CNNIC. We

estimate all Chinese Internet users will be mobile Internet users by 2018, mainly due to

3G/4G LTE wireless and rising smartphone penetration given increasing availability of

lower-end handsets and enhancement in mobile device capability. We estimate China’s

smartphone users as a % of mobile subscribers to reach 76% in 2018, driven by both

increasing availability of low-end handsets and enhancement in mobile device capability.

We expect wireless penetration in China to reach 105% by 2016, 14pcpt higher than that

in 2013, driven by multiple connected devices.

Chart 18: China smartphone users and penetration

Source: Company data, MIIT, Jefferies estimate as of Aug 2014

Chart 19: China’s wireless penetration as percent of population

Source: Company data, MIIT, Jefferies

We estimate China’s smartphone

users as a percentage of mobile

subscribers to reach 76% in 2018,

driven by both increasing availability

of low-end handsets and

enhancement in mobile device

capability.

We expect wireless penetration in

China to reach 105% by 2016,

14pcpt higher than that in 2013,

driven by multiple connected

devices.

BABA

Initiating Coverage

27 October 2014



The m-commerce market size surged to RMB274bn in 2013 from RMB11.7bn in 2011,

accounting for 14.5% of total e-commerce transaction volume in 2013, according to

iResearch. We estimate m-Commerce market to reach RMB945bn in 2014, +245% YoY,

representing 34.3% of overall e-Commerce market, and RMB2,174bn in 2015, +130%

YoY. We expect m-Commerce growth to accelerate as it provides consumers a convenient

shopping experience helped by rapid development of m-Commerce enabling

infrastructure such as mobile payment by e-Commerce players such as Alibaba, JD.com,

and social apps like Weixin.

Chart 20: China’s m-Commerce market size by GMV

Source: iResearch as of July 2014, Jefferies estimates

Accelerating structural shift to online from traditional retail

As of Sept 2014, total retail sales in China reached RMB18,915bn, +12% YoY, according to

National Bureau of Statistics, compared to 13.1% in 2013. However, the impact of e-

Commerce on offline retail sales has already been felt with aggregate sales of 73

traditional retail companies slightly growing 1.3% YoY in 1H14, according to a survey by

Linkshop, a China’s retail industry portal, published on Aug 29, 2014. Department stores,

in particular, were most affected with 34 out of the 54 stores seeing revenue decline year-

over-year. In the supermarket category, average sales of the 14 surveyed supermarkets

grew 7.3% YoY with 4 of them showing revenue decline. In the electronic and home

appliance store category, average sales of the 5 surveyed retailers saw a 2% YoY decline.

Chart 21: YoY growth rate of China’s total retail sales

Source: National Bureau of Statistics as of Oct 2014, Jefferies

The m-commerce market size surged

to RMB274bn in 2013 from

RMB11.7bn in 2011, accounting for

14.5% of total e-commerce

transaction volume in 2013,

according to iResearch.

We estimate m-Commerce market to

reach RMB945bn in 2014, +245%

YoY, representing 34.3% of overall e-

Commerce market, and

RMB2,174bn in 2015, +130% YoY.

As of Sept 2014, total retail sales in

China reached RMB18,915bn, +12%

YoY, according to National Bureau of

Statistics, compared to 13.1% in

2013.

BABA

Initiating Coverage

27 October 2014



Chart 22: 1H14 offline retail company ranking

Source: Linkshop.com.cn as of Aug 2014, Jefferies

Note: Founded in 2000, Linkshop.com.cn is a China’s retail industry portal offering information and media news of the retail industry.

Retail stores Ranking Company (CN) Company (EN)

Revenue

(RMB bn)

YoY %

change

Net profit

(RMB bn)

YoY %

change

1 大商股份 Dashang Co., Ltd (SHA: 600694) 17.0 -3.3% 0.8 7.6%

重庆百货 Chongqing Department Store Co., Ltd(SHA: 600729) 15.1 -5.4% 0.4 -9.6%

百货业态 Department store 7.4 -2.3%

超市业态 Supermarket 4.6 -11.3%

电器业态 Electronics superstore 2.6 -6.6%

3 万达百货 Wanda Department Store 11.1 62.0%

4 豫园商城 Shanghai Yuyuan Tourist Mart Co., Ltd(SHA: 600655) 10.0 -25.3% 0.3 -36.8%

5 百盛百货 Parkson Department (HKEX: 3368 HK) 10.0 -4.5% 0.3 -22.1%

6 王府井百货 Beijing Wangfujing Department Store (SHA: 600859) 9.4 -6.0% 0.4 2.1%

7 鄂武商A Wuhan Department Store Group Co., Ltd (SHE: 000501) 8.6 0.6% 0.4 37.3%

8 天虹商场 Rainbow Department Store Co., LTD (SHE:002419) 8.2 0.6% 0.3 -6.2%

9 金鹰商贸 Golden Eagle Retail Group (HKEX: 3308 HK) 7.9 -7.9% 0.5 -23.2%

10 银泰商业 Intime Retail Group Co.,Ltd (HKEX: 1833 HK) 7.9 1.7% 0.5 -30.7%

银座股份 Silver Plaza Group Co., Ltd (SHA:600858) 7.2 -1.1% 0.2 -5.2%

商业营收 Commercial revenue 7.1 0.1%

12 首商股份 Beijing Capital Retailing Group Co.,Ltd (SHA: 600723) 6.0 -3.0% 0.1 -41.7%

华地国际 Springland International Holding Ltd (HKEX: 1700 HK) 5.8 0.2% 0.4 -4.5%

百货业态 Department store 4.4 -1.7%

超市业态 Supermarket 1.4 6.6%

14 长春欧亚 ChangChun Ouya 5.8 11.6% 0.1 18.7%

15 茂业国际 Maoye International HoldingsLimited (HKG: 0848) 5.6 -3.2% 0.4 7.2%

16 合肥百货 Hefei Department Store Group Co., Ltd (SHE: 000417) 5.3 -2.4% 0.2 -6.8%

利福国际 Lifestyle International Holding Ltd (HKEX: 1212 HK) 5.2 0.8% 0.8 -7.2%

香港业务 Hong Kong Business 0.4 5.0%

苏州久光 Suzhou Jiuguang 3.2 0.3%

上海久光 Shanghai Jiuguang 7.3 -5.6%

大连久光 Dalian Jiuguang -17.6%

北人集团 Beiren Group 4.3%

18 大东方 Wuxi Commercial Mansion Grand Orient Co., Ltd (SHA:600327) 4.4 -0.5% 0.1 31.0%

19 广百股份 Guangzhou Grandbuy Co., Ltd (SHE: 002187) 3.9 -3.0% 0.1 7.5%

20 友好集团 Xinjiang Youhao (Group) Co.,Ltd (SHA: 600778) 3.9 -22.9% 0.1 -75.9%

21 中央商场 Nanjing Central Emporium (SHA: 600280) 3.8 -5.6% 0.3 16.1%

永旺 AEON Stores (Hong Kong) Co., Ltd (HKEX: 0984 HK) 3.5 5.9% 0.1 411.4%

内地业务 Mainland China 2.0 11.3%

香港业务 Hong Kong 1.5 -0.4%

23 新华百货 Yinchuan Xinhua Commercial Group Co., Ltd (SHA: 600785) 3.4 2.3% 0.2 39.9%

24 友阿股份 Hunan Friendship & Apollo Commercial Co., Ltd (SHE: 002277) 3.1 -3.8% 0.3 -9.8%

25 武汉中商 Wuhan Zhongnan Commercial Group Co., Ltd (SHE: 000785) 2.2 1.2% 0.0 -23.0%

26 通程控股 Changsha Tongcheng Holding Co., Ltd (SHE: 000419) 2.2 2.5% 0.1 -16.1%

27 翠微股份 Beijing Cuiwei Tower Co., Ltd (SHA: 603123) 2.2 -12.0% 0.1 -34.7%

28 西安民生 Xi'an Minsheng Group Co., Ltd (SHE: 000564) 2.0 2.8% 0.0 -4.0%

29 小商品城 Zhejiang China Commodities City Group Co., Ltd (SHA: 600415) 2.0 10.6% 0.2 -50.3%

30 开元商业 Xi'an Kaiyuan Investment Group Co., Ltd (SHE: 000516) 2.0 4.2% 0.1 51.0%

2

13

17

22

11

Department

store

BABA

Initiating Coverage

27 October 2014



Chart 23: 1H14 offline retail company ranking (cont’d)

Source: Linkshop.com.cn as of Aug 2014, Jefferies

Note: Founded in 2000, Linkshop.com.cn is a China’s retail industry portal offering information and media news of the retail industry.

Retail stores Ranking Company (CN) Company (EN)

Revenue

(RMB bn)

YoY %

change

Net profit

(RMB bn)

YoY %

change

31 大连友谊 Dalian Friendship Group Co., Ltd (SHE: 000679) 1.8 5.7% 0.1 0.8%

32 广州友谊 Guangzhou Friendship Group Co., Ltd (SHE: 000987) 1.7 -20.0% 0.1 -23.2%

33 中兴商业 Zhongxing Shenyang Commercial Building Group Co., Ltd (SHE: 000715) 1.7 -10.6% 0.0 -15.2%

34 上海益民 Shanghai Yimin Commerce Group Co., Ltd (SHA: 600824) 1.7 1.2% 0.1 5.1%

35 上海新世界 Shanghai New World Co., Ltd 1.6 -1.1% 0.1 -3.1%

36 海宁皮城 Haining China Leather Market Co., Ltd (SHE: 002344) 1.4 -16.6% 0.6 2.1%

37 南宁百货 Nanning Department Store Co., Ltd (SHA: 600712) 1.3 -12.8% 0.0 -53.0%

38 北京城乡 Beijing Urban Rural Trade Centre Co., Ltd (SHA: 600861) 1.2 -10.2% 0.0 -2.4%

39 成商集团 Chengshang Group Co., Ltd (SHA: 600828) 1.1 1.7% 0.2 99.3%

40 徐家汇商城 Shanghai Xujiahui Commercial Co., Ltd 1.0 -4.1% 0.1 2.0%

41 昆百大A Kunming Sinobright (Group) Co., Ltd (SHE: 000560) 1.0 13.3% 0.1 411.7%

42 商业城 Shenyang Commercial City Co. Ltd (SHA: 600306) 0.8 -17.1% (1.2) -12.7%

43 杭州解百 Hangzhou Jiebai Group Co., Ltd (SHA: 600814) 0.8 -18.6% 0.0 -43.6%

44 兰州民百 Lanzhou Minbai Shareholding (Grp) Co (SHA: 600738) 0.6 -16.3% 0.1 -978.0%

45 世纪金花 Century Ginwa Retail Holdings Ltd (HKG: 0162) 0.7 -7.0% 0.1 -49.0%

46 工大首创 Hit Shouchuang Technology Co., Ltd (SHA: 600857) 0.6 -28.0% 0.0 47.9%

47 岁宝百货 Shirble Department Store Holdings China Ltd (HKEX: 0312 HK) 0.6 -8.0% 0.0 118.0%

48 百大集团 Baida Group Co., Ltd (SHA: 600865) 0.5 -23.0% 0.1 110.0%

49 佳华百货 JiahuaStores Holdings Limited (HKG:0602) 0.4 -5.4% 0.2 -16.0%

50 津劝业 Tianjin Quanyechang (SHA: 600821) 0.4 -27.8% 0.0 14.3%

51 人和商业 Renhe Commercial Holdings Company Ltd (HKEX: 1387) 0.3 5.0% (0.9) -385.9%

52 民生控股 Minsheng Holdings Co., Ltd (SHE: 000416) 0.2 -5.1% 0.0 174.0%

53 长百集团 Changchun Department Jituan Store Co., Ltd (SHA: 600856) 0.2 -5.3% 0.0 -86.6%

54 庄胜百货 Junefield Department Store Group Ltd (HKG: 0758) 0.1 275.0% (0.1) -371.0%

Subtotal 206.7 -2.0% 7.7 -20.6%

1高鑫零售

(大润发+欧尚) Sun Art Retail Group Ltd (HKEX: 6808 HK) 48.0 7.9% 1.7 8.5%

2 华润万家 China Resource Vanguard Co., Ltd 41.7 9.8% 0.6 9.9%

3 永辉超市 Yonghui Superstores Co., Ltd (SHA: 601933) 17.7 22.8% 0.5 16.4%

4 联华超市 ZhuhaiHoldings Investment GroupLtd (HKG: 0908) 15.0 -3.7% 0.1 -48.8%

5 物美商业 Wumart Store Inc (HKEX: 1025 HK) 10.4 9.2% 0.3 -9.8%

6 中百集团 Zhongbai Holdings Group Co Ltd (SHE: 000759) 8.8 3.2% 0.1 -10.9%

7 华联综超 Beijing Hualian Hypermarket Co., Ltd (SHA: 600361) 6.8 5.6% 0.1 276.5%

8 步步高 Better Life Commercial Chain Share Co., Ltd (SHE: 002251) 6.4 11.4% 0.3 13.3%

9 人人乐 Renrenle Commercial Group Co., Ltd (SHE: 002336) 6.3 -3.8% 0.0 17.0%

10 卜蜂莲花 CP Lotus Corp (HKEX: 0121 HK) 5.5 1.8% (0.0) 17.0%

11 京客隆 Beijing Jingkelong Company Ltd (HKEX: 0814 HK) 5.4 6.8% 0.0 -39.3%

12 新华都 New Huadu Supercenter Co., Ltd (SHE: 002264) 3.7 -3.6% 0.0 164.9%

13 红旗连锁 Chengdu Hongqi Chain Co., Ltd (SHE: 002697) 2.4 9.1% 0.1 3.1%

14 三江购物 Sanjiang Shopping Club Co., Ltd (SHA: 601116) 2.3 -5.3% 0.1 -24.4%

Subtotal 180.5 7.3% 3.8 5.8%

1 苏宁云商 Suning Commerce Group Co., Ltd (SHE: 002024) 51.2 -7.9% (0.7) -202.1%

2 国美电器 GOME Electrical Appliances Holdings Ltd (HKEX: 0493 HK) 29.1 7.4% 0.7 115.2%

3 宏图三胞 Jiangsu Hongtu High Technology Co., Ltd. (SHA: 600122) 6.2 5.1% 0.1 -5.9%

4 汇银家电 Huiyin Household Appliances Holdings Co., Ltd (HKEX: 1280 HK) 1.5 16.9% 0.0 -60.3%

5 三联商社 Sanlian Commercial Co., Ltd (SHA: 600898) 0.4 5.2% 0.0 23.3%

Subtotal 88.4 -2.0% 0.1 -93.9%

Total 475.6 1.3% 11.6 -20.3%

Electronics &

home

appliance

stores

Supermarket

Department

store

BABA

Initiating Coverage

27 October 2014



Due to the wide disparity of consumer taste and purchasing power among regions,

China’s retail market is highly fragmented with the top 20 retailers in aggregate

accounting for approximately 12% of total market share in 2013, compared to 40% in the

U.S., according to Euromonitor International. Retail space per capita of 0.6 square meters

in China was also significantly lower than other developed countries. Unlike in the U.S.,

which is dominated by large department stores or retail chain operators, China’s retail

market is mostly made up of small and medium size retailers, which generally focus their

operation on respective regions. This fragmented market landscape gives rise to an

increasing number of consumers turning to online e-Commerce platforms for product

selection, lower prices and convenient delivery services.

Chart 24: Comparison between China and other countries in retail space per

capita in 2013

Source: Euromonitor International, Jefferies

Retail space per capita of 0.6 square

meters in China was also

significantly lower than other

developed countries, according to

Euromonitor International.

BABA

Initiating Coverage

27 October 2014



Chart 25: Scenario analysis of China’s e-Commerce market size

Source: iResearch, Jefferies estimates

According to iResearch estimates, overall China retail sales will grow 11.8-12.8% between

2014-15, reaching RMB26,590bn and RMB29,999bn respectively. We estimate traditional

retail sales growth of 10% in 2015. Holding the total overall China retail sale market size

estimate constant, our scenario analyses assume +5% to -5% YoY percent change of

traditional retail sales. The results indicate 32%-95% upside to our current 2015 China’s e-

Commerce market size estimates.

Holding the total overall China retail sales market size estimate constant,

Results of scenario one: assuming traditional retail sales grow 5% YoY in 2015, implied

e-Commerce market size will reach RMB4,977bn, representing 32% upside to current

market estimate.

Results of scenario two: assuming traditional retail sales grow 2% YoY in 2015, implied

e-Commerce market size will reach RMB5,692bn, representing 51% upside to current

market estimate.

Results of scenario three: assuming traditional retail sales remain flattish YoY in 2015,

implied e-Commerce market size will reach RMB6,169bn, representing 63% upside to

current market estimate.

Results of scenario four: assuming traditional retail sales decline by 2% YoY in 2015,



Results of scenario five: assuming traditional retail sales decline by 5% YoY in 2015,



Market size data (in RMB bn) 2013 2014E 2015E

Overall China retail sales 23,781 26,590 29,999

YoY growth % 11.8% 12.8%

Traditional retail sales 21,889 23,830 26,219

YoY growth % 8.9% 10.0%

E-Commerce sales 1,892 2,760 3,780

YoY growth % 45.8% 37.0%

Scenario #1 #2 #3 #4 #5

YoY growth assumption of traditional retail sales 5% 2% 0% -2% -5%

2015 Traditional retail sales (RMB bn) 25,022 24,307 23,830 23,353 22,639

Implied 2015 e-Commerce sales 4,977 5,692 6,169 6,645 7,360

YoY growth % 80% 106% 124% 141% 167%

Upside to 2015 e-Commerce market est. 32% 51% 63% 76% 95%

Holding the total overall China retail

sale market size estimate constant,

our scenario analyses assume +5% to

-5% YoY percent change of

traditional retail sales. The results

indicate 32%-95% upside to our

current 2015 China’s e-Commerce

market size estimates.

BABA

Initiating Coverage

27 October 2014




BABA

Initiating Coverage

27 October 2014



Alibaba - The Powerful E-Commerce Ecosystem Connecting Half of China

BABA

Initiating Coverage

27 October 2014




BABA

Initiating Coverage

27 October 2014



Alibaba’s Business Model and Segment Revenue Founded in 1999, Alibaba started off as a B2B marketplace platform and later expanded

into C2C and B2C retail business, developing itself into the biggest e-Commerce

ecosystem in China. Its ecosystem is built upon its core domestic e-Commerce platforms

including Taobao, Tmall and 1688.com, as well as international platforms AliExpress and

Alibaba.com, with transactions settled through Alipay, its online payment solution,

marketing services provided by Alimama, its proprietary online marketing platform, and

data management supported by cloud computing infrastructure.

Chart 26: Alibaba’s e-Commerce ecosystem

Source: Company data, Jefferies

Note: Alipay, SME loan and Yu’e Bao is owned and operated under Small and Micro

Financial Services Company, an independent company which Alibaba has a contractual

agreement with (please refer to p.98 for detail of the structure).

Alibaba is the largest e-Commerce company in the world by GMV in 2013 with GMV of

RMB1,542bn (USD248bn) surpassing the combined GMV of Amazon and Ebay by 21.6%,

according to IDC.

Chart 27: Top 10 global e-Commerce players ranked by GMV in 2013

Source: IDC as of May 2014, Jefferies

Rank Company Country GMV (USD bn)

1 Alibaba China 248.0

2 Amazon U.S. 116.4

3 eBay U.S. 87.5

4 JD.com China 20.7

5 Rakuten Japan 16.5

6 Staples U.S. 10.4

7 Walmart U.S. 10.0

8 Otto Group Germany 8.3

9 MercadoLibre Argentina 7.8

10 Groupon U.S. 5.8

Alibaba’s ecosystem is built upon its

core domestic e-Commerce

platforms including Taobao, Tmall

and 1688.com, as well as

international platforms AliExpress

and Alibaba.com, with transactions

settled through Alipay, its online

payment solution, marketing

services provided by Alimama, its

proprietary online marketing

platform, and data management

supported by cloud computing

infrastructure.

Alibaba is the largest e-Commerce

company in the world by GMV in

2013 with GMV of RMB1,542bn

(USD248bn) surpassing the

combined GMV of Amazon and Ebay

by 21.6%, according to IDC.

BABA

Initiating Coverage

27 October 2014



Alibaba’s business model can be illustrated as follows:

China commerce business (84.6% of FY1Q15 revenue)

o Retail (80.1% of FY1Q15 revenue)

Taobao – largest C2C platform in China

Tmall – largest B2C platform in China

Juhuasuan – a leading group buy marketplace in China

o Wholesale (4.5% of FY1Q15 revenue)

1688.com – largest domestic B2B platform in China

International commerce business (9.3% of FY1Q15 revenue)

o Retail (2.3% of FY1Q15 revenue)

AliExpress

o Wholesale (7% of FY1Q15 revenue)

Alibaba.com

Cloud computing and Internet infrastructure (1.5% of FY1Q15 revenue)

Others - mainly from micro loan interest income (4.6% of FY1Q15 revenue)

Chart 28: Alibaba’s revenue mix in FY1Q15


Chart 29: Alibaba’s China commerce revenue mix in

FY1Q15


Note: Retail marketing includes Tmall, Taobao and Juhuasuan; retail

commission includes Tmall and Juhuasuan

Chart 30: Alibaba’s international commerce revenue mix in

FY1Q15


Note: Wholesale refers to Alibaba.com; retail refers to AliExpress

China and international commerce

accounted for 84.6% and 9.3% of

Alibaba’s FY1Q15 revenue

respectively, with the remaining

contributed by cloud computing,

Internet infrastructure and others

(mainly interest income from micro

loans).

BABA

Initiating Coverage

27 October 2014



China commerce retail (94.7% of FY1Q15 China commerce revenue) –

Taobao, Tmall, Juhuasuan

Alibaba’s China commerce retail business, comprising Taobao Marketplace, Tmall and

Juhuasuan, in aggregate contributed 81.6% of Alibaba’s total revenue in FY14, and 80.1%

in FY1Q15. This includes online marketing revenue, transaction-based commission and

storefront fees. The three marketplaces generated a combined GMV of RMB1,833bn

(USD296bn) from 279mn active buyers and 8.5mn active sellers in the twelve months

ended June 30, 2014.

We estimate China commerce retail revenue to reach RMB64.8bn in FY15, +51.3% YoY,

accounting for 84.4% of total revenue, largely driven by strong growth in commission

revenue. We expect revenue to further grow 42% YoY to reach RMB92bn in FY16.

Online marketing service revenue (66.5% of FY1Q15 China commerce

retail revenue): We estimate online marketing service revenue to reach

RMB39.4bn in FY15, +32.7% YoY, accounting for 51.3% of total revenue, and

RMB50.1bn in FY16, +27.1% YoY, 47.7% of total revenue. Our estimates are

based on continued strong GMV growth partially offset by declining merchants’

advertising budget-to-GMV ratio, due to the increasing GMV contribution from

mobile on which merchants typically allocate a smaller proportion of their

budget to advertising due to limited ad slots from screen size constraints.

Commission revenue (31.9% of FY1Q15 China commerce retail

revenue): We estimate commission revenue of RMB24.5bn in FY15, +104%

YoY, representing 31.9% of total revenue, and RMB41.2bn in FY16, +68% YoY,

39.2% of total revenue. This is based on strong GMV growth of 81.5% YoY and

62.2% YoY on Tmall in the respective years, and assuming average commission

rate to grow slightly to 3.4% and 3.6% respectively.

Other revenue (1.7% of FY1Q15 China commerce retail revenue): We

estimate other revenue, mainly comprised of Wangpu storefront fees, continue

to account for a declining revenue contribution of 1.1% in FY15 and 0.6% in

FY16.

Taobao

Taobao is the largest C2C platform in China with GMV reaching RMB1.2trn in FY14,

+42.4% YoY, representing 69.9% of total China commerce retail GMV, and RMB342bn in

FY1Q15, +33.1% YoY, accounting for 68.3% of total GMV. Major product categories on

Taobao Marketplace include apparel and accessories, electronics and appliances, home

furnishings, maternity and baby products.

Basic storefront and listings on Taobao are available for free to sellers. Instead, revenue is

mainly generated through:

Pay-for-performance (P4P) and display marketing services: merchants

bid for keywords or place display ads to direct traffic to storefronts.

Taobaoke program (categorized as online marketing revenue):

merchants pay Alibaba a GMV-based commission fee for transactions settled

through Alipay from users sourced from third-party marketing affiliates.

Storefront fee: merchants who pay a RMB50 monthly subscription fee for

premium storefront software, Wangpu (“旺铺”), can get access to a suite of

store management and decoration tools, including store logo, customized

storefront, product recommendation column.

BABA

Initiating Coverage

27 October 2014



Tmall

Tmall was launched in 2008 to address growing consumer demand for branded products.

GMV generated from Tmall platform reached RMB505bn in FY14, +99.6% YoY,

accounting for 30.1% of total GMV, and RMB159bn in FY1Q15, +80.7% YoY, representing

31.7% of total GMV. Major product categories on Tmall include apparel and accessories,

electronics and appliances, home furnishings, home appliances and maternity and baby

products.

Tmall’s revenue is mainly generated through:

Pay-for-performance (P4P) and display marketing services: merchants

bid for keywords or place display ads to direct traffic to storefronts.

Taobaoke program (categorized as online marketing revenue):

merchants pay Alibaba a GMV-based commission fee for transactions settled

through Alipay from users sourced from third-party marketing affiliates.

Commission revenue: sellers on Tmall are required to pay a commission

typically ranging from 0.3% to 5% of GMV for transactions settled through

Alipay depending on the product category.

Successful execution of cross-border business development will provide upside to Tmall’s

revenue in the long term.

Juhuasuan

Launched in 2010, Juhuasuan is China’s most popular group buying marketplace by

MAUs in 2013, according to iResearch. GMV generated from traffic through Juhuasuan

reached RMB58.2bn (USD9.4bn) in FY14. Operated on a flash sales model, Juhuasuan

allows sellers, majority of which are Tmall merchants, to sell products at a discounted

price for a limited period of time. Major product categories on Juhuasuan include apparel

and accessories, electronics and appliance, home appliance products, beauty and health

product and home furnishings.

Juhuasuan’s revenue is mainly generated through:

Placement revenue: merchants pay placement fees to purchase promotional

slots on Juhuasuan marketplace for a specified period;

Commission revenue: sellers on Juhuasuan are required to pay a commission



China commerce wholesale (5.3% of FY1Q15 China commerce revenue)

1688.com

1688.com is a leading online wholesale marketplace in China connecting Chinese

wholesalers, suppliers or distributors with buyers, majority of which are merchants on

Taobao and Tmall marketplaces.

Revenue of 1688.com is primarily generated through:

Membership fee revenue: domestic manufacturers or distributors subscribe

for the China TrustPass membership on 1688.com to host premium storefronts,

with access to basic analytic applications and upgraded storefront management

tools.

Value-added service revenue: merchants pay Alibaba for value-added

services such as premium data analytics.

Pay-for-performance (P4P) marketing service revenue: merchants can

also bid for keywords that appear on search results of 1688.com.

We estimate China wholesale revenue to reach RMB3.1bn in FY15, +35.3% YoY,

accounting for 4.1% of total revenue, and RMB3.8bn in FY16, +22.8% YoY, 3.6% of total

BABA

Initiating Coverage

27 October 2014



revenue. This is mainly supported by solid growth of marketing revenue as well as paying

members subscribing to China TrustPass.

International commerce wholesale (75.6% of FY1Q15 international

commerce revenue)

Alibaba.com (international B2B)

Launched in 1999, Alibaba.com is the first online commerce platform and China’s largest

global online wholesale marketplace by revenue in 2013, according to iResearch. Sellers

on Alibaba.com are typically manufacturers and distributors based in China and other

manufacturing countries such as India, Pakistan, the US and Japan. Buyers are generally

SMEs engaged in the import and export business, trade agents, and wholesalers, retailers

and manufacturing companies.

Revenue of Alibaba.com is primarily generated through:

Membership fee revenue: global manufacturers or distributors subscribe for

the Gold Supplier membership on Alibaba.com to host premium storefronts,

with product listings on the marketplace.

Value-added service revenue: merchants pay Alibaba a value-added service

fee for import/export business solutions such as product showcase, custom

clearance and value-added tax refund.

Pay-for-performance (P4P) marketing service revenue: merchants can

also bid for keywords that appear on search results of Alibaba.com.

We estimate international wholesale revenue to reach RMB4.7bn in FY15, +20.5% YoY,

representing 6.1% of total revenue, mainly supported by growth in number of paying

members.

International commerce retail (24.4% of FY1Q15 international commerce

revenue)

AliExpress

Launched in 2010, AliExpress is a global consumer marketplace that allows Chinese

manufacturers and exporters to reach overseas consumers, including Russia, Eastern

Europe and South America.

Revenue of AliExpress is primarily generated through:

Commission revenue: sellers on AliExpress are required to pay a 5%

commission fee based on GMV settled through Alipay.

Third-party marketing affiliate program: merchants pay Alibaba a fee in

addition to the 5% commission for transactions settled through Alipay from

users sourced from third-party marketing affiliates.

We estimate international retail revenue to reach RMB1.8bn in FY15, +96.9% YoY,

representing 2.4% of total revenue, driven by solid growth in both commission and

marketing revenue, assuming a stable commission rate of 5%.

BABA

Initiating Coverage

27 October 2014



Chart 31: Alibaba’s monetization model (as of FY14A)


M&A strategies

To enhance user engagement and capture new growth opportunities, Alibaba has been

actively pursuing M&A activities, such as Youku Tudou in the digital entertainment

category, Sina Weibo on the mobile front, Autonavi in O2O area, etc. We expect the

company to continue pursuing suitable M&A opportunities in the strategic areas of

mobile commerce, international expansion, rural penetration and expansion into new

verticals of products and services. For a more detailed summary of Alibaba’s M&A

investments, please refer to p.120.

Online marketing

(69.4%)Commission (28.1%) Storefront fee (2.5%)

Membership fee

(74.1%)

Online marketing (mainly

P4P) (25.9%)

Tmall Tmall Taobao 1688.com 1688.com

Taobao Juhuasuan

Juhuasuan

Third-party marketing

(20.5%)Commission (79.5%)

Membership fee

(87.6%)

Online marketing (mainly

P4P) (12.4%)

AliExpress AliExpress Alibaba.com Alibaba.com

Retail B2C (94.9%) Wholesale B2B (5.1%)

China commerce revenue (86%)

International commerce revenue (9.2%)

Retail B2C (19.3%) Wholesale B2B (80.7%)

Cloud computing and Internet infrastructure (1.5%)

Others - mainly from interest revenue in SME loan business (3.3%)

BABA

Initiating Coverage

27 October 2014



A Strong Self-reinforcing Network Effect Alibaba, the largest e-Commerce ecosystem in China, has an overall online shopping (B2C

+ C2C) market share of 80.7% in 1H14, according to iResearch. Consumers, merchants

and third-party service providers, including marketing affiliates and logistics partners,

participate in Alibaba’s huge ecosystem to buy products, source materials and do

business, hence creating a strong self-reinforcing network effect.

Alibaba mainly monetizes through online marketing and commission revenue from its

three China commerce retail marketplaces including Taobao, Tmall and Juhuasuan, which

in aggregate accounted for 82% of FY14 revenue, and 80% of FY1Q15 revenue. We

currently estimate China commerce retail revenue to reach RMB64.8bn in FY15, +51.3%

YoY, accounting for 84.4% of total revenue, largely driven by strong growth in

commission revenue. We expect revenue to further grow 42% YoY to reach RMB92bn in

FY16.


1. We expect to see increasing GMV contribution from Tmall, the leading B2C

player in China with 57.3% market share in 2Q14, given rising consumer

demand for product quality, after-sales services and increasing promotional

efforts by brands. Higher priority of Tmall products over Taobao in search result

listing, regardless of initial login site, also helps increase Tmall merchants’

exposure among consumers. We see the increasing GMV contribution from

Tmall as positive for driving continuous revenue growth and PC monetization

rate given that merchants have to pay transaction-based commission in addition

to online marketing fees.

2. Taobao’s C2C model allows individuals and small enterprises, particularly in

lower tier cities, to offer a wide diversity of competitively priced products

through their online stores, hence generating huge user traffic and high user

stickiness. Alibaba recently announced a rural expansion plan to meet the

underserved demand in rural areas which only accounted for 8.3% of Taobao

GMV in 2Q14.

3. Juhuasuan, the largest online group buying marketplace in China, will shift

towards a high-end brand-focused flash sales model. We believe successful

execution of the flash sales business will depend on Juhuasuan’s ability in

bringing aboard well-known brands and monitoring product quality.

4. 1688.com, Alibaba’s leading domestic B2B platform, serves as a wholesale

sourcing channel for Taobao and Tmall merchants and hence, drives synergies

across its wholesale and retail marketplaces.

5. Alimama, Alibaba’s proprietary online marketing platform, offers pay-for-

performance (P4P) marketing, display advertising and Taobaoke program

(display ads on third-party affiliate partners’ websites) through the Taobao Ad

Network and Exchange (TANX). We expect advertising revenue growth to

moderate given increasing GMV contribution from mobile on which merchants

typically allocate a smaller proportion of their budget to advertising due to

limited ad slots given screen size constraints. Enhancing mobile-based marketing

products will help narrow the CPC gap between PC and mobile over time.

BABA

Initiating Coverage

27 October 2014



A Strong Self-reinforcing Network Effect

Clear leadership in China’s e-Commerce market

China commerce retail revenue, including commission, online marketing and storefront

fee, reached RMB42.8bn in FY14, +58.8% YoY, representing 81.6% of Alibaba's total

revenue, and RMB12.6bn in FY1Q15, +45.8% YoY, 80.1% of total revenue. This is

attributed to the strong GMV growth across marketplaces, including 33.1% and 80.7%

YoY growth on Taobao and Tmall respectively in FY1Q15, mainly driven by increasing the

number of active buyers to 279mn in the twelve months ended June 30, 2014, +51% YoY.

Total GMV reached RMB1.7trn in FY14, +55.8% YoY (or RMB1.5trn in CY13, +60.5% YoY),

implying an overall online shopping market share of 81.5% in 2013, up 0.5pcpt YoY.

1H14 GMV reached RMB931bn, implying an overall market share of 80.7%, down 0.8%.

Chart 32: China’s overall online shopping market share (2013 vs. 1H14)

Source: Company data, iResearch, Jefferies

A strong self-reinforcing network effect

In our view, the huge user base and strong network effort enables Alibaba to secure

dominant leadership in China’s e-Commerce market. As of June 30, 2014, Alibaba has an

active buyer base of 279mn, 7x that of JD’s 38mn and a far distance ahead of other e-

Commerce players. Alibaba’s well-established presence in B2C, C2C and B2B markets and

the interactions between buyers and sellers across these marketplaces generates a strong

self-reinforcing network effect. The large merchant pool of Alibaba’s marketplaces

generates huge user traffic which in turn attracts more merchants onto the platforms. We

see this as Alibaba’s core competence and key competitive edge.

Chart 33: No. of active buyers across major e-Commerce players in China (as

of June 30, 2014)

Source: Company data. Note: Alibaba’s active buyer base represents those on its China

commerce retail business (Tmall, Taobao, Juhuasuan)

Alibaba’s total GMV reached

RMB1.5trn in CY13, +60.5% YoY (or

RMB1.7trn in FY14, +55.8% YoY),

implying an overall online shopping

market share of 81.5%, up 0.5pcpt

YoY.

1H14 GMV reached RMB931bn,

implying an overall market share of

80.7%.

As of June 30, 2014, Alibaba has an

active buyer base of 279mn, 7x that

of JD’s 38mn and a far distance

ahead of other e-Commerce players.

BABA

Initiating Coverage

27 October 2014



Chart 34: Alibaba’s self-reinforcing network effect

Source: Company data

Taobao – competitive pricing and product diversity creates high stickiness

Taobao is the largest C2C platform in China with a dominant market share of 97.6% in

2013, up 1.5pcpt YoY. GMV reached RMB1.1trn in CY13, +47.6% YoY, accounting for

71.4% of total GMV, or RMB1.2trn in FY14, +42.4% YoY, representing 69.9% of total

GMV.

Chart 35: China’s C2C market share by GMV (2013 vs. 1H14)

Source: Company data, iResearch, Jefferies

Taobao’s free C2C model and easy-to-use storefront management tools facilitate

individuals and small businesses who have limited capital and resources to set up their

virtual stores. Cost of entry is low as no annual service fee or transaction-based

commission fee is charged on the platform, allowing Taobao merchants to offer a large

variety of competitively-priced products. Sellers who would like to upgrade to premium

storefront settings and management tools can subscribe for Wangpu with an affordable

monthly fee of RMB50.

Taobao’s value proposition of competitive pricing and large product diversity generates

high consumer stickiness. According to a survey conducted by CNNIC in 2013, 84.4% and

71.1% of repeat purchase customers on Taobao are attracted by its rich product selection

and bargain pricing respectively.

Taobao is the largest C2C platform

in China with a dominant market

share of 97.6% in 2013, up 1.5pcpt

YoY.

Alibaba’s well-established presence

in B2C, C2C and B2B markets and

the interactions between buyers and

sellers across these marketplaces

generates a strong self-reinforcing

network effect. The large merchant

pool of Alibaba’s marketplaces

generates huge user traffic which in

turn attracts more merchants onto

the platforms.

BABA

Initiating Coverage

27 October 2014



Chart 36: Top factors driving repeat purchase on Taobao Marketplace (2013)

Source: CNNIC, Jefferies

Features such as Aliwangwang, an online instant messenger that facilitates text, audio and

video communication between buyers and sellers, also help enhance consumer stickiness

in the Taobao community. We currently estimate Taobao’s GMV to reach RMB1.5trn in

FY15, +28%, representing 62.1% of total GMV, and RMB1.8trn in FY16, +18.6% YoY, 54.5%

of total GMV.

Chart 37: Taobao GMV estimates (fiscal year)

Source: Company data, Jefferies estimates

Chart 38: Taobao GMV estimates (calendar year)


Deepening penetration in lower tier cities and rural areas

Taobao’s customer reach spreads across all income classes, particularly buyers in lower

tier cities, where offline retail infrastructure is scarce and less developed. 173.3mn active

buyers, or approximately 62% of all active buyers on Alibaba’s China retail marketplaces,

were located outside of tier-1 and 2 cities during the twelve months ended June 30, 2014,

according to the company.

The low cost of entry also attracts large number of merchants in lower tier cities to

establish an online presence through Taobao. 4.5mn sellers, or approximately 52% of

total active sellers on Alibaba’s China retail marketplaces, were located outside of tier-1

and 2 cities during the twelve months ended June 30, 2014. According to AliResearch,

there were approximately 20 Taobao Villages in China as of Nov 30, 2013. Taobao Villages

are defined as rural areas with at least 10% of households being independently involved in

e-Commerce on Taobao and generate a total GMV of over RMB10m.

According to a survey conducted by

CNNIC in 2013, 84.4% and 71.1% of

repeat purchase customers on

Taobao are attracted by its rich

product selection and bargain

pricing respectively.

BABA

Initiating Coverage

27 October 2014



During the 1st ZheJiang Country-level E-Commerce Summit held on Oct 13th 2014,

Alibaba announced the launch of its rural expansion plan named “Qian Xian Wan Cun (

千县万村). In the next three to five years, Alibaba will invest RMB10bn in building 1K

county-level operation centers and 100K village service stations, extending its e-

Commerce network coverage to 1/3 of counties and 1/6 of villages in China.

Rural area is still in the early stage of e-Commerce development as rural GMV only

accounted for 8.3% of total GMV on the Taobao marketplace in 2Q14, according to

AliResearch. Growing disposal income and fragmented offline retail infrastructure drives

potential upside for rural e-Commerce penetration. China’s rural e-Commerce market is

expected to reach RMB460bn in 2016, 2.6x that of RMB180bn in 2014, according to

AliResearch. Alibaba plans to expand into rural areas through enhancing logistics and

delivery services in these areas, acquiring more buyers, sellers and third-party service

providers, enabling transactions of agricultural and consumer products between rural and

urban residents.

Chart 39: Taobao GMV contribution from rural areas

Source: AliResearch as of Oct 2014, Jefferies

Chart 40: China’s rural e-Commerce market size estimates

Source: AliResearch as of Oct 2014, Jefferies

Tmall – a revenue growth engine

Tmall was launched in 2008 to address growing consumer demand for branded products.

According to iResearch, Tmall is the largest B2C market player in China with 57.7% and

57.3% market share in 2013 and 2Q14 respectively.

Chart 41: China’s B2C market share by GMV in 2013

(including platform)

Source: iResearch as of Jan 2014, Jefferies

Chart 42: China’s B2C market share by GMV in 2Q14

(including platform)

Source: iResearch as of Aug 2014, Jefferies

Note: Tencent and JD deal took place in March 2014.

BABA

Initiating Coverage

27 October 2014



There are three types of store structures on Tmall:

Flagship store (“品牌旗舰店”): for brands with a trademark (either ® or ™)

ownership

Authorized store (“专卖店”): for merchants who have been granted

distribution rights to sell products without geographical restrictions in the

Greater China region, as proven by brand authorization document holding

Speciality store (“专营店”): for merchants who have two or more brands

within one of Tmall’s product categories

Tmall merchants must be authenticated and pay a deposit, annual technical service fee

and transaction-based commission fee, depending on the type of products and storefronts.

Deposit: a deposit must be paid upfront for reimbursing consumers if the

merchant is found to have sold counterfeit products. A flagship or specialty store

owner with a TM and R trademark is required to pay RMB100K and RMB50K

respectively, while a RMB150K and RMB100K deposit fee is mandatory for a

monopolized store owner with a TM and R trademark respectively.

Annual technical service fee: Tmall charges an annual technical service fee

typically in the range of RMB10K-60K depending on the product category. This

platform fee is refundable (either 50% or in full) to merchants provided that they

reach a predefined sales target set by Tmall for the products.

Commission fee: sellers on Tmall are required to pay a commission typically

ranging from 0.3% to 5% of GMV for transactions settled through Alipay

depending on the product category.

Cross-promotion across Taobao and Tmall

Tmall’s huge traffic and user base has attracted increasing number of both domestic and

international brands to choose Tmall as the channel to build online presence. Currently,

Tmall has over 110,000 brands on the platform, including Apple, Gap, Nike, Lacoste,

Panasonic, etc. The well-built ecosystem and seamless shopping experience, whereby

buyers who search on Taobao will automatically see Tmall shops included in the product

listing results, allows Tmall sellers to leverage on the internal traffic flow across the two

marketplaces for more effective customer acquisition and cross-promotion opportunities.

Chart 43: Monthly active user trends of B2C websites in

China

Note: MAUs of other B2C websites are negligible on scale to label.

Source: iResearch as of Oct 2014, Jefferies

Chart 44: Page view trends of B2C websites in China

Note: PVs of other B2C websites are negligible on scale to label.


BABA

Initiating Coverage

27 October 2014



Increasing Tmall GMV and more favorable product mix drives commission

Commission revenue is mainly driven by transacted GMV on Tmall, Juhuasuan and

AliExpress that is settled through Alipay as well as product mix. 78.1% of Alibaba's China

retail commerce GMV was settled through Alipay in the twelve months ended June 30,

2014, compared to 78.3% in FY14. Commission rate varies across product categories in

the range of 0.3-5% but is identical across PC and mobile. Higher gross margin products

such as apparels are charged a higher commission rate of 5% compared to 2% in

consumer electronics which typically have a lower margin.

Chart 45: Commission rate by product categories on Tmall


We see improving blended commission rate from 3% in FY14 to 3.3% in FY1Q15,

according to our estimates, benefitting from a more favorable category mix towards high

margin products. For example, Tmall secures leadership in both apparels and mother &

baby products with 74.3% and 54.2% market share in 2Q14 respectively, according to

Analysys International.

Chart 46: China’s B2C market share by GMV in 2Q14 –

Apparels

Source: Analysys International as of July 2014, Jefferies

Chart 47: China’s B2C market share by GMV in 2Q14 –

Mother & baby products

Source: Analysys International as of July 2014, Jefferies

Tmall categories Commission rate Annual technical service fee

Apparel 5% 30,000/60,000

Shoes and handbags 5% 60,000

Sports and outdoors 5% 60,000

Jewellery & accessories 5% 60,000

Cosmetics & beauty products 4% 30,000

Home furniture & decoration 2%/5% 30,000/60,000

Books & audible 2% 30,000

Musical instrument 2% 30,000

Local lifestyle service 0.5%/2% 30,000

Auto & accessories 0%/2%/3% 30,000/300,000/600,000/700,000

Electronic ticket vouchers 0.5% 30,000

Household goods 2.5%/5% 30,000/60,000

Mother, baby products & toys 2%/5% 30,000/60,000

Food 2% 30,000

Nutritional and medical products 3% 30,000

3C 2% 30,000

Home appliance 2%/5% 30,000

Game cards 0.5% 10,000

Pre-paid phone cards 0.3%/0.5% 10,000

Online travel 2%/up to RMB100 per order 15,000

There are 20 level 1 product

categorise sold on Tmall categories,

including apparel, home appliance,

as well as virtual goods such as

game cards and pre-paid phone

cards.

Higher gross margin products such

as apparels are charged a higher

commission rate of 5% compared to

2% in consumer electronics which

typically have a lower margin.

BABA

Initiating Coverage

27 October 2014



Commission revenue reached RMB12bn in FY14, +95.1% YoY, representing 22.9% of total

revenue, and RMB4bn in FY1Q15, +114.1% YoY, 25.5% of total revenue, driven by strong

growth of Tmall's GMV and lottery commission income generated from Taobao during

the World Cup in June 2014. GMV generated from Tmall platform reached RMB441bn in

CY13, +105.1% YoY, representing 28.6% of total China commerce retail GMV, or

RMB505bn in FY14, +99.6% YoY, accounting for 30.1% of total GMV.

We expect continued strong growth of Tmall's GMV given rising consumer demand for

product quality, after-sales services and increasing promotional efforts by brands. In our

view, consumers choose Tmall over Taobao Marketplace for the following reasons:

Top search results: When people search on Taobao Marketplace, products on

Tmall are prioritized ahead of goods from Taobao Marketplace in the listing.

Users who click on Tmall products are automatically directed to Tmall regardless

of initial login site.

Authenticity: All Tmall merchants must guarantee that the products that they

sell on Tmall are authentic.

Quality guaranteed: Goods on Tmall usually enjoy guarantee as sellers on

Tmall are established brands or large retailers while sellers on Taobao

marketplace are usually individuals.

Professional service: It is easier to communicate with several customer care

staff hired by retailers on Tmall regarding the return & exchange and after sale

service, compared individual sellers (usu. One person) on Taobao Marketplace.

7-day return/15-day exchange: shopping on Tmall enables customers to

return products due to subjective reasons within 7 days upon receiving the

products or exchange goods within 15 days, no reasons asked. For Taobao,

certain merchants (not all) allow 7-day return with some restrictions attached.

Consumer credit facilities: Tmall has consumer credit facilities in place

allowing consumers to pay by installments at zero interest.

We estimate Tmall's GMV to reach RMB917bn in FY15, +81.5% YoY, and further to

RMB1,487bn in FY16, +62.2% YoY. This implies a rising GMV contribution from Tmall of

37.9% and 45.5% in FY15 and FY16 respectively, up from 30.1% in FY14.

Alibaba’s China PC commerce retail monetization rate was 3.03% in FY1Q15, up from

2.94% in FY14, and 2.77% in FY1Q14. Rising monetization rate, defined as revenue

divided by GMV, is driven by increasing GMV and revenue contribution from Tmall. In

addition to commissions, Tmall merchants generally pay marketing service fees for their

products to be displayed on Taobao Marketplace and Tmall. Therefore, the average

amount of revenue generated from each Tmall merchant is much higher than that from a

Taobao merchant.

Chart 48: China PC commerce retail monetization rate

(fiscal year)


Chart 49: China PC commerce retail monetization rate

(calendar year)


BABA

Initiating Coverage

27 October 2014



We currently estimate a blended Tmall commission rate of 3.4% and 3.6% in FY15 and

FY16, benefiting from increasing GMV contribution from higher-margin product

categories on Tmall Global (for purchase of imported overseas products for Chinese

consumers), such as apparels, shoes and accessories, health and beauty products.

Assuming that 78% of Tmall’s transactions are settled through Alipay, we currently

estimate commission revenue of RMB24.5bn in FY15, +104% YoY, and RMB41.2bn, +68%

YoY, in FY16.

Chart 50: Tmall’s GMV trend (fiscal year)


Chart 51: Tmall’s GMV trend (calendar year)


Chart 52: Commission revenue trend (fiscal year)


Chart 53: Commission revenue trend (calendar year)


Expect 50% YoY GMV growth on 2014 Singles Day (Nov 11th) promotion

Alibaba started launching an annual promotional campaign on Nov 11th, 2009, a day that

is known as “Singles Day” in China during which major e-Commerce players compete by

rolling out heavy discounts. Alibaba set record-breaking numbers last year with Taobao

and Tmall GMV in aggregate reaching RMB36.2bn on Nov 11th, +89.5% YoY. Based on

our channel checks, we believe GMV is expected to surpass RMB50bn on the upcoming

2014 Singles Day with 50% YoY growth.

BABA

Initiating Coverage

27 October 2014



Chart 54: Alibaba’s China commerce retail GMV transacted on annual Nov 11

Singles Day promotions


Juhuasuan – shifting gear from group buy to brand-based flash sales

Juhuasuan, launched in 2010, was the largest online group buying marketplace in China

in terms of MAU in 2013, according to iResearch. It offers products at discounted prices by

aggregating demand from numerous consumers, mainly through flash sales which make

products available for a limited period of time. Only Taobao and Tmall merchants are

allowed to purchase promotional slots on Juhuasuan, and transactions from traffic

originated on Juhuasuan are completed on merchants’ storefronts on Taobao Marketplace

or Tmall. Therefore, GMV generated from traffic through Juhuasuan is recorded as either

Taobao Marketplace GMV or Tmall GMV depending on which of these two marketplaces

the transaction is completed. GMV generated from traffic through Juhuasuan was

RMB65.6bn (USD10.6bn) in the twelve months ended June 30, 2014, accounting for 3.6%

of China commerce retail GMV.

Juhuasuan contains several channels including:

Group buying for branded products (“ 品牌团 ”): for established

international and domestic brands with over three months of operation on Tmall,

as well as Taobao merchants in the cosmetics category with high customer

recommendation history on products, after-sales and delivery services.

Merchants are required to display at least 6 products during each event. Group

buying events on this channel typically last for two days.

Zhengdianju (“ 整点聚 ” ): for merchants with high customer

recommendation history and over three months of operation. Each merchant is

required to display 5-30 products on Zhengdianju. Events on Zhengjianju are

generally limited within 24 hours.

Group buying for high-end brands (“聚名品”): for top 300 merchants

ranked by quarterly transaction volume via Alipay on Tmall, or top 500

merchants in terms of quarterly transaction volume via Alipay on Global Taobao

marketplace.

Group buying for lifestyle services (“生活汇”): for Tmall merchants with

over one month of operation as well as Taobao merchants with high

recommendation history. Major categories include local lifestyle services, such as

restaurant coupon, hotel reservation and education courses.

Group buying for travel services (“旅游团”): Major categories include

domestic and outbound travel package, hotel reservation, scenic spot tickets as

well as Visa application services.

Alibaba set record-breaking numbers

last year with Taobao and Tmall

GMV in aggregate reaching

RMB36.2bn on Nov 11th, +89.5%

YoY. Based on our channel checks,

we believe GMV is expected to

surpass RMB50bn on the upcoming

2014 Singles Day with 50% YoY

growth.

BABA

Initiating Coverage

27 October 2014



Group buying for general merchandise (“量贩团”): Major categories

include laundry services, imported food, food and nutritional, mother & baby

products, household goods, underwear and accessories.

Qualified Juhuasuan merchants are required to pay a deposit, placement fee and

transaction-based commission fee, depending on the type of products and storefronts.

Deposit: a deposit must be paid upfront for reimbursing consumers if the

merchant is found to have sold counterfeit products. Merchants on Juhuasuan

platform can choose to pay fixed deposit, pro-rata deposit, or after-sale

insurance for product quality guarantee.

Chart 32: Deposit options on Juhuasuan platform


Placement fee: merchants pay placement fees to purchase promotional slots

on Juhuasuan marketplace for a specified period;

Commission fee: sellers on Juhuasuan are required to pay a commission



Juhuasuan will shift away from its current mass-market group buy model to a high-end

brand-focused flash sales model. Its new brand sales channel, ladygo.tmall.com, features

15-20 flash sales events with 3 new events starting at 10:00am every day. Current product

offerings are concentrated in apparels, shoes and bags as well as accessories of domestic

brands. We believe successful execution of the flash sales business will depend on

Juhuasuan’s ability in bringing aboard well-known brands and monitoring product quality.

Chart 32: Comparison between ladygo.tmall.com and Vipshop


Deposit Terms Refunds

Fixed deposit RMB500K Refundable after 12 months

Pro-rata deposit

-GMV<RMB100K, deposit=GMV;

-RMB100K≤GMV<RMB300K, deposit=RMB100K;

-RMB300K≤GMV<RMB1mn, deposit=RMB300K;

-GMV≥RMB1mn, deposit=RMB500K.

Refundable 30 days after the

completion of group buy events

After-sale insuranceMerchants pay 0.3% of pro-rata deposit as insurance fee,

up to RMB1,500.Not refundable

Metrics Ladygo.tmall.com Vipshop

No. of sales events per day 15-20 100-200

Product categoriesWomen's and men's apparels, shoes

and bags, accessories

Women's and men's apparels, shoes and

bags, accessories, cosmetics, home décor,

3C, sporting goods, food

Brands Mainly domestic Domestic and international

Delivery Free shipping on order size over RMB268 Free shipping on order size over RMB288

Product return7-day return with full reimbursement of

shipping fee7-day return with RMB10 credit rebate

Merchants on Juhuasuan platform

can choose to pay fixed deposit, pro-

rata deposit, or after-sale insurance

for product quality guarantee.

Juhuasuan ‘s new brand sales

channel, ladygo.tmall.com, features

15-20 flash sales events with 3 new

events starting at 10:00am every

day. Current product offerings are

concentrated in apparels, shoes and

bags as well as accessories of

domestic brands.

BABA

Initiating Coverage

27 October 2014



1688.com – wholesale sourcing channel for retail merchants

1688.com is a leading online wholesale marketplace in China, mainly monetized through

China TrustPass membership fee accounting for 74.1% of its revenue in FY14 with the rest

contributed by premium data analytics and online marketing service.

1688.com has evolved into a transaction platform between wholesalers and buyers, the

majority of which are retail merchants on Taobao and Tmall marketplaces. Approximately

50%-60% of total orders on 1688.com were contributed by Taobao and Tmall merchants

as of Dec 31, 2013, according to TechWeb. With a wide coverage of 49 verticals and 1,709

sub-verticals, 1688.com drives synergy between its wholesale and retail marketplaces,

enabling manufacturers to shorten the distribution chain, and retail merchants to gain

access to a more cost-effective direct sourcing channel.

Chart 55: China’s B2B market share in 2013

Source: Analysys International as of Feb 2014, Jefferies

Alibaba’s domestic wholesale revenue reached RMB2.3bn in FY14, +4.7% YoY accounting

for 4.4% of total revenue and RMB709mn in FY1Q15, +34.8% YoY, representing 4.5% of

revenue. We expect 1688.com to remain as the major wholesale sourcing channel for

Alibaba’s retail merchants and currently estimate domestic wholesale revenue to reach

RMB3.1bn in FY15, +35.3% YoY, accounting for 4.1% of total revenue, and RMB3.8bn in

FY16, +22.8% YoY, 3.6% of total revenue, driven by increasing number of paying

members and rising adoption of online marketing services.

Chart 56: Domestic wholesale revenue trend (fiscal year)


Chart 57: Domestic wholesale revenue trend (calendar

year)


According to Analysys International,

Alibaba (alibaba.com and 1688.com

combined) accounted for 46.4%

market share in 2013.

BABA

Initiating Coverage

27 October 2014



Leading advertising platform with comprehensive product portfolio

Alibaba is one of the largest advertising platforms in China and was ranked no.2 behind

Baidu in terms of online advertising revenue in 2Q14, according to iResearch, driven by

strong traffic acquisition demand from its merchants, particularly during promotional

campaigns.

Chart 58: Top 10 players ranked by online advertising revenue (2Q14)

Source: Company data, iResearch as of July 2014, Jefferies

Launched in 2007, Alimama is Alibaba’s proprietary online marketing platform offering

pay-for-performance (P4P) marketing services (including Wangxiaobao on wholesale

marketplace), Diamond Showcase (i.e. display marketing) and Taobaoke program. This is

all conducted through the Taobao Ad Network and Exchange (TANX ADX).

The Taobao Ad Network and Exchange

The Taobao Ad Network and Exchange (TANX ADX), one of the earliest and largest real-

time online advertising exchanges in China, enables transparent pricing of advertising

inventory, and helps to optimize online marketers’ return on investment. Participants on

TANX include publishers, merchants, demand side platforms, third-party data and

technology companies.

Alibaba is one of the largest

advertising platforms in China and

was ranked no.2 behind Baidu in

terms of online advertising revenue in

2Q14, according to iResearch, driven

by strong traffic acquisition demand

from its merchants, particularly during

promotional campaigns.

BABA

Initiating Coverage

27 October 2014



Chart 59: Overview of Alibaba’s online marketing ecosystem


Note: (1) SSP refers to supply side platform, a technology platform that enables publishers to manage advertising inventory and monetize traffic efficiently. Supply side mainly consists of Portals, vertical

websites, SNS communities, blogs and other websites; (2) RTB refers to real-time bidding, by which ad inventory is bought and sold via programmatic instantaneous auction; (3) DSP refers to demand side

platform, a technology platform that enables advertisers to bid for targeted users with selected region. Internal DSP includes pay-for-performance, or P4P marketing service on Taobao and Tmall

marketplace, Wangxiaobao (“网销宝”) and display marketing service, or diamond showcase; (4) External DSP refers to P4P marketing service on e-Tao platform, through which third-party e-Commerce

websites such as JD.com, Yougou can place ads on it; (5) DMP refers to data management platform, which allows advertisers on TANX to evaluate and select online adverting inventory using both

behavioural data as well as browsing behaviour and shopping history. Through which, advertisers could place ads more precisely and efficiently.

BABA

Initiating Coverage

27 October 2014



Pay-for-performance

Pay-for-performance, or P4P, marketing services, where retail marketplace sellers bid for

keywords that match product or service listings appearing in search or browser results on

a cost-per-click (CPC) basis. Prices are set by merchants through an online auction system.

P4P marketing services are provided on both marketplaces and websites of third-party

marketing affiliates. Merchants are able to carry out targeted marketing based on location,

interest, customer profile, PC/mobile terminal, ad display time during the day, etc.

Chart 60: Screenshot of Alibaba Group’s P4P service on Taobao Marketplace


BABA

Initiating Coverage

27 October 2014



Diamond Showcase

Diamond Showcase (“钻石展位”), or display marketing, where sellers can bid for display

positions on the relevant marketplace or through third-party marketing affiliates at

through the online auction system on a cost-per-mille or CPM basis.

Chart 61: Screenshot of Alibaba Group’s Diamond Showcase ads on China retail marketplace


BABA

Initiating Coverage

27 October 2014



Taobaoke Program

Through Taobao Affiliate Network, sellers on Taobao Marketplace and Tmall place P4P

marketing and marketing displays on websites and mobile apps of Alibaba’s marketing

affiliates. Sellers pay Alibaba commissions based on a percentage of GMV for transactions

settled through Alipay, a significant portion of which is then shared with the participating

affiliates. According to the company, the commission rate is set by Taobao merchants in

the range of 1.5% to 50%. Of this commission payment, 90% is paid to publishers with

the remaining 10% paid to Alimama as platform service fees.

Chart 62: Screenshot of Taobaoke Ads placed on third-party affiliate website


BABA

Initiating Coverage

27 October 2014



Wangxiaobao

Wangxiaobao (“网销宝 ”) is a pay-for-performance marketing service which allows

wholesale marketplace sellers to bid for keywords that match product or service listings

appearing in search or browser results on a cost-per-click (CPC) basis through online

auction system.

Chart 63: Screenshot of Alibaba Group’s WangXiaoBao ads on China wholesale marketplace


BABA

Initiating Coverage

27 October 2014



Juhuasuan Promotional Slot

Juhuasuan (“ 聚划算 ”) promotional slots: sellers pay placement fees to purchase

promotional slots on Juhuasuan marketplace for a specified period.

Chart 64: Screenshot of Alibaba Group’s ads placement on Juhuasuan platform


BABA

Initiating Coverage

27 October 2014



Moderating ad revenue growth impacted by increasing mobile contribution

Alibaba’s online marketing revenue reached RMB29.7bn in FY14, +50.9% YoY,

representing 56.6% of total revenue. FY1Q15 revenue was RMB8.4bn, +29% YoY,

accounting for 53.3% of total revenue, driven by a 39.2% increase in number of clicks on

P4P marketing and partially offset by a 6.9% decline in cost-per-click paid by merchants.

The decline in blended CPC was attributed to an increasing revenue contribution from

mobile marketing services, which currently charge merchants at a lower CPC compared to

that on PC.

Merchants generally allocate a certain proportion of their budget to purchase online

marketing services based on GMV generated. Online marketing revenue as a percentage

of China commerce retail GMV was 1.77% in FY14, down from 1.83% in FY13, and

declined further to 1.68% in FY1Q15, compared to 1.89% in FY1Q14. This is due to the

increasing GMV contribution from mobile on which CPC is lower and merchants typically

allocate a smaller proportion of their budget to advertising due to limited ad slots given

screen size constraints.

Chart 65: Online marketing revenue trend (fiscal year)


Chart 66: Online marketing revenue trend (calendar year)


We expect Alibaba’s online marketing revenue as a percentage of GMV continue to be

under pressure in the near term, despite a robustly growing GMV, as the company

focuses on prioritizing mobile user activity engagement over monetization. However,

enhanced mobile-based marketing products would help narrow the CPC gap between PC

and mobile over time and provide upside to advertising revenue. We estimate online

marketing revenue to reach RMB39.4bn in FY15, +32.7% YoY, representing 51.3% of total

revenue, and RMB50.1bn in FY16, +27.1% YoY, accounting for 47.7% of total revenue.

BABA

Initiating Coverage

27 October 2014



Extending Mobile Leadership Benefiting from the proliferation of affordable smartphones and its established customer

reach in lower tier cities where offline shopping facilities are less developed, Alibaba led

China’s m-Commerce market accounting for 84.2% of total mobile retail GMV in 2Q14,



1. Alibaba has amassed a large mobile user base and traffic with its diversified

mobile app portfolio, including its widely used Alipay mobile payment app.

Alibaba saw surging mobile GMV which accounted for 32.8% of total GMV in

FY1Q15, up 21pcpt YoY. We estimate mobile GMV to reach RMB1,068bn in

FY15, +235.4% YoY, representing 44.2% of total GMV, up 25.2pcpt YoY.

2. Alibaba’s mobile monetization rate was 0.91% in FY14, much lower than 2.94%

on PC due to the lagging advertising monetization on mobile compared to PC.

Given the inherent monetization hurdles in mobile ad including limited screen

size and balance of user experience, we expect mobile monetization rate to

remain at a discount to PC in the near term. However, we expect better mobile-

based marketing products and wider adoption among merchants should help

narrow the CPC and hence, monetization gap between the two terminals. We

currently estimate mobile revenue of RMB19.7bn in F15, +576.6% YoY,

representing 30.3% of China commerce retail revenue and implying a

monetization rate of 1.84%, up 0.93pcpt YoY.

3. Alibaba’s various mobile investments, including UCWeb, Weibo and TangoMe,

help expand its mobile user base through major mobile traffic gateways such as

browser, SNS and instant messaging.

BABA

Initiating Coverage

27 October 2014



Extending Mobile Leadership As discussed in our sector note, “A Taste of Domestic Consumption: The Unleashing of

China’s E-Commerce Power” published on Sept 19, 2014, proliferation of affordable

smartphones and improving wireless infrastructure encourages users in lower-tier cities

and rural China directly take up mobile shopping and skip PC-based e-Commerce.

Taobao led China’s m-Commerce market with 84.2% of total mobile retail GMV in 2Q14,


Explosive m-Commerce market growth

M-commerce experienced phenomenal growth since 2012-13 driven by incentive

schemes imposed by several major players including Alibaba, JD.com, Vipshop etc. The

m-commerce market size surged to RMB274bn in 2013 from RMB11.7bn in 2011,

accounting for 14.5% of total e-commerce transaction volume in 2013, according to

iResearch. We estimate m-Commerce market to reach RMB945bn in 2014, +245% YoY,

representing 34.3% of overall e-Commerce market, and RMB2,174bn in 2015, +130%

YoY.

Chart 67: China’s m-Commerce market size by GMV

Source: iResearch as of July 2014, Jefferies estimates

Alibaba (Taobao + Tmall) led China’s m-Commerce market with a market share of 84.2%,

followed by JD.com with 5.3% market share and Vipshop with 2% market share in 2Q14,

according to iResearch. Taobao initiated a series of incentive schemes to convert its PC

traffic to the mobile end, such as special discount on goods sold on mobile end and

rebate for mobile transactions. JD launched its level 1 access points on Tencent’s Weixin

and mobile QQ to leverage on its massive mobile traffic. Vipshop launched special sales

campaign from April 18 to April 19, 2014 and launched selected products on mobile

before PC end.

The m-commerce market size surged

to RMB274bn in 2013 from

RMB11.7bn in 2011, accounting for

14.5% of total e-commerce

transaction volume in 2013,


We estimate m-Commerce market to

reach RMB945bn in 2014, +245%

YoY, representing 34.3% of overall e-

Commerce market, and

RMB2,174bn in 2015, +130% YoY.

BABA

Initiating Coverage

27 October 2014



Chart 68: China’s m-Commerce market share in 2Q14

Source: iResearch as of July 2014, Jefferies

Alibaba securing m-Commerce leadership with large mobile user base

Alibaba launched the mobile platforms for Taobao and Tmall in 2010. Since then, Alibaba

gradually enriched its mobile app portfolio by adding Juhuasuan, Alibaba, AliExpress,

Taobao Travel, Taobao Read, Wangxin, etc.

Taobao, Tmall, AliExpress, Alibaba and 1688 are Alibaba’s storefront apps. Taobao was

ranked no.1 e-Commerce mobile app by both DAU and MAU in August 2014, while Tmall

was ranked no.2 and 3 by DAU and MAU respectively, according to iResearch. Among

group-buying apps, Juhuasuan was ranked no.2 and 3 by MAU and DAU respectively.

Chart 69: Alibaba's mobile app portfolio


Alibaba (Taobao + Tmall) led China’s

m-Commerce market with a market

share of 84.2%, followed by JD.com

with 5.3% market share and Vipshop

with 2% market share in 2Q14,


Alibaba launched the mobile

platforms for Taobao and Tmall in

2010. Since then, Alibaba gradually

enriched its mobile app portfolio by

adding Juhuasuan, Alibaba,

AliExpress, Taobao Travel, Taobao

Read, Wangxin, etc.

BABA

Initiating Coverage

27 October 2014



Chart 70: Top 10 e-Commerce mobile apps by MAU (August

2014)


Chart 71: Top 10 e-Commerce mobile apps by DAU (August

2014)


Chart 72: Top 10 group buy mobile apps by MAU (August

2014)


Chart 73: Top 10 group buy mobile apps by DAU (August

2014)


Alipay Wallet acts as mobile traffic gateway

Alibaba offers seamless mobile transaction experience through Alipay Wallet, Alipay’s

mobile app, which serves as an important gateway to mobile traffic. Delivering

convenient wireless payment in various settings, such as money transfer, restaurant check

payment, cinema ticket purchase, taxi booking, utility bill payment. Alipay Wallet has

accumulated 161.4mn MAU and was ranked the no. 3 mobile app by MAU in August

2014, according to iResearch. It is also the only payment app that is ranked among the

top ten.

Chart 74: Top 10 mobile apps by MAU (Aug 2014)

Source: iReseach as of Oct 2014, Jefferies

No. App MAU (mn)

1 Taobao 133.4

2 JD.com 54.8

3 Tmal l 46.6

4 Suning Yigou 15.7

5 Yixun 14.9

6 Yihaodian 13.7

7 Xiaomi 12.1

8 Vipshop 11.9

9 Dangdang 11.7

10 Amazon 8.7

No. App DAU (mn)

1 Taobao 60.1

2 Tmal l 18.0

3 JD.com 11.7

4 Suning Yigou 3.8

5 Yihaodian 3.6

6 Yixun (Tencent) 3.0

7 Xiaomi 2.2

8 Vipshop 2.2

9 Dangdang 1.9

10 Amazon 1.3

No. App MAU (mn)

1 Meituan (Alibaba holds minority stake) 38.6

2 Juhuasuan 21.3

3 Nuomi (owned by Baidu) 19.6

4 Tuan800 13.0

5 Baidu Group Buy 12.9

6 Lashou Group Buy 9.1

7 Dianping Group Buy (Tencent holds 20% stake) 7.7

8 55tuan 7.4

9 Maoyan movie Group Buy 3.5

10 Meituan Merchant 0.4

No. App DAU (mn)

1 Meituan (Alibaba holds minority stake) 9.2

2 Juhuasuan 4.7

3 Nuomi (owned by Baidu) 4.7

4 Tuan800 3.5

5 Baidu Group Buy 2.7

6 Lashou Group Buy 1.4

7 Dianping Group Buy 1.4

8 55tuan 1.3

9 Maoyan movie group-buy 0.5

10 Meituan Merchant 0.1

No. App MAU (mn)

1 Weixin (Wechat) 298.6

2 QQ 266.4

3 Al ipay 161.4

4 UC Browser 135.6

5 Sougou Input 133.5

6 Taobao 133.4

7 Youku 120.0

8 Sina Weibo 112.8

9 360 Mobi le Safe 105.4

10 iQiyi 96.8

Alipay Wallet has accumulated

161.4mn MAU and was ranked the

no. 3 mobile app by MAU in August

2014, according to iResearch. It is

also the only payment app that is

ranked among the top 10.

BABA

Initiating Coverage

27 October 2014



Chart 75: Screenshot of Alipay Wallet interface

Note: recent 7-day annualized rate of return refers to the week from Jun 9, 2014 to Jun 15, 2014.


Alibaba’s wide variety of mobile apps supported by Alipay Wallet and its various mobile

promotional campaigns drove surging mobile GMV growth. For example, Alibaba

launched “Mobile Taobao 3.8 Life Festival” on March 8th, 2014, offering discounts on

restaurant dine-in, movie ticket purchase and karaoke via its mobile apps including

Mobile Taobao, Taodiandian and Alipay Wallet. Taobao partnered with 1,500 in-store

brand outlets, 800 restaurants, 300 movie theatres and 230 karaoke operators during this

event. The festival sold a total of 2mn movie tickets and helped boost movie box office

sales to RMB133mn on March 8th, compared to RMB60mn on the same day in 2013.

These mobile-only initiatives encouraged mobile transactions and the adoption of

Alibaba’s mobile apps.

Alibaba’s mobile GMV reached RMB319bn in FY14, accounting for 19% of total GMV, 4x

that of FY13. Mobile penetration further rose to 32.8% in FY1Q15 with mobile GMV

surging to RMB164bn and mobile MAU on its China retail marketplaces reaching 188mn

by end of June 2014, according to the company. We expect Alibaba to continue to host

mobile-only promotional events in an effort to drive transactions via mobile device. We

estimate Alibaba’s mobile GMV to reach RMB1,068bn in FY15, +235.4% YoY, representing

44.2% of its total GMV and further to RMB1,922bn in FY17, 58.8% of total GMV. We

currently estimate Alibaba’s m-Commerce market share of 88% in 2014 and 79% in 2015.

Chart 76: Alibaba’s mobile GMV annual trend


Alibaba’s wide variety of mobile

apps supported by Alipay Wallet and

its various mobile promotional

campaigns drove surging mobile

GMV growth. Alibaba’s mobile GMV

reached RMB319bn in FY14,

accounting for 19% of total GMV, 4x

that of FY13.

We estimate Alibaba’s mobile GMV

to reach RMB1,068bn in FY15,

+235.4% YoY, representing 44.2% of

its total GMV and further to

RMB1,922bn in FY17, 58.8% of total

GMV.

BABA

Initiating Coverage

27 October 2014



Chart 77: Alibaba’s m-Commerce market share estimates


Narrowing monetization gap between PC and mobile

Alibaba’s mobile monetization rate, defined as mobile revenue divided by mobile GMV,

was 0.91% in FY14, +0.42pcpt YoY, but still much lower than 2.94% on PC, resulting in

an overall monetization rate of 2.55%. In FY1Q15, PC and mobile monetization rates

improved to 3.03%, +0.25pcpt YoY, and 1.49%, +0.91pcpt YoY, respectively. However,

the overall monetization rate only improved slightly by 0.01pcpt YoY to 2.52% due to

increased mobile GMV contribution.

Monetization rate on mobile is relatively low mainly due to the still lagging monetization

on mobile advertising compared to PC. According to Analysys International, Alibaba’s

mobile advertising monetization rate was 0.69% in CY2Q14/FY1Q15 vs. 2.16% on PC.

Major challenges in monetizing mobile advertising include difficulties in reaching the right

group of audience due to lack of cookie system in mobile apps and instability of cookie

system in mobile browser. Thus, advertisers tend to pay less on an ad viewed by 1,000

people on mobile than on PC. Additionally, the balance of user experience and display

space also limits the number of ad slots available on mobile. On the other hand,

commission rates charged by Tmall are identical across PC and mobile, according to the

company, and therefore commission revenue is not negatively impacted by the increasing

mobile GMV contribution.

We expect the mobile monetization rate to narrow the gap with that of PC, as Alibaba

enhances its mobile ad products and increases both paid clicks, and CTR (click through

rate), eventually closes the gap between mobile and PC-based cost per click (CPC).

Alibaba’s mobile revenue saw significant growth reaching RMB2.5bn in FY1Q15, +922.5%

YoY, implying a mobile monetization rate of 1.49%, +0.91pcpt YoY. This compares to

FY14 mobile revenue of RMB2.9bn, +646.8% YoY, with a mobile monetization rate of

0.91%. Given the monetization challenges in mobile advertising, we believe Alibaba’s

mobile monetization rate will remain at a discount to PC in the near term.

We currently estimate mobile revenue to reach RMB19.7bn in FY15, +576.6% YoY,

representing 30.3% of Alibaba’s China commerce retail revenue and implying a

monetization rate of 1.84%, +0.93pcpt YoY. On the PC front, we are modelling the

monetization rate to reach 3.34% in FY15 and further to 3.54% in FY16, benefiting from

increasing GMV contribution from Tmall which charges merchants transaction-based

commission fees in addition to advertising, as opposed to only advertising on Taobao

marketplace.

Calender year 2012 2013 2014E 2015E 2016E

China's m-Commerce market size (in RMB bn) 69 274 945 2,174 3,696

as % of total e-Commerce 5.8% 14.5% 34.3% 57.5% 77.5%

YoY growth % 490.3% 297.4% 245.0% 130.0% 70.0%

Alibaba's mobile GMV (in RMB bn) 48 232 832 1,709 2,532

as % of total GMV 5.7% 15.0% 37.1% 55.7% 64.9%

YoY growth % 324.1% 258.7% 105.4% 48.1%

Alibaba's m-Commerce market share 69.5% 84.7% 88.0% 78.6% 68.5%

We currently estimate Alibaba’s m-

Commerce market share of 88% in

2014 and 79% in 2015.

BABA

Initiating Coverage

27 October 2014



Chart 78: Alibaba’s PC, mobile and overall monetization rates


Chart 79: Alibaba’s mobile revenue annual trend


Note: Alibaba’s fiscal year ends on March 31st.

Rigorous investments on mobile platform

Alibaba has made several investments to expand its mobile user base in the past two

years, such as UCWeb, Sina Weibo, Momo, LBE Security Master, Quixey and Umeng.

Three out of top ten mobile apps by MAU are owned by Alibaba in August 2014,


UCWeb: UCWeb, fully acquired by Alibaba in June 2014, is China’s largest mobile

browser with 134mn domestic mobile MAUs in June 2014, according to iResearch. With

264mn global active users in June 2014 as disclosed by the company, UCWeb had an

overseas user base of approximately 130mn. Alibaba and UCWeb jointly launched a

mobile search engine, Shenma (sm.cn), in April 2014, incorporating display ads from

Taobao into its search results.

We are modelling PC monetization

rate to reach 3.34% in FY15 and

further to 3.54% in FY16, benefiting

from increasing GMV contribution

from Tmall.

We estimate mobile monetization

rate to reach 1.84% in FY15 and

further to 2.31% in FY16, as Alibaba

works on enhancing mobile-based

marketing products and hence

narrowing the CPC and

monetization gap between PC and

mobile.

We estimate mobile revenue to reach

RMB19.7bn in FY15, +576.6% YoY,

representing 30.3% of Alibaba’s

China commerce retail revenue and

implying a monetization rate of

1.84%, +0.93pcpt YoY.

BABA

Initiating Coverage

27 October 2014



Chart 80: Top 10 mobile browser by MAU –June 2014

Source: iReseach as of September 2014, Jefferies

Chart 81: Screenshot of search results on Shenma


Sina Weibo: Alibaba acquired 30% equity stake in Sina Weibo by April 2014. Sina Weibo

offers social display ads and promoted marketing products based on the target audience’s

geographic location, age, interest etc. Weibo charges advertisers based on CPM (cost per

mille) or CPE (cost per engagement) models. The investment in Sina Weibo allows Alibaba

to leverage on the rich user database of Sina Weibo to develop a social commerce model

and customize targeted marketing solutions for merchants and users.

Momo: According to public new sources, Alibaba made a USD40mn strategic investment

in Momo, one of the most popular location-based social network mobile apps in China,

which allows users to interact with nearby people. The investment may help to enhance

Alibaba’s positioning in local lifestyle service offerings, in our view.

Sina Weibo and MoMo were ranked no.1 and 5 among social media mobile apps by MAU

in August 2014, according to iResearch.

Chart 82: Top 10 social media mobile apps by MAU - August

2014

Source: iResearch as of September 2014, Jefferies

Chart 83: Screenshot of Momo


TangoMe: Alibaba completed a 20% equity stake purchase of TangoMe, a US-based

mobile messaging app, with USD217mn cash in March 2014. We believe this could

potentially facilitate Alibaba’s cross-border e-Commerce initiatives and fill up its capability

gap in mobile messaging.

No. App MAU (mn)

1 UCWeb 133.5

2 QQ Browser 74.7

3 Baidu Browser 29.5

4 360 Mobi le Browser 28.3

5 Opera Browser 18.1

6 Chrome 8.9

7 Liebao Browser 6.6

8 Maxthon Browser 6.0

9 2345 Browser 3.7

10 Sougou Browser 3.5

No. App MAU (mn)

1 Sina Weibo 112.8

2 Qzone 55.5

3 Baidu Tieba 28.9

4 Renren 19.7

5 Momo 19.5

6 Qiushibaike 13.3

7 Tecent Weibo 10.9

8 Weishi 10.2

9 DSCJ8888 7.9

10 Baihe 5.6

BABA

Initiating Coverage

27 October 2014



Umeng: Public news sources reported Alibaba’s USD80mn strategic investment in

Umeng in April 2013. Umeng provides statistical analysis of mobile apps such as new

adds, active users, traffic channels, etc. We believe Alibaba can better understand user

behaviour on mobile to enhance its mobile monetization ability through its investment in

Umeng.

Chart 84: Top 10 mobile security apps by MAU- August

2014


Chart 85: Screenshot of Umeng


Table 1: Alibaba’s mobile investments – Disclosed by the company

Date Target Deal Details Target Company Description Implied Strategy

June, 2014 UCWeb

(Private)

Alibaba acquired 66% economic

interests in UCWeb over several

rounds of investments, the last of

which completed in April 2014. It

then acquired all remaining

shares for USD458mn in cash

plus restricted shares and RSUs in

the aggregate number of

12.3mn.

- China's largest mobile browser

company in terms of MAUs, according to

iResearch.

- UCWeb had 264mn active users

globally during June 2014, according to

company data

- "Shenma" had more than 6bn monthly

mobile search queries as of April 2014,


- Enhance mobile offerings beyond e-

Commerce, such as general mobile

search

-Access UCWeb's large base of mobile

users and offer existing user base with

additional mobile solutions

Apr, 2014/

Apr, 2013

Weibo

(NASDAQ:

WB)

USD1,035mn in aggregate for

approx. 30% stake on a fully-

diluted basis. (Initial investment

of USD586mn for 18% stake,

followed by USD449mn in April

2014 with Alibaba exercising its

option to increase its stake upon

Weibo's IPO)

- A leading social media platform in

China, with 156.5mn MAUs and 69.7mn

DAUs as of Jun 2014, according to

company data.

- Its total revenue grew 105% YoY to

USD77.3mn in 2Q14.

- Gain access to and capture

integration benefits from the user

data base of Weibo, enhancing

Alibaba's platform and data base

-Cooperate on content, behavior data

integration and marketing solution

-Develop a social commerce model

by converting traffic from the social

media platform onto Alibaba's e-

Commerce platforms

Apr, 2014/

Mar, 2014

TangoMe

(Private)

USD217mn in aggregate for 20%

stake on a fully-diluted basis

- A leader in mobile messaging services

based in the United States offering free

voice, video and text messaging to

consumers globally, similar to Skype of

Microsoft and Apple's FaceTime.

- Its total registered users were 200mn

with MAUs of over 70mn as of Dec 2013,

according to the Wall Street Journal.

-Improve mobile messaging

technology and solution;

-Expand customer reach to overseas

market


No. App MAU (mn)

1 360 Mobi le Safe 105.4

2 Tencent Mobi le Manager 39.6

3 LBE Secruity Master 28.1

4 Baidu Mobi le Safe 20.1

5 Kingsoft Mobi le Safe 10.6

6 Kingsoft Mobi le Anti -Virus 5.5

7 SECUREit 4.9

8 Anti -KungFu Virus 2.7

9 Baidu Safe 2.0

10 360 Privacy Safety 1.9

BABA

Initiating Coverage

27 October 2014



Table 2: Alibaba’s mobile investments – reported by public news sources

Date Target Deal Details Target Company Description Implied Strategy

Dec, 2013 LBE Security

Master ("LBE 安

全大师",

private)

Undisclosed A mobile security app for Android platform,

accounting for 11.6% mobile security market

share in terms of monthly time spent in Jun

2014, according to iResearch.

-Strengthen its presence on mobile

-Potentially cooperate on expanding

service offerings on app distribution

platform and Alipay Wallet

Oct, 2013 Quixey

(Private)

Alibaba led a

USD50mn funding

A mobile app search engine, which allows users

to find apps based on functionality search

-Strengthen its mobile search technology

Apr, 2013 Umeng ("友盟",

private)

Acquisition for

USD80mn

-A service provider of applications data statistical

analysis, similar to Google Analytics for mobile

applications in China.

-It has served over 100K mobile apps across all

major mobile platforms including iOS, Android

and Windows Phone, with more than 50

percent of Chinese developers using the service,

according to company data.

-Help to better understand mobile users

data and in-app behavior

-Strengthen its advertising technology on

mobile e-Commerce

Oct, 2012 MoMo

("陌陌", private)

Strategic investment

of USD40mn

-A location-based social network app with over

100mn registered users, according to the

company as of Feb 2014.

-MAUs and DAUs of Momo reached 18.8mn and

5.1mn in Jul 2014, according to iResearch.

-Enhance its positioning on LBS mobile

social network as a supplement to

Taobao's overall local lifestyle service

offering

Source: Bloomberg, Wall Street Journal, Sina News, NetEase News, Tech in Asia, Tech Crunch, Tech Web and Tencent News.

BABA

Initiating Coverage

27 October 2014



Building the Largest Ecosystem Alibaba’s large and growing ecosystem is supported by its expanding logistics platform,

payment settlement services and Internet finance business.


1. Investing in Smart Logistics: Alibaba’s China retail marketplace generated

5bn packages in 2013, accounting for 54.4% of total package delivery in China.

In order to meet increasing delivery demands and strengthen its overseas

logistics solution for cross-border e-Commerce opportunities, Alibaba has been

stepping up investment effort in expanding its logistics platform, including

China Smart Logistics, Haier/Goodaymart and Singapore Post.

2. Alipay: As a core component of Alibaba’s ecosystem, Alipay provides secure

and convenient online payment services for buyers and sellers as well as a

stream of applications touching different aspects of consumers’ daily lives.

Alipay accounted for 48.8% market share of China’s third-party online payment

and 79.9% on the mobile front in 2Q14, according to iResearch.

3. Internet finance: Leveraging on the data and credit history accumulated from

its online platforms, Alibaba, through Small and Micro Financial Services

Company, pushes into Internet finance including wealth management, SME

loan and Internet banking to further enhance user engagement within its

ecosystem. Its money market fund product, Yu’e Bao, accounted for 98% of

AUM managed by Tianhong Asset Management, making it the largest asset

management company in China in 1H14.

4. New verticals: Alibaba is making inroads into new verticals such as healthcare,

digital media & entertainment and local lifestyle services to capture growth

opportunities and build out its O2O ecosystem.

BABA

Initiating Coverage

27 October 2014



Building the Largest Ecosystem

Scaling up logistics platform

Instead of operating an in-house fulfillment infrastructure, Alibaba cooperates with third-

party logistics service providers through a central logistics information system. As of Jun

30, 2014, Alibaba has established strategic partnerships with 14 delivery companies

covering over 600 cities. Its logistic network is able to support a daily average delivery of

16.6mn packages in the twelve months ended June 30, 2014 and a peak of 156mn on the

Nov 11th Singles Day promotion in 2013.

Driven by surging online transactions, number of packages delivered in China reached

9.2bn in 2013 with a 5-year CAGR of 43.5%, according to State Post Bureau of China.

Among which, 5bn packages were generated from Alibaba’s China retail marketplace

(Taobao, Tmall and Juhuasuan), accounting for 54.4% of total package delivery.

Chart 86: Number of packages delivered in China

Source: State Post Bureau of China, Jefferies

According to company data as of June 30, 2014, Alibaba has established strategic

partnership with 14 delivery companies, covering over 600 cities in 31 provinces, directly

controlled municipalities and autonomous regions in China. This includes 1,800

distribution centers and 97,000 delivery stations with over 1.1mn delivery personnel. In

the twelve months ended June 30, 2014, the network managed the delivery of 6.1bn

packages from Alibaba’s China retail marketplace.

Logistics network: 1,800 distribution centers and 97,000 delivery stations

Coverage: over 600 cities in 31 provinces, directly controlled municipalities and

autonomous regions in China

Personnel: over 1.1mn delivery personnel from 14 delivery companies.

Capacity: daily average of 16.6mn packages; 156mn packages were handled

on Singles Day promotion in 2013.

In face of increasing need for logistics capacity, Alibaba has been stepping up investment

effort in expanding its logistics platform, including:

Zhejiang Cainiao Supply Chain Management – building a logistics hub

Zhejiang Cainiao Supply Chain Management, or China Smart Logistics, was established as

a joint venture by Alibaba Group (48% stake), Yintai Holdings, Fosun Group, Forchn

Holdings and other five major express delivery companies in May 2013 with total

registered capital of RMB5bn. Alibaba owns 48% of the joint venture and has invested

RMB1.68bn as of Mar 31, 2014. The company will complete its full investment of

RMB2.4bn by May 2015.

Driven by surging online

transactions, number of packages

delivered in China reached 9.2bn in

2013 with a 5-year CAGR of 43.5%,

according to State Post Bureau of

China. Among which, 5bn packages

were generated from Alibaba’s China

retail marketplace (Taobao, Tmall

and Juhuasuan), accounting for

54.4% of total package delivery.

BABA

Initiating Coverage

27 October 2014



In 5 to 8 years, through China Smart Logistics, Alibaba aims to build a network of key

logistics hubs across China, including distribution centers, warehouses and other supply

chain facilities, providing 24-hour delivery and supporting the delivery of over 100mn

packages per day, or RMB30bn of daily online retail sales (or RMB10trn annual run-rate).

According to the company, China Smart Logistics intends to build warehouses in 15 cities,

including Beijing, Tianjing, Shanghai, Guangzhou, Hangzhou, Wuhan, Zhengzhou,

Chongqing and Chengdu, which accounted for six of top fifteen cities in terms of delivery

volume market share in 2013. As of July 2014, China Smart Logistics had acquired land

use rights in eight cities and will continue with land acquisition. On the other hand,

JD.com, the leading online direct sales player in China, has seven fulfillment centers and

six front distribution centers with a total of 97 warehouses across 39 cities as of June 30,

2014. This includes Shanghai, Beijing, Guangzhou, Chengdu, Wuhan and Nanjing, which

are among the top fifteen cities with highest delivery volume.

Chart 87: Top 15 cities in terms of delivery volume market share in 2013

Source: State Post Bureau of PRC China, company data, Jefferies

Haier/Goodaymart – investing in bulky object logistics

Alibaba Group reached a strategic cooperation with Haier Electronics Group (HKSE: 1169

HK) in Dec 2013, under which Alibaba invested a total of HKD2.821bn (USD361mn) to

acquire a 2% equity interest in Haier and a 9.9% equity interest in Goodaymart Logistics

(“日日顺物流”) , a wholly-owned logistics subsidiary of Haier, and an additional 24% stake

upon conversion of all convertible bonds. Goodaymart Logistics specializes in bulky item

shipping and delivery including home appliances, furniture and home decoration items,

with 90 logistics delivery centers and over 2mn square meters in warehouse space.

We believe the strategic investment in Haier and Goodaymart fills in Alibaba’s capability

gap in large-sized item and door-to-door installation services. Goodaymart’s established

logistics network in lower-tier cities, including 2,600 counties nationwide, helps Alibaba

improve its home appliance footprint in tier 3 cities and below.

Singapore Post Limited – developing overseas logistics

In May 2014, Alibaba purchased 10.32% equity stake in Singapore Post Limited (SGX: S08

SP) for SGD313mn (USD249mn). As the country’s national postal service provider,

SingPost has established strong delivery networks and international logistics infrastructure,

and may help to strengthen overseas e-Commerce logistics ability allowing Alibaba to

beef up its overseas e-Commerce logistics presence, in our view.

According to the company, China

Smart Logistics intends to build

warehouses in 15 cities, including

Beijing, Tianjing, Shanghai,

Guangzhou, Hangzhou, Wuhan,

Zhengzhou, Chongqing and

Chengdu, which accounted for six of

top fifteen cities in terms of delivery

volume market share in 2013.

On the other hand, JD.com, the

leading online direct sales player in

China, has seven fulfillment centers

and six front distribution centers

with a total of 97 warehouses across

39 cities as of June 30, 2014.

BABA

Initiating Coverage

27 October 2014



China Post Group – expanding footprint in lower-tier cities

On Jun 12, 2014, Alibaba entered into a strategic partnership with China Post Group to

collaborate on logistics delivery, e-Commerce, financial services and information security.

Alibaba and China Post will jointly develop the China Smart Logistics Network and

provide access to each other’s warehousing, processing center and delivery resources.

As disclosed by the company, China Post has a wide coverage of 100,000 service points

spanning across tier-1 cities to rural villages in China. We believe the strategic cooperation

with China Post will further expand Alibaba’s footprint in lower-tier cities where online

shopping activities are rapidly rising.

Table 3: Alibaba’s M&A investments in logistics

Date Target Deal Details Target Company Description Company Stated/Industry Experts’ View

Jul, 2014 Singapore Post

Limited

(SGX: S08 SG)

SGD313mn (USD249mn) for

10.3% stake

-The national postal service provider in

Singapore and a leading provider of e-

Commerce logistics solutions in the Asia-

Pacific region.

-Total revenue grew 24.6% YoY to

SGD821mn, and its net profit

attributable to shareholders increased by

4.8% YoY to SGD136.5mn as of the year

ended Mar 31, 2014.

-Improve its international logistics solution

-Facilitate purchase of overseas products by

domestic consumers

Mar, 2014 Haier Electronics

Group

(HKSE: 1169 HK)

HKD2.8bn (USD364mn) for

2% stake in Haier, 9.9% stake

in Goodaymart, a wholly-

owned subsidiary of Haier

engaged in logistics, and

additional 24% stake in

Goodaymart upon conversion

of all convertible bond

-Haier Electronics Group is a company

engaged in R&D, manufacturing and

sale of electrical appliances, especially

large electrical appliance.

-Goodaymart Logistics ("日日顺物流"), a

wholly-owned subsidiary of Haier, mainly

focused on large format goods delivery

and installation of home appliance,

furniture and sanitary ware for Haier and

third-party branded products

-Established a logistic joint venture with Haier

specializing in the delivery, installation and

servicing of large format goods such as home

appliance, furniture and sanitary ware.

-Provide high quality after-sale customer

service to consumers who shop for appliances

on Tmall Marketplace

-Leverage on Goodaymart's expertise,

experience and infrastructure of distribution

capacity across China especially in tier 3 and

tier 4 cities.

May, 2013 Zhejiang Cainiao

Supply Chain

Management Co.,

Ltd ("菜鸟") or

China Smart

Logistics (Private)

RMB2.4bn (USD385.9mn) for

48% stake in the Joint Venture

with Intime Group, Fosun

International and other five

major express delivery

companies. (Alibaba has

invested RMB1.68bn as of Mar

2014, and will invest the

remaining capital over a two-

year period)

-An operator of a nationwide logistics

infrastructure and information system in

China. Alibaba Group holds 48% stake of

China Smart Logistics.

-In the 12 months ended Jun 30, 2014,

the logistics system ensured the

successful delivery of an average of

approximately 16.6mn packages per

day.

-Enhance user experience by offering efficient

logistics and delivery services.

-China Smart Logistics plans to build a network

of key logistics hubs across China, including

distribution centers, warehouses and other

supply chain facilities, which could support the

delivery of over 100mn package per day to

consumers' doorsteps anywhere in China

within 24 hours in the long term.


BABA

Initiating Coverage

27 October 2014



Building a closed-loop ecosystem with payment

M-Commerce, O2O and Internet finance drives payment market growth

China’s third party PC online payment market grew at a 3-year CAGR of 74.5% to

RMB5.4trn in 2013, representing 31.2% of total third party payment market, according to

iResearch. It is estimated to reach RMB18.5trn in 2017 with a 2013-17E CAGR of 36.2%,

accounting for 35.1% of overall third party payment market, largely driven by increasing

online retail sales and rising investment in funds through new Internet finance tools such

as Yu’e Bao.

China’s third party mobile payment market, including online payment, NFC (near-field

communication) and SMS payment, reached RMB1.2trn in 2013, of which mobile online

payment accounted for 93.1%, according to iResearch. Benefitting from accelerating m-

Commerce development, China’s third party mobile online payment market grew by

more than 13x YoY to RMB1.1trn in 2013, representing 17.2% of overall third party online

payment market. We believe rising m-Commerce and O2O activities will lead to growing

demand for mobile payment solutions. We estimate third party mobile online payment

market to reach RMB16.5trn in 2017, accounting for 47.2% of overall GMV processed by

third party online payment solutions.

Chart 88: China’s third party PC online payment market size by GMV

Source: iResearch as of Apr 2014, Jefferies

Chart 89: China’s third party mobile payment market size

by GMV

Source: iResearch as of Apr 2014, Jefferies estimates

Chart 90: China’s third party mobile payment market

breakdown

Source: iResearch as of Apr 2014, Jefferies estimates

China’s third party PC online

payment market is estimated to

reach RMB18.5trn in 2017 with a

2013-17 CAGR of 36.2%, accounting

for 35.1% of overall third party

payment market in China, largely

driven by increasing online retail

sales and rising investment in funds

through new Internet finance tools

such as Yu’e Bao.

BABA

Initiating Coverage

27 October 2014



Chart 91: China’s third party mobile online payment market size

Source: iResearch as of Jul 2014, Jefferies estimates

Chart 92: China’s overall third party online payment market size

Source: iResearch as of Jul 2014, Jefferies estimates

Alipay – leading online payment solution for China’s e-Commerce

Launched in 2004, Alipay, the payment processing and escrow service provider of

Alibaba’s marketplaces, is the leading third party online payment solution in China with

48.7% market share by GMV in 2013 and 48.8% in 2Q14, a far distance ahead of the no.2

and 3 players, Tenpay and Unionpay, which accounted for 19.8% and 11.4% of market

share, respectively. Due to its first-mover advantage and the convenience it provides to

consumers in making purchases in shops, restaurants, vending machines and others,

Alipay Wallet has been strengthening its position as the leading mobile payment tool in

China with a 79.9% market share in 2Q14, up from 77.4% in 1Q14. On Nov 11, 2013,

Alipay settled 188mn transactions with mobile accounting for 24%. Mobile transaction

volume reached RMB11.3bn on Nov 11, 2013, 10x the volume in 2012.

Benefitting from accelerating m-

Commerce development, China’s

third party mobile online payment

market grew by more than 13x YoY

to RMB1.1trn in 2013, representing

17.2% of overall third party online

payment market.

We estimate China’s overall third

party online payment market

(including PC and mobile) to reach

RMB11.5trn in 2014, +76.9% YoY.

BABA

Initiating Coverage

27 October 2014



Chart 93: China’s 3rd party online payment market share in 2Q14

Source: iResearch as of Jul 2014, Jefferies

Chart 94: China’s 3rd party mobile online payment market share in 2Q14

Source: iResearch as of Jul 2014, Jefferies

Alipay has established a wide partnership with financial institutions including leading

national and regional banks across China as well as Visa and MasterCard to facilitate

payments under different application scenarios. As of Sept 2014, Alipay has established

deep cooperation relationships with 134 banks and financial institutions including 6 state-

owned banks and 9 joint-stock commercial banks and more than 110 other financial

institutions, including urban commercial bank, Rural Credit Cooperatives and foreign-

funded banks. The payment and escrow services provided by Alipay are free of charge to

merchants on Taobao and Tmall unless payment is made using a credit card, in which

case Alipay will charge a fee to the merchants equal to the corresponding bank

transaction fee. According to our channel checks, Alipay typically charges a fee equal to

0.8% and 1% of transactions made through credit cards on Taobao and Tmall respectively.

In addition to supporting Taobao Marketplace and Tmall platform, Alipay also provides a

stream of applications touching different aspects of consumers’ daily lives, including:

Shopping (e.g. mobile Taobao, on-site payment in brick-and-mortar stores)

Personal convenience (e.g. fund transfer, utility bill payment, credit card

payment, bookkeeping, AliPass)

Entertainment (e.g. mobile game top-up, lottery)

Wealth management (e.g. Yu’e Bao, donation)

Location-based service (e.g. taxi hailing, food ordering)

Social-based service (e.g. split the bill, face-to-face transfer)

Alipay, the payment processing and

escrow service provider of Alibaba’s

marketplaces, dominated China’s

third party online payment market

with 48.8% market share by GMV in

2Q14, according to iResearch.

Alipay Wallet has been

strengthening its position as the

leading mobile payment tool in

China with a 79.9% market share in

2Q14, up from 77.4% in 1Q14.

BABA

Initiating Coverage

27 October 2014



Chart 95: Summary of applications enabled by Alipay


Total real-name registered users of Alipay reached approximately 300mn by YE13 with

number of Alipay Wallet users surpassing 100mn in Nov 2013. According to the

company, Alipay Wallet settled 2.78bn transactions in 2013 with over RMB900bn

transaction volume.

In the twelve months ended June 30, 2014, Alibaba’s China retail marketplace

accounted for 29.7% of Alipay’s total payment volume.

In the twelve months ended June 30, 2014, 78.1% of GMV on Alibaba’s China

retail marketplaces were settled through Alipay

In the twelve months ended June 30, 2014, 65% of GMV generated on

AliExpress was settled through Alipay.

Driven by the rapid GMV growth of Alibaba’s China retail marketplaces, as well as rising

payment scenarios given the development of O2O and local lifestyle services, total

payment volume settled through Alipay grew 50% HoH to reach RMB4,825bn

(USD778bn) in the twelve months ended Jun 2014, 3.8x that of Paypal.

BABA

Initiating Coverage

27 October 2014



Chart 96: Operation metrics comparison across payment tools

Source: Company data, Jefferies Note: (1) no. of registered accounts is defined as the no. of accounts as of the end of the specified period. Among the 800mn Alipay's registered accounts, 300mn are

registered with real names. PayPal's registered accounts refer to active registered accounts. (2) Alipay’s commission rate refers to the fees charged to merchants

(excluding Alibaba’s marketplaces) who use Alipay as online payment tool on their platforms. Commission rate ranges from 0.7%-1.2% on PC and 1.8%-2% on mobile.

(3) PayPal’s commission rate is calculated by dividing total revenue by total payment volume.

Given the large user base of Alipay, third party websites such as Vipshop have also

adopted Alipay as one of their online payment solutions. Compared to 0.18-0.19%

charged to internal merchants, Alipay charges merchants outside of its Alibaba

marketplaces a commission fee ranging from 0.7%-1.2% on PC and 1.8%-2% on mobile,

depending on the total transaction volume settled through Alipay within the year. This

rate is much lower compared to Paypal’s implied commission rate of 3.5% as of June

2014. Alipay also provides an annual payment package offering discounted commission

rates to merchants upon making a prepayment.

Chart 97: Commission charged to merchants (excluding Alibaba’s

marketplaces) based on GMV settled through Alipay on PC


Chart 98: Commission charged to merchants (excluding Alibaba’s

marketplaces) based on GMV settled through Alipay on mobile


Chart 99: Annual payment package available for merchants (excluding

Alibaba’s marketplaces) based on GMV settled through Alipay on PC


Note: Any additional transaction volume above the maximum allowance will be charged a

1.2% commission rate

Twelve months ended as of Dec-13 Jun-14 Dec-13 Jun-14 Dec-13 Jun-14

No. of registered accounts (mn) 800 (1) n.a. 143 152 >200 n.a.

Total payment volume (in USD bn) 519 778 180 203 n.a. n.a.

Commission rate 0.7%-2%(2) 0.7%-2% 3.7% (3) 3.5% 1% 1%

Mobile as % of total payment volume 27.9% n.a. 15.0% n.a. n.a. n.a.

Alipay PayPal TenPay

Transaction Volume (RMB) Commission rate

0-60K 1.2%

60K-500K 1.0%

500K-1mn 0.9%

1mn-2mn 0.8%

Above 2mn 0.7%

Transaction Volume (RMB) Commission rate

0-1mn 2.0%

Above 1mn 1.8%

Prepayment (RMB) Transaction volume(RMB) Commission rate

600 60K 1.0%

1,800 200K 0.9%

3,600 450K 0.8%

Compared to 0.18-0.19% charged to

internal merchants, Alipay charges

merchants outside of its Alibaba’s

marketplaces a commission fee

ranging from 0.7%-1.2% on PC,


Alipay also provides annual payment

package offering discounted

commission rate to merchants upon

making a prepayment.

Alipay charges merchants outside of

its Alibaba marketplaces a

commission fee ranging from 1.8%-

2% on mobile, according to

company data.

BABA

Initiating Coverage

27 October 2014



Alipay Commercial agreement & intellectual property and software

technology services agreement

Pursuant to the Alipay commercial agreement, Alipay provides payment processing

services to Alibaba Group and its subsidiaries in return for a fee on preferential terms to

Alibaba. Fees paid by Alibaba to Alipay amounted to RMB1.3bn, RMB1.6bn, RMB2.3bn

and RMB740mn in FY12, FY13, FY14 and the three months ended June 30, 2014

respectively, implying a payment fee of approximately 0.18% as a percentage of payment

volume settled through Alipay on Alibaba’s China retail marketplaces in FY14.

Pursuant to an intellectual property and software technology services agreement, Alipay

pays Alibaba royalty fees and software technology service fees equal to the sum of an

expense reimbursement plus 49.9% of the consolidated pre-tax income of Alipay. As

disclosed by the company, Alipay paid a royalty and software technology service fee to

Alibaba of RMB27mn, RMB277mn, RMB1,764mn and RMB527mn in FY12, FY13, FY14

and the three months ended June 30, 2014 respectively.

2011 Framework agreement

Upon the occurrence of certain liquidity events of Alipay (including an initial public

offering, a transfer of 37.5% or more of the equity interests of Alipay or a sale of all or

substantially all assets of Alipay), Small and Micro Financial Services Company will pay

Alibaba Group an amount equal to 37.5% of the equity value of Alipay with a minimum

payment of USD2bn and a maximum payment of USD6bn.

If a liquidity event does not occur by the tenth anniversary of July 29, 2011, Alibaba

Group will have the right to demand Alipay effect a liquidity event provided that the

equity or enterprise value of Alipay at such time exceeds USD1bn. If Alibaba demands a

liquidity event and unless the liquidity event is effected by means of a 37.5% or more

equity interest transfer of Alipay, the minimum amount of USD2bn will not be applicable.

2014 Share and asset purchase agreement (SAPA) & amended Alipay

intellectual property and software technology services agreement

On August 12, 2014, Alibaba entered into a share and asset purchase agreement and

restructured the relationships with Small and Micro Financial Services Company and its

wholly owned subsidiary Alipay. The 2011 framework agreement was terminated.

Alibaba agreed to dispose of the SME loan business to Small and Micro Financial

Services Company in exchange for cash consideration and annual fees for seven

years. Alibaba Group will receive an annual fee equal to 2.5% of the average

daily balance of SME loans from 2015 to 2017; and fixed annual fee equal to the

2017 annual fee from 2018 to 2021. The disposal allows the company to focus

on the core e-commerce businesses and eliminates the direct risks of carrying a

loan portfolio on balance sheet, such as credit defaults, capital adequacy,

leverage and regulatory requirements associated with a loan.

The USD6bn cap on the liquidity event payment under the 2011 framework

agreement has been removed, but Alibaba will still be entitled to a payment of

37.5% of the equity value of Small and Micro Financial Services Company.

The profit share has been restructured that the base of profits was expanded

from the pre-tax income of only Alipay to the pre-tax income of all of the

businesses of Small and Micro Financial Services Company, while the profit

sharing percentage has been reduced to 37.5% from 49.9%.

Upon the IPO of Small and Micro Financial Services Company, Alibaba is entitled

to receive a payment equal to 37.5% of the equity value of Small and Micro

Financial Services Company until Alibaba acquire a full 33% equity interest.

BABA

Initiating Coverage

27 October 2014



Competitive Landscape

Other major third party online payment players include Tenpay, 99bill and Lakala on

mobile.

Tenpay

Launched by Tencent in 2005, Tenpay is the second largest third party online payment

platform with 19.8% of market share in 2Q14, according to iResearch, leveraging on its

large QQ and Weixin user base of 829.3mn and 438.2mn MAU as of June 30, 2014,

respectively. Tenpay’s applications include bill payment, money transfer, and purchase of

wealth management products, lottery, etc. In addition, Tenpay is also available as a

payment option on major e-commerce platforms, including Vipshop, Dangdang,

Dianping.com, Jumei, Vancl, etc.

Chart 100: Summary of applications enabled by Tenpay


Similar to Alipay, Tenpay charges merchants commission rates based on transaction

volume. Merchants will be charged a commission fee equal to 1% of transaction volume

handled through Tenpay. They can also opt for discounted package rates in the range of

0.45-0.96% upon prepayment. According to our checks, rates offered by Tenpay are

slightly lower than what Alipay is charging to external merchants (excluding Alibaba’s

marketplaces). For transaction volume of RMB200K, Alipay charges external merchants

0.9% while Tenpay charges only 0.84%. As for transaction volume of RMB500K, Alipay

charges a 0.8% commission rate compared to Tenpay’s 0.75%.

BABA

Initiating Coverage

27 October 2014



Chart 101: Commission rates charged by Tenpay

Source: Jefferies, company data

Lakala

Lakala, founded in 2005, is China’s largest community-based financial service operator.

Since 2007, Lakala has set up a wide coverage of POS payment terminals in over 40K

convenient stores across 300 cities. According to company data, its total registered users

reached 80mn with monthly GMV surpassing RMB100bn. Lakala entered the mobile

payment market with the launch of mobile card reader and mobile POS products,

“Shoukuanbao” (“手机收款宝”). Compared to an average rate of 0.78% based on

transaction volume settled through fixed-line POS, Lakala charges merchants 0.5-1% on

Mobile Shoukuanbao with daily transaction volume capped at RMB40K. Mobile

transactions accounted for 30% of total GMV settled through Lakala as of Jun 2014.

According to iResearch, it was the no.3 third party mobile online payment player with 6.5%

market share in 2Q14.

Chart 102: Lakala’s fixed-line POS

Source: company data, Jefferies

Chart 103: Lakala’s mobile POS

Source: company data, Jefferies

In addition to payment terminal, Lakala also launched Kaidianbao (“开店宝”), an e-

Commerce platform integrated with community related services such as utility bill

payment, financial services, ticket reservation and mobile top-up.

Prepayment (RMB) Transaction volume (RMB) Commission rate

0 unlimited 1%

480 5K 0.96%, 1% for the volume exceeding 5K



7000 1mn 0.7%, 1% for the volume exceeding 1mn

12K 2mn 0.6%, 1% for the volume exceeding 2mn



BABA

Initiating Coverage

27 October 2014



http://www.lakala.com/ http:/www.lakala.com/skb/skb140311.html

Chart 104: Lakala’s Kaidianbao

Source: Jefferies, company data

99Bill

99Bill is the fourth largest third party online payment market player in China with 6.8%

market share in 2Q14, according to iResearch. It mainly serves enterprise customers with a

suite of payment solutions, including bill collection, payment and account management.

As disclosed by company, 99Bill currently has a customer base of 3mn+ merchants in

industries including travel, retail, education, e-Commerce, insurance and digital

entertainment. It started to enter into supply chain financing in 2009, and further

expanded to cross-border payment. 99Bill is one of the first payment companies allowed

to carry out cross-border RMB settlement in Shanghai Pilot Free Trade Zone.

Apple Pay

On Oct 20, Apple officially launched Apple Pay in the U.S, an NFC-enabled mobile

payment technology, allowing users of iPhone 6 and 6 Plus to store credit card

information on their phones and make in-store payment by tapping on offline payment

terminals. We do not foresee the imminent pressure of Apple Pay on Chinese third-party

payment players given the dominance of Android phones in China.

Currently, mobile payment scenarios in China are still mostly conducted through QR

codes. However, as infrastructure improves including the emergence of more NFC-

enabled smartphones, we believe NFC mobile payment in China could potentially be a

large open field for players including Alipay and Tenpay which has already amassed a

large user base through their e-Commerce ecosystem and cross-platform social

networking apps respectively.

BABA

Initiating Coverage

27 October 2014



Developing Internet finance opportunities for buyers and sellers

Online retail sales including B2C and C2C accounted for 35.2% of third party online

payment market in 2013, down 6.3pcpt YoY, due to the significant increase in Internet

finance activities. Share of B2B e-Commerce remained largely stable at 3.7% given that

monetization of B2B online transactions was still at an early stage of development.

Chart 105: China’s 3rd party online payment market breakdown

Source: iResearch as of April 2014, Jefferies

Yu’e Bao – innovating the way of wealth management

In June 2013, Alibaba launched Yu’e Bao (余额宝), also known as Zeng Li Bao (增利宝), an

online money market fund managed by Tianhong Asset Management (天弘基金 ).

Zhejiang Alibaba E-Commerce Co., Ltd. (also known as Small and Micro Financial Services

Company) received regulatory approval in late May to acquire 51% equity stake of

Tianhong for RMB1.18bn.

Yu’e Bao invests money collected from users into bank term deposits and interbank

deposits with up to 90% of funds invested in interbank deposits at 29 banks. Yu’e Bao

offered a return rate as high as 6.73% in Jan 2014 when liquidity in China’s money market

system was tight. It came down to 5% in mid-May and remained stable at 4.23% since

end of June, still higher than the 3% yield of one-year fixed bank deposit.

Within a year of launch, total AUM surpassed RMB574.1bn with 114mn accumulated

users by June 30, 2014, compared to RMB4.8bn AUM and 2.5mn users a year ago, as

disclosed by Tianhong. Average AUM per user also increased to RMB5,030, 2.6x that of

2Q13. Yu’e Bao accounted for 98% of AUM managed by Tianhong, making it the largest

asset management company by AUM in China in 1H14, according to public news

sources. Its total AUM is close to 2x that of the no.2 player, China Asset Management.

Chart 106: Operation metrics of Yu’e Bao

Source: Data disclosed by Tianhong Asset Management, Jefferies

As of end of 2Q13 3Q13 4Q13 1Q14 2Q14

AUM (in RMB bn) 4.8 55.7 185.3 541.3 574.2

QoQ 1057% 233% 192% 6%

YoY 11837%

No. of users (in mn) 2.5 13.7 43.0 81.0 114.1

QoQ 443% 215% 88% 41%

YoY 4438%

Average AUM per user (RMB) 1,912 4,071 4,307 6,683 5,030

QoQ 113% 6% 55% -25%

YoY 163%

Total AUM has surpassed

RMB574.1bn with 114mn

accumulated users by June 30, 2014,

compared to RMB4.8bn AUM and

2.5mn users a year ago, as disclosed

by Tianhong. Average AUM per user

has also increased to RMB5,030, 2.6x

that by end of 2Q13.

Alipay dominated 3rd party online

payment market, with 48.7% market

share in terms of GMV in 2013A, and

further expanded to 48.8% in

2Q14A, according to iResearch.

BABA

Initiating Coverage

27 October 2014



Chart 107: Top asset management companies in terms of AUM in China in

1H14

Source: Sina Finance, Jefferies

In our view, the high liquidity and convenience offered by Yu’e Bao in managing users’

idle money in their Alipay accounts is why the fund is able to amass large amount of users

and assets within a short period of time. There is no minimum required deposit or time

restriction whereby investors can make withdrawals at any time without penalty. Alipay

has also integrated Yu’e Bao into its mobile app allowing easy fund transfer and extremely

convenient user experience. On the other hand, Alipay provides a gateway for fund

companies to reach the huge user base of Alipay who are also potential customers.

In view of the booming Internet finance market, Tencent also launched its wealth

management services, called Licaitong, on Weixin starting January 2014. Licaitong allows

users to invest in money market funds jointly developed by Tencent and four asset

management companies, including China Asset Management and GF Fund Management.

Other companies, including Baidu and Suning, also partnered with fund companies to

launch their own online investment products, namely Baifa and Lingqian Bao respectively.

Ranking Company

Assets under

Management (in

RMB bn)

1 Tian Hong Asset Management 586.2

2 China Asset Management 304.4

3 ICBC Credit Suisse Asset Management 190.5

4 China Southern Asset Management 178.2

5 Harvest Fund Management 165.4

6 E Fund Management 131.9

7 GF Fund Management 123.0

8 Bosera Asset Management 102.8

9 China Universal Asset Management 97.7

10 Bank of China Investment Management 91.5

According to Sina Finance, Yu’e Bao

accounted for 98% of AUM managed

by Tianhong, making it the largest

asset management company by

AUM in China in 1H14. Its total AUM

managed is close to 2x that of the

no.2 player, China Asset

Management.

BABA

Initiating Coverage

27 October 2014



Chart 108: AUM of Yu’e Bao


Chart 109: Number of Yu’e Bao users


Chart 110: Comparison across Alibaba’s Yu’e bao, Tencent’s Licaitong and Baidu’s Baifa

Note: latest 7-day annualized rate of return as of Sept 28, 2014


SME loan business

Launched in 2010, Alibaba’s micro finance business provides micro loans, for generally

between 7 to 360 days, to SMEs who are sellers on its wholesale and retail marketplaces.

Alibaba performs credit assessment through analysing the transaction history, operating

data and financial health of its merchants. As of June 30, 2014, Alibaba’s SME loan

business had over 400K borrowers with a total outstanding loan balance, net of

allowance for doubtful accounts, of RMB14.6bn (USD2.4bn), which was principally

funded by borrowings of RMB13.1bn (USD2.1bn), including RMB8.8bn secured

borrowings and RMB4.2bn current bank borrowings. These loan receivables are

recognized as assets held by Alibaba’s VIEs and the micro loan-derived interest revenue is

therefore recognized under Alibaba’s P&L.

In order to fund its micro loan business, Alibaba has entered into arrangements with

certain third-party financial institutions under which it transferred the legal title or

economic benefits in micro loan receivables in exchange for cash proceeds, which are

recognized as secured borrowings. Alibaba generated approximately RMB1.7bn interest

revenue from micro loans in FY14, +223.7% YoY, representing 3.3% of total revenue and

implying an average interest rate of 19.9%.

Company Product name Payment tool Fund partners

Peak 7-day

annualized

rate of return

Latest 7-day

annualized

rate of return

AUM (as of Jun

30, 2014)

No. of users

(as of Jun 30,

2014)

Average AUM

per userLaunch date

Alibaba Yu'E Bao Alipay Tian Hong Asset Management (天弘) 6.763% 4.230%RMB574.2bn

(USD92.6bn)114mn RMB5,030 17-Jun-13

China Asset Management (华夏) 7.902% 4.571%RMB62.2bn

(USD10bn)n.a. n.a. 22-Jan-14

China Universal Asset Management

(汇添富)5.254% 4.851%

RMB4.5bn

(USD725.8mn)n.a. n.a. 25-Mar-14

E Fund Management (易方达) 5.405% 5.311%RMB0.94bn

(USD151.6mn)n.a. n.a. 17-Apr-14

GF Fund Management (广发) 5.823% 5.394%RMB11.1bn

(USD1.8bn)n.a. n.a. 17-Apr-14

Baidu Baifa Baidu WalletChina Asset Management (华夏) and

Harvest Fund Management (嘉实)8.004% n.a.

RMB3bn

(USD483.9mn)n.a. n.a. 28-Oct-13

Tencent Licaitong Weixin Payment

BABA

Initiating Coverage

27 October 2014



According to the share and asset purchase agreement in Aug 2014, Alibaba agreed to

dispose its SME loan business to Small and Micro Financial Services Company. Instead of

recognizing interest income from SME loan business in the line of revenue, Alibaba will

receive economic benefits from the Small and Micro Financial Services Company in the

form of:

an annual fee equal to 2.5% of the average daily balance of SME loans from

2015 to 2017; and fixed annual fee equal to the 2017 annual fee from 2018 to

2021.

a profit share of 37.5% of the pre-tax income of all of the businesses of Small

and Micro Financial Services Company (including SME loan business).

We estimate Alibaba’s economic benefits received from Small and Micro Financial Services

Company based on the following assumptions:

Payment processing revenue: We estimate Alipay’s payment volume of RMB6,684bn

in FY15, +72.6% YoY, and RMB9,730bn in FY16, +45.6% YoY. We expect Alipay’s

transactions contributed by Alibaba’s China commerce retail marketplaces to decline

gradually as payment scenarios of Alipay continue to diversify. We estimate internal

transactions to account for 28% and 26% of Alipay’s payment volume in FY15 and FY16

respectively, down from 34% in FY14. Assuming an average commission rate of 1%

charged to external merchants outside Taobao/Tmall and a 0.19% preferential payment

processing fee paid by Alibaba for internal transactions, we estimate Alipay’s total revenue

of RMB44.7bn in FY15, +60% YoY, and RMB67.8bn in FY16, +51.8% YoY.

Yu’e Bao management fee: As disclosed by Tian Hong Asset Management and Alipay,

Yu’e Bao incurs an aggregate fee of 0.63%, including management fee of 0.3%, fund

custodian fee of 0.08% and sales and service fee of 0.25%. Among which, approximately

26.7% of the management fee is paid to Alipay, according to public news sources. We

currently estimate Alipay’s management fee received from Yu’e Bao to reach

RMB489.1mn in FY15 and RMB606.3mn in FY16, assuming stable growth in AUM.

SME loan interest revenue: For the SME loan business, we estimate interest revenue to

reach RMB3.3bn in FY15, +90.6% YoY, and RMB4.7bn in FY16, +39.6% YoY. Hence, we

estimate total revenue of Small and Micro Financial Services Company of RMB48.5bn in

FY15, +88.8% YoY, and RMB73.1bn in FY16, +50.7% YoY.

Overall economic benefits: Assuming a 12.6% pre-tax income margin of Small and

Micro Financial Services Company and Alibaba’s 37.5% share of its pre-tax income, we

estimate royalty and software technology service income Alibaba receives from Small and

Micro Financial Services Company to be RMB2.5bn in FY15 and RMB3.4bn in FY16.

Zhejiang Internet Commerce Bank

On Sept 29, 2014, Small and Micro Financial Service Company received an approval from

the China Banking Regulatory Commission to set up the Zhejiang Internet Commerce

Bank in Hangzhou jointly with three other parties. Small and Micro Financial Service

Company will hold 30% equity stake, while a Fosun Group subsidiary, Wangxiang Group

subsidiary and NBRC will hold 25%, 18% and 16% stakes, respectively. Back in March

2014, the China Banking Regulatory Commission announced its plan to grant banking

licenses to ten private companies. In July 2014, three separate banks, including one in

Shenzhen led by Tencent, one in Tianjing and one in Wenzhou led by other investor

groups, were granted approval. Shanghai JuneYao Group, the parent company of

Juneyao Airlines, also received a banking license on Sept 29, 2014.

Using Internet as a sales channel supported by cloud computing and big data analysis,

the bank will focus on serving investment and financing needs of small businesses and

individual consumers with deposit products below RMB200K and loan products below

RMB5mn. The bank will have six months to complete preparation for operation. In our

BABA

Initiating Coverage

27 October 2014



view, Alibaba’s big data accumulated from the internal transaction history of consumers

and its huge SME merchant base will be key advantages in meeting the underserved

financing needs of small businesses and individuals.

Expanding into new verticals and O2O services

Operating under a platform model without taking inventory, Alibaba is able to offer a

wide selection of products, including “long-tail” products (more niche and tailored items),

under 118 categories and 2,000 sub-categories. On average, active buyers placed orders

in 10.1 product categories out of 118 in the 12 months ended June 30, 2014, up from 9.4

in the same period in 2013 and 8 in the same period in 2012. Alibaba continues to

expand its presence in more specialty categories, such as digital entertainment and local

services, through strategic investment in leading category players.

Chart 111: Number of product categories in which average active buyers

placed orders


Note: refers to twelve months ended June 30 of each year.

Digital entertainment

With an aim to advance its digital entertainment strategy, Alibaba made a series of

strategic investments in traditional and online media companies this year, allowing it to

gain access to a large pool of media content, including movies and television programs.

Youku Tudou: In May 2014, Alibaba purchased 16.5% equity stake in Youku

Tudou, one of China’s leading online video players, for USD1.1bn.

China Vision: In June 2014, Alibaba invested HKD6.2bn (USD803mn) in China

Vision, a film and TV program production and distribution company, for a 60%

equity stake. Concurrently, China Vision was renamed Alibaba Pictures.

Wasu: In April 2014, Alibaba entered into a full recourse loan of RMB6.5bn with

Mr. Simon Xie, one of Alibaba’s founders, to finance a minority investment in

Wasu via Hangzhou Yunxi, a limited partnership owned by Mr. Xie.

Consequently, Alibaba entered into strategic business arrangements with Wasu

to enhance its digital entertainment strategy. Wasu is a public company

engaged in the business of digital media broadcasting and distribution in China.

On average, active buyers placed

orders in 10.1 product categories

out of 118 in the 12 months ended

June 30, 2014, up from 9.4 in the

same period in 2013 and 8 in the

same period in 2012.

BABA

Initiating Coverage

27 October 2014



Healthcare

Alibaba gained a foothold in the healthcare sector through its investment in CITIC 21CN, a

leading developer of product identification, authentication and tracking systems for

pharmaceuticals and medical products in China earlier this year. As part of the “Future

Hospital” initiative, Alibaba aims to enhance the efficiency of hospital operation, including

EHR and prescription, through Alipay and its cloud computing platform.

CITIC 21: In April 2014, Alibaba acquired a 38% interest in CITIC 21 for

HKD932mn (USD120.3mn). Yunfeng Capital, a private equity firm co-founded

by Jack Ma, acquired another 16% stake resulting in an aggregate stake

purchase of 54% for HKD1.33bn (USD171mn). The two companies jointly

developed and launched an app in July that allows users to verify drug

authenticity through barcode scanning combining CITIC 21CN’s drug data and

Alibaba’s cloud computing and big data technology. As of Sept 4, 2014, the

company was renamed as Alibaba Health Information Technology Ltd.

Travel

Alibaba made its first investment post-IPO in Beijing Shiji Information Technology, a

technology software and service provider for hotel management, allowing the company

to explore synergy between Taobao Travel, Alibaba’s travel platform, and the hotel

information data & customer base of Shiji.

Shiji: On Sept 28, 2014, Alibaba acquired a 15% stake in Beijing Shiji

Information Technology with RMB2.8bn (USD457mn). Alibaba will integrate the

backend management system of Taobao Travel with the hotel information

management system of Shiji. According to Shiji, its customer base covers 90% of

China’s five-star hotels. The large hotel customer base of Shiji will allow Alibaba

to explore potential O2O opportunities in the travel industry, in our view.

O2O

Alibaba continues to beef up its local service offering and capability by accessing massive

location data and offline local merchant base through its investments.

Autonavi: In April 2014, Alibaba fully acquired Autonavi, a leading digital map

and navigation provider in China, for USD1bn, in addition to its existing 28%

stake purchased back in May 2013. This helps enhance Alibaba’s location-based

service offerings to its mobile users leveraging on Autonavi’s mapping

technology. Its data has already been integrated into Alibaba’s Taobao Diandian

to provide a location-based food ordering service.

Intime: In July 2014, Alibaba acquired a 9.9% equity stake and convertible

bonds which upon conversion would translate into an additional 16% stake in

Intime, a leading department store and shopping mall operator. Alibaba and

Intime established a joint venture in July 2014, in which Alibaba invested

USD13mn for an 80.1% equity stake, to develop an O2O business related to

shopping malls, department stores and supermarkets. The two companies

cooperate in developing an “offline-to-online” multi-channel retailing model

that enables users to purchase online inventory through mobile devices while

shopping in physical stores.

BABA

Initiating Coverage

27 October 2014




BABA

Initiating Coverage

27 October 2014



Expanding Cross-Border E-Commerce To satisfy the growing appetite for foreign brands among Chinese consumers and

Chinese manufacturing goods among global wholesale buyers, Alibaba has been

expanding its cross-border sales initiatives through Tmall Global, Alibaba.com and

AliExpress.


1. Tmall Global helps to connect international retailers with Chinese consumers by

lowering the cost, delivery time and language barriers in overseas online

shopping, while facilitating merchants who do not have a physical presence in

China with its Alipay international payment settlement and shipment services.

2. On Oct 15, 2014, Alipay launched ePass, a new payment processing service for

Chinese consumers to make direct purchase on U.S. retail websites. In our view,

this significantly lowers the barrier for overseas merchants in reaching the

300mn+ Chinese online shoppers, while unlocking the purchasing power of

Chinese consumers, particularly young professionals, who have a huge demand

for foreign brands.

3. Alibaba.com, a leading overseas wholesale platform, allows manufacturers and

distributors based in China to reach global customers through the integration of

OneTouch’s comprehensive import/export outsourcing services.

4. Alibaba is also making forays into international retail market through AliExpress,

its global consumer marketplace, and 11 Main, its U.S. shopping site. According

to Nielsen, China is the second largest cross-border online shopping destination

in U.S., UK and Brazil.

BABA

Initiating Coverage

27 October 2014



Expanding Cross-Border E-Commerce

Tmall Global

The growing appetite for foreign brands among Chinese consumers

Chinese consumers who seek for quality and authentic foreign branded products often

have to purchase directly through the international websites of foreign retailers. The

number of cross-border online shoppers, known as “hai tao (海淘)” in China, reached

18mn with a total of RMB216bn in overseas online purchase spending in 2013, according

to a survey conducted by Nielsen. Among these, 78% are mobile shoppers who spend a

total of approximately RMB103.5bn, accounting for close to 50% of total cross-border

online purchases. Top five cross-border purchase categories in China are clothes, shoes &

accessories, health & beauty products, computer hardware, jewelry & watches, and

personal electronics. Cross-border shoppers in China tend to be concentrated in the

younger demographics in the average age of 25-44 years old. U.S., Hong Kong, Japan, UK

and Australia are the top shopping destinations.

Insufficient purchasing channels and lack of promotional discounts of foreign goods in

China leads to a rapidly growing cross-border online shopping market which is expected

to grow at a 2013-18 CAGR of 36% to reach RMB1trn by 2018 with 35.9mn shoppers,

according to Nielsen estimates.

Chart 112: Top five cross-border purchase categories by Chinese consumers

Source: Nielsen as of Jun 2013, Jefferies

Chart 113: Top five cross-border online shopping destinations in China


Top five cross-border purchase

categories in China are clothes,

shoes & accessories, health & beauty

products, computer hardware,

jewelry & watches, and personal

electronics, according to a survey

conducted by Nielsen in 2013.

U.S. (84% of respondents), Hong

Kong (58%), Japan (52%), UK (43%)

and Australia (39%) are the top

shopping destinations, according to

a survey conducted by Nielsen in

2013.

BABA

Initiating Coverage

27 October 2014



However, there are certain complications with direct purchase from foreign retailers,

including long delivery time, language barriers, difficulty in product return, etc.

According to a survey conducted by Tmall Global, 43% of respondents find long delivery

time as the most often encountered problem in their cross-border shopping experiences,

followed by costs and language barriers.

Chart 114: Most encountered problem by Chinese consumers in cross-border

shopping experience

Source: Consumer survey done by Tmall Global, Jefferies

Lowering the cost, time and language barriers in overseas online shopping

Tmall Global was launched in Feb 2014 to satisfy the growing appetite for foreign brands

among Chinese and help foreign merchants to better reach Chinese consumers. Tmall

Global now offers products including mother and baby products, health food, cosmetics

and skincare, apparel, shoes and accessories. To set up a storefront on Tmall Global,

merchants are required to pay a USD25K one-time deposit, an annual service fee of

USD5K or USD10K and a commission rate in the range of 0.5-5% of GMV (logistics fee

inclusive), depending on product category. Alipay also charges a service fee equal to 1%

of GMV (logistics fee inclusive).

Unlike Tmall, overseas merchants on Tmall Global need not have a business entity or

physical store in China. Instead of storing their products in a local warehouse, merchants

can ship directly from overseas to China and receive payment in their local currencies. In

April 2014, Alibaba entered into a strategic partnership with Ningbo Free Trade Zone and

launched “Global Flash Sales” platform in July 2014. Partnering with six free trade zones

in China (Ningbo, Shanghai, Chongqing, Hangzhou, Zhengzhou, and Guangzhou), Tmall

Global allows merchants to ship and store their inventories, on a per batch basis, in the

free trade zone. Upon receiving a customer order, merchants can then deliver the

products directly from the free trade zone. Instead of paying custom duties of 10-50%

and VAT of 17% as required in direct import, merchants only need to pay a personal item

tax in the range of 10-50%, depending on product category. Alibaba also requires

merchants to set up a product return point within the free trade zones in order to facilitate

after-sales services for customers.

We believe this helps to solve a lot of the problems encountered by Chinese consumers

when purchasing foreign branded goods, including language barriers, slow delivery time,

high fulfillment cost and poor after-sales service experience.

According to a survey conducted by

Tmall Global, 43% of surveyed

consumers find long delivery time as

the most often encountered problem

in their cross-border shopping

experiences, followed by costs and

language barrier.

BABA

Initiating Coverage

27 October 2014



Chart 115: Requirements in setting up a shop on Tmall vs. Tmall Global


We conducted a scenario analysis on the potential revenue upside from cross-border e-

Commerce opportunity in 2016. Based on a 30-70% Alibaba market share assumption

and average commission rate of 3.5%, our analysis shows 5-12% CY16 potential revenue

upside to our current estimate.

Chart 116: Scenario analysis on potential cross-border e-Commerce revenue

contribution to Alibaba

Source: Nielsen as of Jun 2013, Jefferies estimates

Note: (1) 2016 China’s cross-border online shopping market size is estimated by Jefferies

based on Nielsen data published on a Paypal-commissioned report titled “Modern Spice

Routes” in July 2013; (2) cross-border revenue estimates are based on an average

commission rate assumption of 3.5%

Given the large market opportunity, players including Amazon China and Vipshop are

also developing their cross-border e-Commerce businesses. Brands among these

platforms are generally non-exclusive. In our view, each of the players has its own

competitive edge with Amazon having its established supplier relationship, Vipshop

having its loyal female-oriented customer base in lower-tier cities and Tmall Global having

a deep understanding of local consumer demand.

ePass – easing the friction of international purchase

On Oct 15, 2014, Alipay launched a new payment processing service for U.S. retailers

called ePass which allows Chinese consumers to directly make purchases on U.S. retail

sites through Alipay. Through ePass, shoppers can pay in CNY using their Alipay accounts

and Alipay will transmit the payment to merchants in local currency via international

financial institutions. Alipay will also provide logistics and marketing services to these

overseas partners as needed. Currently, ePass is already in beta testing by merchants

including Gilt.com, Gap and H&M.

In our view, U.S. retailers, including large department stores such as Macy’s, Neiman

Marcus, will be interested in adopting ePass given that it significantly lowers the barrier in

reaching the 300mn+ Chinese online shoppers. On the flip side, we believe this will

significantly unlock the overseas purchasing power of Chinese consumers, particularly

young professionals, given the removal of hurdles and possible mark-ups involved in

using an international credit card previously (most shoppers do not even have

Tmall Tmall Global

Physical store Within China Outside China

Legal Entity Within China Outside China

Local team Required Not required

Payment received CNY Local currency

Shipment Stored and shipped within China Directly imported from overseas

Tax Customs duties, VAT Personal item tax

Annual fee: RMB10K-RMB60K Annual fee: USD5K / USD10K

Deposit: RMB50K / RMB100K / RMB150K Deposit: USD25K

Commission: 0.3-5% Commission: 0.5-5% (plus an Alipay service fee of 1%)

Fees

Scenario #1 #2 #3 #4 #5

2016 China's cross-border online shopping market

size estimate (RMB bn)

Alibaba's market share assumption 30.0% 40.0% 50.0% 60.0% 70.0%

Alibaba's cross-border GMV (RMB bn) 183.7 244.9 306.2 367.4 428.7

Commission rate assumption

Alibaba's cross-border revenue (RMB bn) 6.4 8.6 10.7 12.9 15.0

Current 2016 revenue estimate (RMB bn)

Current 2016 revenue estimate + cross-border

revenue upside (RMB bn)133.6 135.8 137.9 140.1 142.2

% upside 5% 7% 8% 10% 12%

612

127.2

3.5%

To set up a storefront on Tmall

Global, merchants are required to

pay a USD25K one-time deposit, an

annual service fee of USD5K or

USD10K with a commission rate in

the range of 0.5-5% of GMV

(logistics fee inclusive), depending

on product category. Alipay also

charges a service fee equal to 1% of

GMV.

Based on a 30-70% Alibaba market

share assumption, our analysis

shows a 5-12% CY16 revenue upside

to our current estimate.

BABA

Initiating Coverage

27 October 2014



international credit cards). By taking a certain percentage of the transaction as service

fees, Alipay will benefit from incremental revenue contribution from the launch of ePass.

Alibaba.com

Connecting China’s SMEs with global wholesale buyers

Launched in 1999, Alibaba.com is Alibaba’s first online commerce platform and the

leading global online wholesale platform in China by revenue in 2013, according to

iResearch. Alibaba.com helps to connect global wholesale buyers with Chinese

wholesalers and manufacturers. Major product categories on the platform include

consumer electronics, machinery and apparel. Alibaba.com monetizes mainly through

membership subscription fees, accounting for 87.6% of global wholesale marketplace

revenue in FY14 or 86.4% in FY1Q15, with the rest contributed by P4P online marketing.

The Gold Supplier membership service allows merchants to host premium storefronts

with upgraded storefront management tools, custom clearance, VAT refund and other

import/export business solutions.

Building a global B2B ecosystem with transaction data

In order to improve its one-stop exports service offering, Alibaba completed the

acquisition of ShenZhen OneTouch (深圳一达通) in May 2014. OneTouch, founded in

2001, is the first platform in China engaged in providing import and export business

process outsourcing service for SMEs. According to China National Customs Information

Center, OneTouch was ranked No.4 in terms of values of exports among general trade

enterprises in China in 2013. In our view, the acquisition of OneTouch helps to enhance

customer stickiness on Alibaba.com by providing comprehensive export-related service

solutions for SMEs including customs clearance, logistics, cargo insurance, currency

exchange, tax refund, financing and certification, etc.

The competitive edge of Chinese exporters is gradually diminished given rising labor and

raw material costs. Outsourcing business process to integrated export-service platform

like OneTouch allows exporters to save on logistics and financing costs. By providing

banks with information such as transaction records, OneTouch is also able to secure

cheaper financing for small and mid-sized exporters, of which the company will take 1-1.5%

of the monthly interest as service fee. These products, jointly developed with Bank of

China, include financing for orders, packing loan under letter of credit, loan on credit and

foreign exchange value preservation. In order to aggregate more transaction data and

gain better loan terms from banks, Alibaba.com launched a rebate program in May 2014

offering up to RMB0.03 for every USD1 in export value handled through OneTouch to

attract more paying members onto its platform. As a longer term strategy, Alibaba.com

hopes to leverage on these transaction data to build up a B2B export-focused credit

system for providing trade financing to small businesses.

Revenue generated from Alibaba global wholesale marketplace grew 3.8% YoY to

RMB3.9bn, representing 7.5% of total revenue in FY14, and RMB1.1bn in FY1Q15, +18.4%

YoY. We expect global wholesale marketplace revenue growth to be mainly driven by

increasing number of paying members. We estimate revenue of RMB4.7bn in FY15, +20.5%

YoY, and RMB5.3bn in FY16, +11.7% YoY.

BABA

Initiating Coverage

27 October 2014



Chart 117: Screenshot of Alibaba global B2B marketplace – Integrated export service platform for SMEs


Chart 118: Monthly active user trends of global B2B

websites in China


Chart 119: Page view trends of global B2B websites in

China


BABA

Initiating Coverage

27 October 2014



AliExpress

Making forays into international retail market

Alibaba launched AliExpress in 2010, a global consumer marketplace that brings made-in-

China products to global consumers. AliExpress generated an USD4.5bn GMV in the

twelve months ended June 30, 2014, 65% of which was settled through Alipay.

Transactions settled through Alipay are charged with a 5% commission rate. Coming off a

small base, Alibaba’s international retail commerce business reached RMB938mn in FY14,

+139.3% YoY, and RMB358mn in FY1Q15, +100% YoY, representing 2.3% of total

revenue. According to Nielsen, China is the second largest cross-border online shopping

destination in U.S., UK and Brazil, while coming in at third in Australia.

Chart 120: Top five cross-border online shopping

destinations from U.S.



destinations from UK



destinations from Brazil



destinations from Australia


BABA

Initiating Coverage

27 October 2014



Alibaba, through its U.S. subsidiaries Vendio and Auctiva, beta launched 11 Main, its U.S.

shopping site on June 11, 2014. The site features curated made-in-US products in nine

major categories including fashion, home goods, jewelry, baby products, collecting, tech,

sporting goods, toys and entertainment. We believe this represents a still very early foray

into the U.S retail market by Alibaba.

We currently estimate international retail commerce revenue of RMB1.8bn in FY15,

+96.9% YoY, representing 2.4% of total revenue, and RMB2.6bn in FY16, +41% YoY, 2.5%

of total revenue.

Chart 124: Screenshot of 11 Main website


BABA

Initiating Coverage

27 October 2014



Company Background

Company Description Founded in 1999, Alibaba is the largest online and mobile commerce company in the

world in terms of GMV in 2013, according to IDC. The company operates its marketplaces

as a platform for third parties, and does not engage in direct sales, compete with its

merchants or hold inventory. Alibaba operates Taobao Marketplace and Tmall, the no.1

C2C and B2C platform in China by GMV respectively, according to iResearch. The

company generated RMB1,833bn (USD296bn) GMV on its China retail marketplaces from

279mn active buyers and 8.5mn active sellers in the twelve months ended June 30, 2014.

Alibaba mainly generates its revenue from online marketing services, commissions on

transactions and fees for online services.

Alibaba started trading under the ticker “BABA” on NYSE on Sept 19, 2014.

BABA

Initiating Coverage

27 October 2014



Corporate Structure Alibaba Group Holding Limited is a Cayman Islands holding company established on June

28, 1999, by Jack Ma and 17other founders. The company conducts its business in China

through subsidiaries and variable interest entities (VIE). Its principal subsidiaries consist of

Taobao Holding Ltd., Toaboa China Holding Ltd., Taobao (China) Software Co., Ltd.,

Zhejiang Tmall Technology Co., Ltd., Alibaba.com Ltd., Alibaba.com Investment Holding

Ltd. and Alibaba Investment Ltd. However, due to China’s legal restrictions on foreign

ownership in the operation of Internet content providers, operation of Alibaba’s

marketplaces is conducted through five variable interest entities as follows:

Zhejiang Taobao Network Co., Ltd. – operates Taobao marketplace

Zhejiang Tmall Network Co., Ltd. – operates Tmall and Juhuasuan

Hangzhou Ali Technology Co., Ltd. – operates Alimama

Hangzhou Alibaba Advertising Co., Ltd. – operates Alibaba.com, 1688.com and

AliExpress

Alibaba Cloud Computing Ltd. – operates cloud computing services

These entities, except Zhejiang Taobao Network, are 80%-owned by Jack Ma, lead

founder and executive chairman, and 20%-owned by Simon Xie, one of the founders and

vice president of Alibaba’s China investment team. Zhejiang Taobao Network is 90%-

owned by Jack Ma and 10%-owned by Simon Xie. Alibaba Group, through its wholly-

foreign owned enterprises, entered into certain contractual arrangements with these VIEs

which results in a transfer of substantially all of the profits from the VIEs to the wholly-

foreign owned enterprises.

Chart 125: Alibaba’s corporate structure

Note: (1) Other subsidiaries includes 40 subsidiaries and consolidated entitles incorporated in China and 71 subsidiaries incorporated in

other jurisdictions that are note illustrated in this chart. (2) Primarily involved in the operation of Taobao Marketplace; (3) Primarily

involved in the operation of Tmall and Juhuasuan. (4) Primarily invloved in the operation of Alimama; (5)Primarily involved in the operation

of Alibaba.com, 1688.com and AliExpress; (6) Primarily involved in the operation of cloud computing services. (7) Each of these variable

interest entitles is 80% owned by Jack Ma and 20% owned by Simon Xie, other than Zhejiang Taobao Network Co., Ltd, which is 90%

owned by Jack Ma and 10% owned by Simon Xie.

Source: Company data as of Sept 15, 2014

BABA

Initiating Coverage

27 October 2014



Shareholding Structure On Sept 19, 2014, Alibaba completed its IPO offering on NYSE, offering 320mn ADS (38%

primary) and an additional 48mn ADS in over-allotment (54% primary) at the price of

USD68. Each ADS represents an ownership interest in one ordinary share.

Alibaba’s total outstanding ordinary shares immediately post IPO offering was 2,465mn.

With the full exercise of over-allotment option, total outstanding ordinary shares post

offering amount to 2,491mn.

Softbank, a public company listed on the Tokyo Stock Exchange and the largest

shareholder of Alibaba group, did not sell any shares during the offering. The company

retains 32% of outstanding shares with over-allotment fully exercised.

Yahoo, the second largest holder of the company, sold 140mn shares during the offering,

including 18.3mn additional shares sold in over-allotment, resulting in 15.4% of total

outstanding shares post offering.

Jack Yun Ma, the founder and executive chairman of Alibaba, and Joseph C. Tsai, executive

vice chairman, owned 7.7% and 3.1% of total outstanding shares after the offering with

full exercise of over-allotment, respectively. All directors and executive officers as a group

hold 12.8% of total outstanding shares post offering.

Chart 126: Alibaba’s shareholding structure (with full-exercise of over-allotment)

Note: (1) The shareholder structure is based on 2,491,149,869 ordinary shares outstanding as of Sept 18, 2014, including 2,465,005,966

ordinary shares outstanding immediately after offering plus additional 26,143,904 ADSs offered by Alibaba upon full exercise of over-

allotment option. (2) SoftBank Corp. is a public company listed on the Tokyo Stock Exchange. (3) Yahoo! Inc. is a public company listed on

the NASDAQ Global Select Market. (4) Jack Yun MA is the company lead founder and executive chairman. (5) Joseph C. TSAI is a member

of the Alibaba founding team and has served as executive vice-chairman since May 2013. (6) Certain of current employees refer to over

4,000 employees who are selling ADSs during the IPO offering; certain of former employees refer to over 1,000 former employees who are

selling ADSs during the IPO offering; certain of consultants and employee of affiliates as a group refer to the six consultants of the company

and over 900 employees of Alipay and China Smart Logistics who are selling ADSs during the IPO offering.

Source: Company data as of Sept 18, 2014

BABA

Initiating Coverage

27 October 2014



Partnership System

The Alibaba Partnership

The Alibaba Partnership currently is comprised of 30 members including 24 members of

Alibaba’s management, 4 members of management of Small and Micro Financial Services

Company and 1 member of management of China Smart Logistics. Two members of

Alibaba’s management serve as members of Small and Micro Financial Services Company

as well. Existing partners nominate candidates, who have been serving in Alibaba Group,

its affiliates and/or Alipay for not less than five years, to the partnership committee.

Election of new partners is held annually and requires the approval of at least 75% of all of

the partners.

Removal of partners

Partners retire from the partnership when they cease employment with Alibaba Group, its

affiliates or Alipay, except continuity partners who may remain as partners until they elect

to retire from the partnership, die or are incapacitated or are removed as partners. Any

partner, including continuity partners, may be removed upon the vote of a simple

majority of all partners for violations of certain standards.

Partnership committee

The partnership committee must consist of at least five partners and is currently

comprised of Jack Ma, Joe Tsai, Jonathan Lu, Lucy Peng and Ming Zeng. The Committee is

responsible for administering partner elections and allocating annual cash bonus.

Partnership committee members serve for a term of three years and may serve multiple

terms. Elections of committee members are held once every three years.

Equity interest holding requirement for partners

Alibaba requires each partner to retain at least 60% of the equity interests (including

unvested shares and shares underlying vested and unvested awards) that they held on the

starting date of three-year period. Following the initial three-year holding period and for

so long as he or she remains a partner, a partner is required to retain at least 40% of the

equity interests (including unvested shares and shares underlying vested and unvested

awards) that he or she held on the starting date of the initial three-year holding period. As

of Sept 15, 2014, the partners directly and indirectly hold an aggregate of approximately

349,859,983 ordinary shares (including unvested shares and shares underlying vested

and unvested awards).

BABA

Initiating Coverage

27 October 2014



Chart 127: Members of the Alibaba Partnership

Source: Company data as of September 22, 2014

Note †: Members of the partnership committee

Board of directors

The Alibaba Partnership will have the exclusive right to nominate up to a simple majority

of the members of Alibaba’s board of directors. Nominees have to receive a simple

majority vote from shareholders voting at annual general meeting. The Partnership holds

the right to appoint an interim director until next annual general meeting if nominee fails

to be elected. The director nominees of the Alibaba Partnership will initially all be partners

of the Alibaba Partnership, however, future nominees may also include qualified

individuals who are not affiliated with the Alibaba Partnership.

Initial board of directors upon IPO completion will consist of nine members, four of

whom will be Alibaba Partnership nominees (Jack Ma, Joseph Tsai, Jonathan Lu and Daniel

Zhang). Jacqueline Reses, chief development officer of Yahoo! Inc., will resign from the

board and cease to be one of the directors upon IPO completion. Upon the completion of

the offering, the Alibaba Partnership will be entitled to nominate or appoint two directors

to the board, which would increase the total number of directors to eleven.

Name Age Gender Year Joined

Alibaba GroupCurrent position with Alibaba Group or related/affiliated companies

Jingxian Cai (蔡景现) 37 M 2000 Principle Engineer

Li CHENG (程立) 39 M 2005 Chief Architect, Small and Micro Financial Services Company

Trudy Shan DAI (戴珊) 38 F 1999 Chief Customer Officer

Luyuan FAN (樊路远) 41 M 2007 President, China Business, Small and Micro Financial Services Company

Yongxin FANG (方永新） 40 M 2000 Directo， Human Resources

Simon Xiaoming HU (胡晓明) 44 M 2005 Risk Manager, SME Loan Business; Chief Risk Officer, Small and Micro Financial Services Company

Fang JIANG (蒋芳) 40 F 1999 Vice President, Corporate Integrity and Human Resources

Peng JIANG (姜鹏) 41 M 2000 President, Alibaba Cloud Computing, YunOS and Digital Entertainment; Deputy Chief Technology Officer

Jianhang JIN (金建杭) 44 M 1999 Senior Vice President, Corporate Affairs

Eric Xiandong JING (井贤栋) 41 M 2007 Chief Financial Officer, Small and Micro Financial Services Company

Zhenfei LIU (刘振飞) 42 M 2006 Vice President, Infrastructure Operations

Jonathan Zhaoxi LU (陆兆禧) † 44 M 2000 Chief Executive Officer

Jack Yun MA (马云) † 50 M 1999 Executive Chairman

Xingjun NI (倪行军） 37 M 2003 Principle Engineer， Small and Micro Financial Services Company

Lucy Lei PENG (彭蕾) † 41 F 1999 Chief People Officer, Alibaba Group; Chief Executive Officer, Small and Micro Financial Services Company

Sabrina Yijie PENG (彭翼捷) 36 F 2000 Vice President, International, Small and Micro Financial Services Company

Xiaofeng SHAO (邵晓锋) 48 M 2005 Chief Risk Officer

Timothy A. STEINERT 54 M 2007 General Counsel and Corporate Secretary

Judy Wendong TONG (童文红) 43 F 2000 Chief Operating Officer, China Smart Logistics

Joseph C. TSAI (蔡崇信) † 50 M 1999 Executive Vice Chairman

Jian WANG (王坚) 51 M 2008 Chief Technology Officer

Shuai WANG (王帅) 40 M 2003 Senior Vice President, China Corporate Communications and Marketing

Sophie Minzhi WU (吴敏芝) 38 F 2000 President, Alibaba.com and 1688.com

Maggie Wei WU (武卫) 46 F 2007 Chief Financial Officer

Eddie Yongming Wu (吴泳铭) 39 M 1999 Senior Vice President, Corporate Development

Sara Siying YU (俞思瑛) 40 F 2005 Associate General Counsel, China

Ming ZENG (曾鸣) † 44 M 2006 Senior Vice President, Corporate Strategy

Jeff Jianfeng ZHANG (张建锋) 41 M 2004 President, Taobao Marketplace

Daniel Yong ZHANG (张勇) 42 M 2007 Chief Operating Officer

Yu ZHANG (张宇) 44 F 2004 Vice President, Corporate Development

BABA

Initiating Coverage

27 October 2014



Chart 128: Alibaba Group’s Board of Directors

Source: Company data as of September 22, 2014

Note (*): Jacqueline will resign from the board of directors and cease to be one of the

directors immediately prior to the effectiveness of the registration statement on Form F-1.

(**) Have accepted appointment as the director or independent director, effective upon

completion of the offering.

Voting agreement with Softbank and Yahoo

Alibaba entered into a voting agreement with Jack Ma, Joe Tsai, Softbank and Yahoo

which took effect upon completion of the offering. Provisions include:

SoftBank has the right to nominate one director to Alibaba’s board of directors,

provided that its shareholding stays at 15% or above of Alibaba’s outstanding

shares;

SoftBank will agree to vote its shares in favor of the election of the Alibaba

Partnership’s director nominees at each annual general shareholders meeting

and to grant the voting power of any portion of its shareholdings exceeding

30% of Alibaba’s issued and outstanding ordinary shares to Jack Ma and Joe Tsai

by proxy;

Yahoo will agree to vote its shares in favor of the election of all of the Alibaba

Partnership’s director nominees and the SoftBank director nominee at each

annual general shareholders meeting until SoftBank’s shareholding declines

below 15% of Alibaba’s outstanding shares and to grant the voting power over

any shares it owns, up to 121.5 million of Alibaba’s ordinary shares, to Jack Ma

and Joe Tsai by proxy;

Jack Ma and Joe Tsai will vote their shares and any other shares over which they

hold voting rights in favor of the election of the SoftBank director nominee at

each annual general shareholders meeting until SoftBank’s shareholding

declines below 15% of Alibaba’s outstanding ordinary shares.

Name Age Position/Title

Jack Yun MA 50 Executive Chairman

Joseph C. TSAI 50 Executive Vice-chairman

Masayoshi SON 57 Director

Jacqueline D. RESES * 44 Director

Jonathan Zhaoxi LU ** 44 Director Appointee

Daniel Yong ZHANG ** 42 Director Appointee

Independent directors

Chee Hwa TUNG ** 77 Independent Director Appointee

Walter Teh Ming KWAUK ** 61 Independent Director Appointee

J. Michael EVANS ** 57 Independent Director Appointee

Jerry YANG ** 45 Independent Director Appointee

BABA

Initiating Coverage

27 October 2014



Alibaba’s history with Yahoo In 2005, Yahoo made a strategic investment in Alibaba with a 40% stake (1,047mn

ordinary shares) at combined cash consideration of USD1,000mn and the contribution of

Yahoo China. The equity stake was comprised of USD570mn of existing ordinary shares,

USD70mn of new shares and USD360mn from Softbank. On Oct 24, 2005, Alibaba and

Yahoo entered into the technology and intellectual property license agreement (TIPLA),

later amended and restated in Sept 2012, pursuant to which Alibaba Group made a lump

sum payment of USD550mn to Yahoo and an annual royalty fee of RMB358mn,

RMB592mn and RMB748mn for FY12, FY13 and FY14 respectively. No royalty payment

will be made upon completion of Alibaba’s IPO.

On May 20, 2012, Alibaba entered into a Share Repurchase and Preference Share Sale

Agreement with Yahoo, which entitles Alibaba to make repurchase of its shares from

Yahoo or cause Yahoo to sell its holding of Alibaba in a qualified IPO of the company.

On Sep 18, 2012, Alibaba repurchased 523mn ordinary shares from Yahoo (50% of

Yahoo’s initially owned stake) with a total consideration of USD7.1bn, including a

USD6.3bn cash payment and USD800mn worth of Alibaba Group preference shares

(which was redeemed by Alibaba in full in May 2013). Alibaba and Yahoo entered into an

agreement requiring Yahoo to either sell to Alibaba or to public an additional 261.5mn

ordinary shares owned upon a qualified IPO of Alibaba, which was later amended to

208mn in Oct 2013. In July 2014, the Yahoo repurchase agreement was further amended

to reduce the no. of ordinary shares Alibaba is entitled to cause Yahoo to sell to 140mn.

Chart 129: Alibaba’s history with Yahoo


Note: (1) Stake calculation is based on Alibaba Group’s 2,328mn ordinary shares outstanding as of Mar 31, 2014. (2) Stake calculation is

based on Alibaba Group’s 2,342mn ordinary shares outstanding prior to IPO. (3) Stake calculation is based on Alibaba Group’s 2,491mn

ordinary shares outstanding post IPO with full exercise of over-allotment option.

Date MilestoneNumber of ordinary

shares Yahoo holds

Yahoo's stakeholding

of Alibaba

2005

Yahoo completed a strategic investment in Alibaba with a

USD1bn cash payment and contributed Yahoo China to

Alibaba Group.

1,047mn 40.0%

May, 2012Alibaba entered into a Share Repurchase and Preference

Share Sale Agreement with Yahoo1,047mn 40.0%

Sep, 2012

Alibaba Group repurchased 523mn ordinary shares

owned by Yahoo with a total consideration of USD7.1bn,

including a USD6.3bn cash payment and USD800mn

worth of Alibaba's redeemable preference shares

(redeemed by Alibaba in full in May 2013)

523.5mn 22.5% (1)

Oct, 2013

Alibaba Group and Yahoo amended and reached the

agreement that Alibaba is entitled to cause Yahoo to sell

(either directly to Alibaba Group or in the IPO) 208mn

ordinary shares, compared to 261.5mn prior to

amendment

523.5mn 22.5% (1)

Jul, 2014The number of ordinary shares Alibaba is entitled to cause

Yahoo to sell is further revised down to 140mn523.5mn 22.4% (2)

Post IPO

completion

Yahoo sold 121.7mn ordinary shares and an additional

18.3mn in over-allotment during Alibaba's IPO383.6mn 15.4% (3)

BABA

Initiating Coverage

27 October 2014



Small and Micro Financial Services Company

Ownership structure

Alipay was established in Dec 2004 to operate Alibaba’s payment services and later

restructured as a separate domestic PRC-owned entity in order to obtain a payment

business license from the PBOC. Accordingly, Alibaba divested all of its interest and

control over Alipay which resulted in deconsolidation of Alipay from its financial

statements starting from CY1Q11. Upon divestiture, Jack Ma held a 46% equity stake of

Zhejiang Alibaba E-Commerce Co., Ltd. (also known as Small and Micro Financial Services

Company), Alipay’s parent entity, followed by 12% by Simon Xie and 42% by Hangzhou

Junao Equity Investment Partnership, interests of which are held by certain members of

the Alibaba partnership.

The ownership structure of Small and Micro Financial Services Company was recently

changed and currently Hangzhou Junhan Equity Investment Partnership holds 58% of

equity stake with the rest held by Junao. Interests in Junhan are owned by Jack Ma, Simon

Xie and other employees of Alibaba Group as well as Small and Micro Financial Services

Company. Jack Ma has committed to reduce his interest in Small and Micro Financial

Services Company over time to 8.9% or below. The company intends to raise equity

capital from domestic Chinese investors in the future and the shareholding of Junao and

Junhan will be correspondingly reduced through dilution. However, the combined

ownership of Jack Ma, Junao and Junhan will continue to constitute the majority of

outstanding shares of the company. In terms of voting right, Jack Ma, as the general

partner of Junao and Junhan, is able to exercise the voting power on behalf of both

entities as shareholders in Small and Micro Financial Services Company, which implies

that he will continue to control majority of voting interests in the company.

2011 Framework agreement

Upon the occurrence of certain liquidity events of Alipay (including an initial public

offering, a transfer of 37.5% or more of the equity interests of Alipay or a sale of all or

substantially all assets of Alipay), Small and Micro Financial Services Company will pay

Alibaba Group an amount equal to 37.5% of the equity value of Alipay with a minimum

payment of USD2bn and a maximum payment of USD6bn.

If a liquidity event does not occur by the tenth anniversary of July 29, 2011, Alibaba

Group will have the right to demand Alipay to effect a liquidity event provided that the

equity or enterprise value of Alipay at such time exceeds USD1bn. If Alibaba demands a

liquidity event and unless the liquidity event is effected by means of a 37.5% or more

equity interest transfer of Alipay, the minimum amount of USD2bn will not be applicable.

Alipay Commercial agreement & intellectual property and software

technology services agreement

Pursuant to the Alipay commercial agreement, Alipay provides payment processing

services to Alibaba Group and its subsidiaries in return for a fee on preferential terms to

Alibaba. Fees paid by Alibaba to Alipay amounted to RMB1.3bn, RMB1.6bn, RMB2.3bn

and RMB740mn in FY12, FY13, FY14 and the three months ended June 30, 2014

respectively.

Pursuant to an intellectual property and software technology services agreement, Alipay

pays Alibaba royalty fees and software technology service fees equal to the sum of an

expense reimbursement plus 49.9% of the consolidated pre-tax income of Alipay. As

disclosed by the company, Alipay paid a royalty and software technology service fee to

Alibaba of RMB27mn, RMB277mn, RMB1,764mn and RMB527mn in FY12, FY13, FY14

and the three months ended June 30, 2014 respectively.

BABA

Initiating Coverage

27 October 2014



2014 Share and asset purchase agreement (SAPA) & amended Alipay

intellectual property and software technology services agreement

On August 12, 2014, the company entered into a share and asset purchase agreement

(2014 SAPA), and accordingly restructured the relationships with Small and Micro

Financial Services Company and its wholly owned subsidiary Alipay. The 2011 framework

agreement was terminated.

Alibaba Group agreed to dispose of the SME loan business to Small and Micro

Financial Services Company in exchange for cash consideration and annual fees

for seven years. Alibaba Group will receive an annual fee equal to 2.5% of the

average daily balance of SME loans from 2015 to 2017; and fixed annual fee

equal to the 2017 annual fee from 2018 to 2021. The disposition allows the

company to focus on the core e-commerce businesses and eliminates the direct

risks and disadvantages of carrying a loan portfolio on balance sheet, such as the

direct risks of credit defaults, capital adequacy, leverage and regulatory

requirements associated with a loan.

The cap of USD6 bn on the liquidity event payment under the 2011 framework

agreement has been removed. Under the restructured agreement, the Company

will still be entitled to a payment equal to 37.5% of the equity value of Small

and Micro Financial Services Company.

The profit share has been restructured that the base of profits was expanded

from the pre-tax income of only Alipay to the pre-tax income of all of the

businesses of Small and Micro Financial Services Company, while the profit

sharing percentage has been reduced to 37.5% from 49.9%.

Upon a qualified IPO of Small and Micro Financial Services Company, Alibaba is

entitled to receive a payment equal to 37.5% of the equity value of Small and

Micro Financial Services Company until Alibaba acquires a full 33% equity

interest.

BABA

Initiating Coverage

27 October 2014



Alibaba’s Management Team

Chart 130: Alibaba Group's executive officers

Source: Company Data as of September 22, 2014

Jack Yun MA ( 马云 ) is Alibaba’s lead founder and, since May 2013, has served as the

company’s executive chairman. From 1999 until May 2013, Mr. Ma served as Alibaba’s

chairman and chief executive officer. Mr. Ma currently serves on the board of SoftBank

Corp., one of Alibaba’s major shareholders. He is also a director of Huayi Brothers Media

Corporation, an entertainment group in China listed on The Shenzhen Stock Exchange, as

well as chair of The Nature Conservancy’s China board of directors and a director of its

global board of directors. In September 2013, he joined the Breakthrough Prize in Life

Sciences Foundation as a director. Mr. Ma graduated from Hangzhou Teacher’s Institute

with a major in English language education.

Joseph C. TSAI ( 蔡崇信) joined Alibaba in 1999 as a member of the Alibaba founding

team and has served as the company’s executive vice chairman since May 2013. Mr. Tsai

previously served as the chief financial officer and has been a member of the board of

directors since the founding of the company. From 1995 to 1999, Mr. Tsai worked in

Hong Kong with Investor AB, the main investment vehicle of Sweden’s Wallenberg family,

where he was responsible for Asian private equity investments. Prior to that, he was vice

president and general counsel of Rosecliff, Inc., a management buyout firm based in New

York. From 1990 to 1993, Mr. Tsai was an associate attorney in the tax group of Sullivan

& Cromwell LLP, a New York-based international law firm. Mr. Tsai serves on the boards

of directors of several of Alibaba’s investee companies. Mr. Tsai is qualified to practice law

in the State of New York. He 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 (陆兆禧) succeeded Jack Ma as the chief executive officer in May

2013. Mr. Lu joined Alibaba in 2000 and has at different points served as the top

executive officer of almost all of the company’s key business units. Prior to his current

role, he served as the chief data officer and also oversaw the YunOS division. Before that,

he served as chief executive officer of Alibaba.com from February 2011 until its

privatization in 2012. He joined Taobao in January 2008 and served as its chief executive

officer from January 2010 to June 2011. In September 2004, he led a dedicated team to

establish Alipay and became Alipay’s first president. From 2000 to 2004, Mr. Lu held

several leadership roles at Alibaba.com and managed its South China sales region. Before

joining Alibaba Group, Mr. Lu was co-founder of a network communications company.

Mr. 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. Since May 2014, Mr. Lu has served on the board of directors of Youku

Tudou.

Name Age Year Joined Position/Title

Jack Yun MA 50 1999 Executive Chairman

Joseph C. TSAI 50 1999 Executive Vice Chairman

Jonathan Zhaoxi LU 44 2000 Chief Executive Officer

Daniel Yong ZHANG 42 2007 Chief Operating Officer

Maggie Wei WU 46 2007 Chief Financial Officer

Jian WANG 51 2008 Chief Technology Officer

Peng Jiang 41 2000 President, Alibaba Cloud Computing, YunOS and

Digital Entertainment; Deputy Chief Technology

Lucy Lei PENG 41 1999 Chief People Officer

Xiaofeng SHAO 48 2005 Chief Risk Officer

Trudy Shan DAI 38 1999 Chief Customer Officer

Timothy A. STEINERT 54 2007 General Counsel and Corporate Secretary

Jian hang JIN 44 1999 President

BABA

Initiating Coverage

27 October 2014



Maggie Wei WU ( 武卫) has been the chief financial officer since May 2013. Ms. Wu

served as the deputy chief financial officer from October 2011 to May 2013. Ms. Wu

joined the company in July 2007 as chief financial officer of Alibaba.com and was

responsible for instituting Alibaba.com’s financial systems and organization leading up to

its initial public offering in Hong Kong in November of that year, as well as co-leading the

privatization of Alibaba.com in 2012. She was voted best CFO in FinanceAsia’s annual poll

for Asia’s Best Managed Companies in 2010. Before joining the company, Ms. Wu was an

audit partner at KPMG in Beijing. In her 15 years with KPMG, she was lead audit partner

for the initial public offerings and audits of several major large-cap Chinese companies

listed in international capital markets and provided audit and advisory services to major

multinational corporations operating in China. Ms. Wu is a member of the Association of

Chartered Certified Accountants (ACCA) and a member of the Chinese Institute of

Certified Public Accountants. She received a bachelor’s degree in accounting from Capital

University of Economics and Business.

BABA

Initiating Coverage

27 October 2014



Financial Statements

Income Statement We estimate Alibaba’s total revenue to reach RMB76.8bn, +46.3% YoY, in FY15, and

RMB105bn, +36.7% YoY, in FY16. We currently estimate FY14-17 revenue CAGR of 36%.

We expect total GMV to reach RMB2.4bn in FY15, +44.1% YoY, with Tmall accounting for

37.9% and the rest contributed by Taobao. We estimate FY16 total GMV of RMB3.3bn,

+35.1% YoY.

China commerce: We estimate China commerce sales to grow 50.5% YoY to

RMB67.9bn in FY15, representing 88.4% of total revenue, and 41.1% YoY to RMB95.8bn

in FY16, 91.2% of total revenue, mainly driven by growth in core retail marketplace

businesses.

Retail (Taobao, Tmall, Juhuasuan): We estimate China’s retail revenue to

reach RMB64.8bn in FY15, +51.3% YoY, accounting for 84.4% of total revenue,

largely driven by strong growth in commission revenue. We expect revenue to

further grow 42% YoY to reach RMB92bn in FY16.

Online marketing services: We estimate online marketing service

revenue to reach RMB39.4bn in FY15, +32.7% YoY, accounting for

51.3% of total revenue, and RMB50.1bn in FY16, +27.1% YoY, 47.7%

of total revenue. Our estimates are based on continued strong growth

of GMV partially offset by declining merchants’ advertising budget-to-

GMV ratio, due to the increasing GMV contribution from mobile on

which merchants typically allocate a smaller proportion of their budget

to advertising due to the smaller screen of a mobile device.

Commission: We estimate commission revenue of RMB24.5bn in

FY15, +104% YoY, representing 31.9% of total revenue, and

RMB41.2bn in FY16, +68% YoY, 39.2% of total revenue. This is based

on strong growth of Tmall GMV of 81.5% YoY and 62.2% YoY in the

respective years, and assuming average commission rate at 3.4% and

3.6% respectively.

Others: We estimate other revenue, mainly comprised of Wangpu

storefront fees, continue to account for a declining revenue

contribution of 1.1% in FY15 and 0.6% in FY16.

Wholesale (1688.com): We estimate China wholesale revenue to reach

RMB3.1bn in FY15, +35.3% YoY, accounting for 4.1% of total revenue, and

RMB3.8bn in FY16, +22.8% YoY, 3.6% of total revenue. This is mainly supported

by solid growth of marketing revenue as well as paying members subscribing to

China TrustPass.

International commerce: We estimate FY15 international commerce revenue to reach

RMB6.6bn, up 35.3% YoY, representing 8.5% of total revenue, and RMB7.9bn, up 20%

YoY, in FY16.

Retail (AliExpress): We estimate international retail revenue to reach

RMB1.8bn in FY15, +96.9% YoY, representing 2.4% of total revenue, driven by

solid growth in both commission and marketing revenue, assuming a stable

commission rate of 5%.

Wholesale (Alibaba.com): We estimate international wholesale revenue to

reach RMB4.7bn in FY15, +20.5% YoY, representing 6.1% of total revenue,

mainly supported by growth in number of paying members.

BABA

Initiating Coverage

27 October 2014



Cloud computing and Internet infrastructure: Alibaba offers a suite of cloud

computing services to its marketplace merchants and third-party customers. We estimate

cloud computing and Internet infrastructure revenue of RMB1.1bn, +38.3% YoY, in FY15

and RMB1.3bn, +25% YoY, in FY16.

Gross profit: We currently estimate non-GAAP gross margin to decline 9.1pcpt YoY to

67.7% in FY15 but slightly improve 0.3pcpt YoY to 68% in FY16, as Alibaba continues to

invest heavily in mobile, including but not limited to mobile rebates.

Operating profit: Non-GAAP operating margin improved 10.2pcpt YoY to 56% in FY14,

benefitting from economies of scale. However, we expect to see some margin pressure

this year, taking into consideration of increasing mobile investments (including rebates,

product development and marketing), as well as intensified competition. We are

modelling non-GAAP operating margin to decline 11.1pcpt YoY at 44.9% in FY15 and

0.7pcpt YoY to 44.2% in FY16. Scale-back of investments including rebate and R&D costs

could provide upside to margin in the longer term.

We expect increasing R&D dollar spending as Alibaba continues to focus on

existing and new product development efforts. We currently estimate product

development cost-to-sales ratio on a non-GAAP basis to be 10.4% and 11.3% in

FY15 and FY16, respectively, up from 8.2% in FY14.

We estimate sales and marketing expense-to-sales ratio to increase by 0.6pcpt

YoY to 8.9% in FY15 and 1pcpt YoY to 9.9% in FY16, driven by an increase in

advertising and promotional spending on China retail marketplaces and mobile

commerce.

EBITDA: We are modelling non-GAAP EBITDA margin to decline 11.3pcpt YoY to 47.2%

in FY15 and 0.7pcpt YoY to 46.5% in FY16.

Non-operating income from Small and Micro Financial Services Company:

According to the 2014 share and asset purchase agreement in Aug 2014, Alibaba is

entitled to a profit share of 37.5% of the pre-tax income of Small and Micro Financial

Services Company. We estimate total revenue of Small and Micro Financial Services

Company, including Alipay’s payment processing fee, Yu’e Bao management fee and

SME loan interest, to reach RMB48.5bn in FY15, +88.8% YoY, and RMB73.1bn in FY16,

+50.7% YoY. Assuming a 12.6% pre-tax income margin and Alibaba’s 37.5% profit share,

we estimate royalty and software technology service income Alibaba receives from Small

and Micro Financial Services Company to be RMB2.5bn in FY15 and RMB3.4bn in FY16.

Net profit: Overall, we estimate non-GAAP net profit to grow 14.1% YoY to RMB31.5bn

in FY15, implying a net margin decline of 11.6pcpt YoY to 41%. We estimate FY16 non-

GAAP net profit of RMB45.1bn, +43.1% YoY, with a net margin of 42.9%, +1.9pcpt YoY.

BABA

Initiating Coverage

27 October 2014



Balance Sheet As of June 30, 2014, cash and cash equivalents and short-term investments amounted to

RMB57.9bn (USD9.3bn) with RMB62.1bn (USD10bn) debt, resulting in a net debt of

RMB4.2bn (USD682mn). Short-term investments mainly consist of fixed deposits with

maturities between three months and one year.

Alibaba raised a total of USD25bn at an offering price of USD68 with a total of 368mn

shares sold during the IPO in Sept 2014. Alibaba will not receive any proceeds from the

ADS sold by selling shareholders and hence, we estimate Alibaba received a net proceed

of USD10bn (RMB62bn) from the offering. Given the disposal of SME loan business to

Small and Micro Financial Service Company announced in Aug 2014, we expect its loan

receivables as well as current bank borrowing and secured borrowings that are used to

fund the corresponding business will be removed from the balance sheet.

We currently estimate net cash of RMB81.5bn (USD13.1bn) in FY15.

Cash Flow Statement Alibaba’s operating cash flow was RMB26.4bn in FY14 with free cash flow of RMB32.3bn,

factoring in purchase of property, equipment and intangible assets of RMB3.3bn, and

change in loan receivables of RMB9.2bn. We estimate a free cash flow of RMB21.6bn in

FY15, representing a 1.6% free cash flow yield, and RMB49.2bn in FY16 with a 3.6% free

cash flow yield.

Alibaba’s investing outflow was RMB33bn with total capex (including purchase of

property, equipment and intangible assets, acquisition of land use rights and construction

in progress) of RMB4.8bn in FY14, representing 9.1% of sales, mainly due to construction

of corporate campuses and office facilities in Hangzhou, Beijing and Shenzhen. We

estimate a capex to sales ratio of 12.4% (i.e., RMB9.5bn) in FY15 and 10.1% (i.e.,

RMB10.6bn) in FY16.

Cash provided by financing activities was RMB9.4bn in FY14.

BABA

Initiating Coverage

27 October 2014



Chart 131: Key assumptions (Fiscal year ends on March 31, in RMB mn)


Note: FY15 refers to fiscal year ended March 31, 2015

FY2012A FY2013A FY2014A FY2015E FY2016E FY2017E

China Commerce 15,637 29,167 45,132 67,931 95,831 121,329

YoY % change 104.0% 86.5% 54.7% 50.5% 41.1% 26.6%

As % of total revenue 78.1% 84.5% 86.0% 88.4% 91.2% 91.8%

Retail (Taobao, Tmall, Juhuasuan) 13,422 26,970 42,832 64,819 92,010 116,954

YoY % change 100.9% 58.8% 51.3% 42.0% 27.1%

As % of China Commerce 85.8% 92.5% 94.9% 95.4% 96.0% 96.4%


Online Marketing Service 9,804 19,697 29,729 39,436 50,107 59,137

YoY % change 100.9% 50.9% 32.7% 27.1% 18.0%

As % China commerce retail 73.0% 73.0% 69.4% 60.8% 54.5% 50.6%

As % total revenue 49.0% 57.1% 56.6% 51.3% 47.7% 44.8%

Commission 2,915 6,161 12,023 24,532 41,223 57,272

YoY % change 111.4% 95.1% 104.0% 68.0% 38.9%


As % total revenue 14.6% 17.8% 22.9% 31.9% 39.2% 43.4%

Others (primarily Wangpu storefront fee) 703 1,112 1,080 851 680 544

YoY % change 58.2% -2.9% -21.2% -20.0% -20.0%


As % total revenue 3.5% 3.2% 2.1% 1.1% 0.6% 0.4%

Wholesale (1688.com) 2,215 2,197 2,300 3,112 3,821 4,375

YoY % change -0.8% 4.7% 35.3% 22.8% 14.5%



International Commerce 3,765 4,160 4,851 6,562 7,873 9,182

YoY % change 9.7% 10.5% 16.6% 35.3% 20.0% 16.6%


Retail (AliExpress) 223 392 938 1,847 2,605 3,402

YoY % change 75.8% 139.3% 96.9% 41.0% 30.6%

As % of International Commerce 5.9% 9.4% 19.3% 28.1% 33.1% 37.0%


Wholesale (Alibaba.com) 3,542 3,768 3,913 4,715 5,268 5,780

YoY % change 6.4% 3.8% 20.5% 11.7% 9.7%



Cloud computing and internet infrastructures 515 650 773 1,069 1,336 1,604

YoY % change 21.2% 26.2% 18.9% 38.3% 25.0% 20.0%


Others (mainly interest income from micro loans) 108 540 1,748 1,250 0 0

YoY % change -71.6% 400.0% 223.7% -28.5% -100.0%


Total Revenue (in RMB mn) 20,025 34,517 52,504 76,812 105,040 132,115

YoY % change 68.2% 72.4% 52.1% 46.3% 36.7% 25.8%

Operation Metrics - China Commerce Retail

Active Buyers 123 172 255 380 540 739

YoY % change 39.8% 48.3% 49.0% 42.0% 37.0%

Orders fulfilled (in mn) 4,182 7,224 12,750 22,037 35,361 53,289

YoY % change 72.7% 76.5% 72.8% 60.5% 50.7%

BABA

Initiating Coverage

27 October 2014



Chart 132: Key assumptions (Fiscal year ends on March 31, in RMB mn) (cont’d)



GMV Metrics - China Commerce Retail FY2012A FY2013A FY2014A FY2015E FY2016E FY2017E

Total GMV (in RMB bn) 663 1,077 1,678 2,418 3,268 4,069

YoY % change 62.4% 55.8% 44.1% 35.1% 24.5%

Taobao Marketplace GMV 550 824 1,173 1,502 1,781 2,003

YoY % change 49.8% 42.4% 28.0% 18.6% 12.4%

% of Total GMV 83.0% 76.5% 69.9% 62.1% 54.5% 49.2%

Tmall GMV 113 253 505 917 1,487 2,066

YoY % change 123.9% 99.6% 81.5% 62.2% 38.9%

% of Total GMV 17.0% 23.5% 30.1% 37.9% 45.5% 50.8%

Overall monetization rate 2.02% 2.50% 2.55% 2.68% 2.82% 2.87%

Commission rate 3.0% 3.0% 3.0% 3.4% 3.6% 3.6%

Mobile GMV (in RMB bn) 16 79 319 1,068 1,922 2,730

YoY % change 386.9% 300.9% 235.4% 79.9% 42.1%

% of Total GMV 2.5% 7.4% 19.0% 44.2% 58.8% 67.1%

Mobile Revenue (in RMB mn) - 389 2,905 19,657 44,402 73,605

YoY % change 646.8% 576.6% 125.9% 65.8%

As % of China Commerce retail revenue 1.4% 6.8% 30.3% 48.3% 62.9%

Mobile Monetization rate 0.49% 0.91% 1.84% 2.31% 2.70%

YoY % change 0.5% 0.4% 0.9% 0.5% 0.4%

PC GMV (in RMB bn) 647 998 1,359 1,350 1,346 1,338

YoY % change 54.3% 36.3% -0.7% -0.3% -0.6%

% of Total GMV 97.5% 92.6% 81.0% 55.8% 41.2% 32.9%

PC Revenue (in RMB mn) - 26,581 39,927 45,162 47,608 43,349

YoY % change 50.2% 13.1% 5.4% -8.9%


PC Monetization rate 2.66% 2.94% 3.34% 3.54% 3.24%

YoY % change 2.7% 0.3% 0.4% 0.2% -0.3%

Non-GAAP expenses as % of revenue

Cost of revenue 30.3% 27.1% 23.3% 32.3% 32.0% 30.0%

Product development expenses 12.9% 9.6% 8.2% 10.4% 11.3% 11.8%

Sales and marketing expenses 14.6% 10.1% 8.3% 8.9% 9.9% 11.7%

General and administrative expenses 9.5% 7.5% 4.3% 3.4% 2.7% 2.2%

Gross Profit 6,554 9,719 13,369 27,970 37,413 44,434

YoY % change 48.3% 37.6% 109.2% 33.8% 18.8%

Non-GAAP Gross Profit 13,953 25,180 40,289 51,979 71,427 92,480

YoY % change 80.5% 60.0% 29.0% 37.4% 29.5%

Operating profit 5,015 10,751 24,920 28,255 37,960 47,703

YoY % change 114.4% 131.8% 13.4% 34.3% 25.7%

Non-GAAP Operating profit 6,559 15,802 29,392 34,486 46,382 58,467

YoY % change 140.9% 86.0% 17.3% 34.5% 26.1%

Net Profit 4,665 8,649 23,403 31,157 35,777 46,676

YoY % change 85.4% 170.6% 33.1% 14.8% 30.5%

Non-GAAP Net Profit 9,154 13,869 27,610 31,489 45,060 58,541

YoY % change 229.5% 51.5% 99.1% 14.1% 43.1% 29.9%

Net Cash (net debt) 20,461 4,776 2,557 81,486 130,309 191,652

GAAP Gross Margin 67.3% 71.8% 74.5% 63.6% 64.4% 66.4%

GAAP Operating Margin 25.0% 31.1% 47.5% 36.8% 36.1% 36.1%

GAAP Net Margin 21.1% 24.7% 44.4% 40.5% 34.1% 35.3%

Non-GAAP Gross Margin 69.7% 72.9% 76.7% 67.7% 68.0% 70.0%

Non-GAAP Operating Margin 32.8% 45.8% 56.0% 44.9% 44.2% 44.3%

Non-GAAP EBITDA Margin 36.3% 48.1% 58.5% 47.2% 46.5% 46.8%

Non-GAAP Net Margin 45.7% 40.2% 52.6% 41.0% 42.9% 44.3%

Capex as % of revenue 10.8% 7.3% 9.1% 12.4% 10.1% 9.1%

BABA

Initiating Coverage

27 October 2014



Chart 133: Key assumptions (Fiscal year ends on March 31, in USD mn)




China Commerce 2,484 4,697 7,260 10,950 15,448 19,558

YoY % change -67.6% 89.0% 54.6% 50.8% 41.1% 26.6%


Retail (Taobao, Tmall, Retail) 2,133 4,343 6,890 10,449 14,832 18,853

YoY % change 103.7% 58.6% 51.6% 42.0% 27.1%



Online Marketing Service 1,558 3,172 4,782 6,357 8,077 9,533

YoY % change 103.6% 50.8% 32.9% 27.1% 18.0%

As % of China Commerce Retail 73.0% 73.0% 69.4% 60.8% 54.5% 50.6%


Commission 463 992 1,934 3,954 6,645 9,232

YoY % change 114.2% 94.9% 104.5% 68.0% 38.9%



Others (primarily Wangpu storefront fee) 112 179 174 137 110 88

YoY % change 60.3% -3.0% -21.1% -20.0% -20.0%



Wholesale (1688.com) 352 354 370 502 616 705

YoY % change 0.5% 4.6% 35.6% 22.8% 14.5%



International Commerce 598 670 780 1,058 1,269 1,480

YoY % change 15.0% 12.0% 16.5% 35.5% 20.0% 16.6%


Retail (AliExpress) 35 63 151 298 420 548

YoY % change 78.2% 139.0% 97.3% 41.0% 30.6%



Wholesale (Alibaba.com) 563 607 629 760 849 932

YoY % change 7.8% 3.7% 20.7% 11.7% 9.7%



Cloud computing and internet infrastructures 82 105 124 172 215 258

YoY % change 27.1% 27.9% 18.8% 38.6% 25.0% 20.0%


Others (mainly interest income from micro loans) 17 87 281 202 0 0

YoY % change -70.2% 406.8% 223.4% -28.3% -100.0%


Total Revenue (in USD mn) 3,182 5,558 8,446 12,382 16,932 21,296

YoY % change 76.4% 74.7% 52.0% 46.6% 36.7% 25.8%

Operation Metrics

Active Buyers 123 172 255 380 540 739

YoY % change 39.8% 48.3% 49.0% 42.0% 37.0%

Orders fulfilled (in mn) 4,182 7,224 12,750 22,037 35,361 53,289

YoY % change 72.7% 76.5% 72.8% 60.5% 50.7%

BABA

Initiating Coverage

27 October 2014



Chart 134: Key assumptions (Fiscal year ends on March 31, in USD mn) (cont’d)



GMV Metrics - China Commerce Retail FY2012A FY2013A FY2014A FY2015E FY2016E FY2017E

Total GMV (in USD bn) 105 173 270 390 527 656

YoY % change 64.6% 55.6% 44.4% 35.1% 24.5%

Taobao Marketplace GMV 87 133 189 242 287 323

YoY % change 51.8% 42.2% 28.3% 18.6% 12.4%

% of Total GMV 83.0% 76.5% 69.9% 62.1% 54.5% 49.2%

Tmall GMV 18 41 81 148 240 333

YoY % change 126.9% 99.4% 81.9% 62.2% 38.9%

% of Total GMV 17.0% 23.5% 30.1% 37.9% 45.5% 50.8%

Overall monetization rate 2.02% 2.50% 2.55% 2.68% 2.82% 2.87%

Commission rate 3.03% 3.04% 3.04% 3.43% 3.55% 3.55%

Mobile Metrics

Mobile GMV (in USD bn) 3 13 51 172 310 440

YoY % change 393.4% 300.5% 236.1% 79.9% 42.1%

% of Total GMV 2.5% 7.4% 19.0% 44.2% 58.8% 67.1%

Mobile Revenue (in USD mn) - 63 467 3,169 7,158 11,865

YoY % change 646.0% 578.0% 125.9% 65.8%


Mobile Monetization rate 0.49% 0.91% 1.84% 2.31% 2.70%

YoY % change 0.5% 0.4% 0.9% 0.5% 0.4%

PC GMV (in USD bn) 103 161 219 218 217 216

YoY % change 56.3% 36.1% -0.5% -0.3% -0.6%

% of Total GMV 97.5% 92.6% 81.0% 55.8% 41.2% 32.9%

PC Revenue (in USD mn) - 4,280 6,423 7,280 7,674 6,988

YoY % change 50.1% 13.3% 5.4% -8.9%


PC Monetization rate 2.66% 2.94% 3.34% 3.54% 3.24%

YoY pcpt change 2.7% 0.3% 0.4% 0.2% -0.3%

Non-GAAP expenses as % of revenue

Cost of Revenue 30.3% 27.1% 23.3% 32.3% 32.0% 30.0%

Product Development Expenses 12.9% 9.6% 8.2% 10.4% 11.3% 11.8%

Sales and Marketing Expenses 14.6% 10.1% 8.3% 8.9% 9.9% 11.7%

General and Administrative Expenses 9.5% 7.5% 4.3% 3.4% 2.7% 2.2%

Gross Profit 1,041 1,565 2,151 4,509 6,031 7,163

YoY % change 50.3% 37.4% 109.6% 33.8% 18.8%


YoY % change 82.9% 59.8% 29.3% 37.4% 29.5%

Operating profit 797 1,731 4,009 4,555 6,119 7,690

YoY % change 117.3% 131.6% 13.6% 34.3% 25.7%

Non-GAAP Operating profit 1,042 2,545 4,728 5,559 7,477 9,425

YoY % change 144.2% 85.8% 17.6% 34.5% 26.1%

Net Profit 741 1,393 3,765 5,022 5,767 7,524

YoY % change 87.9% 170.3% 33.4% 14.8% 30.5%

Non-GAAP Net Profit 1,454 2,233 4,441 5,076 7,263 9,437

YoY % change -47.6% 53.6% 98.9% 14.3% 43.1% 29.9%

GAAP Gross Margin 67.3% 71.8% 74.5% 63.6% 64.4% 66.4%

GAAP Operating Margin 25.0% 31.1% 47.5% 36.8% 36.1% 36.1%

GAAP Net margin 21.1% 24.7% 44.4% 40.5% 34.1% 35.3%



Non-GAAP EBITDA Margin 36.3% 48.1% 58.5% 47.2% 46.5% 46.8%

Non-GAAP Net margin 45.7% 40.2% 52.6% 41.0% 42.9% 44.3%

Capex as % of revenue 10.8% 7.3% 9.1% 12.4% 10.1% 9.1%

BABA

Initiating Coverage

27 October 2014



Chart 135: Income statement (Fiscal year ends on March 31, in RMB mn)




Total Revenue (in RMB mn) 20,025 34,517 52,504 76,812 105,040 132,115

YoY% change 68.2% 72.4% 52.1% 46.3% 36.7% 25.8%

Non-GAAP Cost of Revenue 6,072 9,337 12,215 24,832 33,613 39,634



Operating Profit (in RMB mn) 5,015 10,751 24,920 28,255 37,960 47,703

YoY% change 279.3% 114.4% 131.8% 13.4% 34.3% 25.7%

Operating Margin 25.0% 31.1% 47.5% 36.8% 36.1% 36.1%

Non-GAAP Product Development Expenses 2,579 3,300 4,298 8,012 11,848 15,569

Non-GAAP Sales and Marketing Expenses 2,922 3,493 4,356 6,863 10,390 15,495

Non-GAAP General and Administrative Expenses 1,893 2,585 2,243 2,618 2,807 2,950

Non-GAAP Operating Profit (in RMB mn) 6,559 15,802 29,392 34,486 46,382 58,467

YoY% change 173.5% 140.9% 86.0% 17.3% 34.5% 26.1%


Depreciation and amortization 715 805 1,339 1,755 2,468 3,388

Non-GAAP EBITDA (in RMB mn) 7,274 16,607 30,731 36,242 48,850 61,855

YoY% change 141.7% 128.3% 85.0% 17.9% 34.8% 26.6%

Non-GAAP EBITDA margin 36.3% 48.1% 58.5% 47.2% 46.5% 46.8%

Other Income

Interest and investment income 258 39 1,648 8,863 4,648 6,300

Interest income 604 455 1,210 2,612 4,648 6,300

Others -346 -416 438 6,251 - -

Interest expenses -68 -1,572 -2,195 -2,867 -3,120 -3,120

Net Interest Income 536 -1,117 -985 -255 1,528 3,180

Others 327 894 2,429 2,803 4,015 5,442

Government grant and others 300 617 665 184 - -

Royalty and software technology service fee income 27 277 1,764 2,503 3,445 4,696

Annual fee on micro loan - - - 116 571 747

Net income before income tax and share of results of equity investees 5,532 10,112 26,802 37,054 43,503 56,325

Income Tax -842 -1,457 -3,196 -4,907 -6,525 -8,449

Share of results of equity investees -25 -6 -203 -990 -1,200 -1,200

Net (loss)/profit 4,665 8,649 23,403 31,157 35,777 46,676

Net income attributable to noncontrolling interests -437 -117 -88 -34 - -

Net (loss)/profit attributable to Alibaba Group (in RMB mn) 4,228 8,532 23,315 31,123 35,777 46,676

YoY% change 257.4% 101.8% 173.3% 33.5% 15.0% 30.5%

Net margin 21.1% 24.7% 44.4% 40.5% 34.1% 35.3%

Non-GAAP net profit (in RMB mn) 9,154 13,869 27,610 31,489 45,060 58,541

YoY% change 229.5% 51.5% 99.1% 14.1% 43.1% 29.9%

Non-GAAP net margin 45.7% 40.2% 52.6% 41.0% 42.9% 44.3%

GAAP Earnings per ADS, basic (in USD) 0.27 0.60 1.66 2.06 2.32 3.02

GAAP Earnings per ADS, diluted (in USD) 0.27 0.58 1.61 2.04 2.32 3.02

Non-GAAP Earnings per ADS, basic (in USD) 0.59 0.97 1.96 2.08 2.92 3.79

Non-GAAP Earnings per ADS, diluted (in RMB) 3.63 5.81 11.84 12.78 18.09 23.50

Non-GAAP Earnings per ADS, diluted (in USD) 0.58 0.93 1.90 2.06 2.92 3.79

YoY% change 245.5% 62.1% 103.7% 8.1% 41.6% 29.9%

WA ADS basic (mn) 2,479 2,294 2,266 2,441 2,491 2,491

WA ADS diluted (mn) 2,522 2,389 2,332 2,464 2,491 2,491

BABA

Initiating Coverage

27 October 2014



Chart 136: Income statement (Fiscal year ends on March 31, in USD mn)




Total Revenue (in USD mn) 3,182 5,558 8,446 12,382 16,932 21,296

YoY% change 68.2% 72.4% 52.1% 46.3% 36.7% 25.8%

Non-GAAP Cost of Revenue 965 1,504 1,965 4,003 5,418 6,389



Operating Profit (in USD mn) 797 1,731 4,009 4,555 6,119 7,690

YoY% change 279.3% 114.4% 131.8% 13.4% 34.3% 25.7%

Operating Margin 25.0% 31.1% 47.5% 36.8% 36.1% 36.1%

Non-GAAP Product Development Expenses 410 531 691 1,292 1,910 2,510

Non-GAAP Sales and Marketing Expenses 464 562 701 1,106 1,675 2,498

Non-GAAP General and Administrative Expenses 301 416 361 422 452 476

Non-GAAP Operating Profit (in USD mn) 1,042 2,545 4,728 5,559 7,477 9,425

YoY% change 173.5% 140.9% 86.0% 17.3% 34.5% 26.1%


Depreciation and amortization 114 130 215 283 398 546

Non-GAAP EBITDA (in USD mn) 1,156 2,674 4,944 5,842 7,874 9,971

YoY% change 141.7% 128.3% 85.0% 17.9% 34.8% 26.6%

Non-GAAP EBITDA margin 36.3% 48.1% 58.5% 47.2% 46.5% 46.8%

Other Income

Interest and investment income 41 6 265 1,429 749 1,016

Interest income 96 73 195 421 749 1,016

Others -55 -67 70 1,008 - -

Interest expenses -11 -253 -353 -462 -503 -503

Net Interest Income 85 -180 -158 -41 246 513

Others 52 144 391 452 647 877

Government grant and others 48 99 107 30 - -

Royalty and software technology service fee income 4 45 284 403 555 757

Annual fee on micro loan - - - 19 92 120

Net income before income tax and share of results of equity investees 879 1,628 4,311 5,973 7,012 9,079

Income Tax -134 -235 -514 -791 -1,052 -1,362

Share of results of equity investees -4 -1 -33 -160 -193 -193

Net (loss)/profit 741 1,393 3,765 5,022 5,767 7,524

Net income attributable to noncontrolling interests -69 -19 -14 -5 - -

Net (loss)/profit attributable to Alibaba Group (in USD mn) 672 1,374 3,751 5,017 5,767 7,524

YoY% change 257.4% 101.8% 173.3% 33.5% 15.0% 30.5%

Net margin 21.1% 24.7% 44.4% 40.5% 34.1% 35.3%

Non-GAAP net profit (in USD mn) 1,454 2,233 4,441 5,076 7,263 9,437

YoY% change 229.5% 51.5% 99.1% 14.1% 43.1% 29.9%

Non-GAAP net margin 45.7% 40.2% 52.6% 41.0% 42.9% 44.3%

GAAP Earnings per ADS, basic (in USD) 0.27 0.60 1.66 2.06 2.32 3.02

GAAP Earnings per ADS, diluted (in USD) 0.27 0.58 1.61 2.04 2.32 3.02

Non-GAAP Earnings per ADS, basic (in USD) 0.59 0.97 1.96 2.08 2.92 3.79

Non-GAAP Earnings per ADS, diluted (in USD) 0.58 0.93 1.90 2.06 2.92 3.79

YoY% change 245.5% 62.1% 103.7% 8.1% 41.6% 29.9%

WA ADS basic (mn) 2,479 2,294 2,266 2,441 2,491 2,491

WA ADS diluted (mn) 2,522 2,389 2,332 2,464 2,491 2,491

BABA

Initiating Coverage

27 October 2014



Chart 137: Balance sheet (Fiscal year ends on March 31, in RMB mn)



RMB mn FY2012A FY2013A FY2014A FY2015E FY2016E FY2017E

Current asset

Cash and cash equivalents 16,857 30,396 33,045 124,549 173,372 234,715

Short-term investments 4,887 2,290 10,587 5,970 5,970 5,970

Restricted cash and escrow receivables 3,312 3,687 4,921 6,118 6,118 6,118

Loan receivables, net 581 4,426 13,159 0 0 0

Investment securities 593 629 1,442 1,737 1,737 1,737

Prepayments, receivables and other assets 1,669 1,734 4,679 8,449 11,554 14,533

Accounts receivable, net 155 135 269 768 1,050 1,321

Prepayment and other assets 1,514 1,599 4,410 7,681 10,504 13,211

Total current asset 27,899 43,162 67,833 146,824 198,752 263,073

Non current asset

Property and equipment, net 2,463 3,808 5,581 8,616 12,535 17,065

Investment in equity investees 1,642 1,555 17,666 24,443 24,443 24,443

Investment securities 248 242 3,023 3,190 3,190 3,190

Intangible assets, net 355 334 1,906 6,208 8,547 9,946

Land use rights, net 1,701 1,895 1,660 1,522 1,497 1,581

Goodwill 11,436 11,294 11,793 29,289 29,289 29,289

Prepayment, receivables and other assets 1,466 1,496 2,087 3,053 4,175 5,251

Total non current asset 19,311 20,624 43,716 76,321 83,677 90,766

Total asset 47,210 63,786 111,549 223,145 282,428 353,839

Current liabilities

Current bank borrowings 1,283 3,350 1,100 0 0 0

Secured borrowings 0 2,098 9,264 0 0 0

Accrued expenses, accounts payable and other liabilities 4,659 8,961 11,887 17,743 23,949 29,858

Accounts payable 198 697 649 844 840 793

Accrued expenses and other liabilities 4,461 8,264 11,238 16,899 23,109 29,065

Income tax payable 375 259 1,267 1,854 2,535 3,188

Escrow money payable 339 1,315 2,659 3,890 5,320 6,691

Merchant deposits 745 3,083 4,711 6,892 9,425 11,854

Deferred revenue and customer advances 4,350 4,929 6,496 8,449 11,554 14,533

Total current-liabilities 11,751 23,995 37,384 38,828 52,783 66,124

Deferred revenue 529 389 428 538 735 925

Deferred tax liabilities 413 643 2,136 2,136 2,136 2,136

Redeemable preference shares 0 5,191 0 0 0 0

Non-current bank borrowings 0 22,462 30,711 49,033 49,033 49,033

Other liabilities 104 60 72 1,997 2,731 3,435

Total non-current liabilities 1,046 28,745 33,347 53,704 54,635 55,529

Total Liabilities 12,797 52,740 70,731 92,532 107,418 121,652

Total shareholder's equity 34,413 11,046 40,818 130,613 175,010 232,187

Total liabilities and shareholder's equity 47,210 63,786 111,549 223,145 282,428 353,839

BABA

Initiating Coverage

27 October 2014



Chart 138: Balance sheet (Fiscal year ends on March 31, in USD mn)



USD mn FY2012A FY2013A FY2014A FY2015E FY2016E FY2017E

Current asset

Cash and cash equivalents 2,678 4,895 5,316 20,077 27,947 37,835

Short-term investments 776 369 1,703 962 962 962

Restricted cash and escrow receivables 526 594 792 986 986 986

Loan receivables, net 92 713 2,117 0 0 0

Investment securities 94 101 232 280 280 280

Prepayments, receivables and other assets 265 279 753 1,362 1,863 2,343

Accounts receivable, net 25 22 43 124 169 213

Prepayment and other assets 241 257 709 1,238 1,693 2,130

Total current asset 4,433 6,950 10,912 23,667 32,038 42,406

Non current asset

Property and equipment, net 391 613 898 1,389 2,021 2,751

Investment in equity investees 261 250 2,842 3,940 3,940 3,940

Investment securities 39 39 486 514 514 514

Intangible assets, net 56 54 307 1,001 1,378 1,603

Land use rights, net 270 305 267 245 241 255

Goodwill 1,817 1,819 1,897 4,721 4,721 4,721

Prepayment, receivables and other assets 233 241 336 492 673 847

Total non current asset 3,068 3,321 7,032 12,303 13,488 14,631

Total asset 7,501 10,271 17,944 35,970 45,527 57,038

Current liabilities

Current bank borrowings 204 539 177 0 0 0

Secured borrowings 0 338 1,490 0 0 0

Accrued expenses, accounts payable and other liabilities 740 1,443 1,912 2,860 3,861 4,813

Accounts payable 31 112 104 136 135 128

Accrued expenses and other liabilities 709 1,331 1,808 2,724 3,725 4,685

Income tax payable 60 42 204 299 409 514

Escrow money payable 54 212 428 627 858 1,079

Merchant deposits 118 496 758 1,111 1,519 1,911

Deferred revenue and customer advances 691 794 1,045 1,362 1,863 2,343

Total current-liabilities 1,867 3,864 6,014 6,259 8,508 10,659

Deferred revenue 84 63 69 87 119 149

Deferred tax liabilities 66 104 344 344 344 344

Redeemable preference shares 0 836 0 0 0 0

Non-current bank borrowings 0 3,617 4,940 7,904 7,904 7,904

Other liabilities 17 10 12 322 440 554

Total non-current liabilities 166 4,629 5,364 8,657 8,807 8,951

Total Liabilities 2,033 8,493 11,378 14,916 17,315 19,610

Total shareholder's equity 5,468 1,779 6,566 21,054 28,211 37,428

Total liabilities and shareholder's equity 7,501 10,271 17,944 35,970 45,527 57,038

BABA

Initiating Coverage

27 October 2014



Chart 139: Cash flow statement (Fiscal year ends on March 31, in RMB mn)




Net income (loss) 4,665 8,649 23,403 31,157 35,777 46,676

Adjustments for cash generated from operating activities:

Share-based compensation 1,254 1,259 2,844 5,905 7,420 9,300

Equity-settled donation expense 0 0 1,269 0 0 0

Depreciation and amortization of PP&E and land use rights 715 805 1,339 1,755 2,468 3,388

(Gain) Loss on disposal of equity investees (24) (68) 3 (17,496) 0 0

Realized and unrealized loss (gain) related to investment securities 138 (80) (90) 0 0 0

Change in fair value of other assets and liabilities 264 245 21 0 0 0

Loss (Gain) on disposal of other subsidiaries 3 (8) (387) 0 0 0

Amortization of intangible assets 155 130 315 572 1,862 2,564

Impairment of goodwill and intangible assets 135 175 44 0 0 0

Loss on disposal of PP&E 3 3 0 0 0 0

Share of results of equity investees 25 6 203 990 1,200 1,200

Deferred income tax 150 104 1,466 0 0 0

Allowance for doubtful accounts relating to micro loans 4 120 442 0 0 0

Changes in operating assets and liabilities net of effects of acquisition

Restricted cash (113) (974) (1,329) (1,197) 0 0

Loan receivables (226) (2,828) (9,175) 13,159 0 0

Prepayments, receivables and other assets (240) (354) (3,567) (4,737) (4,227) (4,054)

Income tax payable 230 (116) 1,008 587 681 653

Escrow money payable 94 976 1,344 1,231 1,430 1,371

Accrued expenses, accounts payable and other liabilities 1,332 3,657 3,992 7,781 6,940 6,613

Merchant deposits 583 2,338 1,628 2,181 2,533 2,429

Deferred revenue and customer advances 128 437 1,606 2,063 3,303 3,168

Net cash generated from operating activities 9,275 14,476 26,379 43,951 59,387 73,308

Cash flows from investing activities:

Decrease (Increase) in short term investments 3,728 2,589 (8,304) 4,617 0 0

Increase (decrease) in restricted cash (2,108) 334 199 0 0 0

Decrease (Increase) in trading investment securities 167 (12) (147) 0 0 0

Acquisition of available-for-sale and held-to-maturity investment securities (508) (60) (2,972) (462) 0 0

Disposal of available-for-sale investment securities 1,966 26 372 0 0 0

Acquisition of property and equipment and intangible assets (749) (1,046) (3,285) (9,219) (10,143) (11,437)

Acquisition of land use rights and construction in progress (1,419) (1,457) (1,491) (307) (420) (528)

Disposal of property and equipment 1 301 0 0 0 0

Cash paid for business combination, net of cash acquired (191) (52) (732) 0 0 0

Deconsolidation and disposal of subsidiaries, net of cash proceeds (20) 551 (46) 0 0 0

Loans to employees, net ot repayment (305) (344) (212) 0 0 0

Acquisition of equity investees (761) (452) (16,468) (6,777) 0 0

Disposals of equity investees 74 167 89 0 0 0

Net cash used in investing activities (125) 545 (32,997) (12,148) (10,564) (11,965)

Net cash generated from (used in) financing activities 475 (1,406) 9,364 59,701 0 0

Exchange rate effect on cash and cash equivalents (54) (76) (97) 0 0 0

Net increase in cash and cash equivalents 9,571 13,539 2,649 91,504 48,823 61,343

Cash and cash equivalents at beginning of the year 7,286 16,857 30,396 33,045 124,549 173,372

Cash and cash equivalents at end of the year 16,857 30,396 33,045 124,549 173,372 234,715

Free cash flow 8,752 19,745 32,269 21,574 49,243 61,871

FCF/share 3.47 8.26 13.84 8.75 19.77 24.84

FCF Yield 0.6% 1.5% 2.5% 1.6% 3.6% 4.5%

BABA

Initiating Coverage

27 October 2014



Chart 140: Cash flow statement (Fiscal year ends on March 31, in USD mn)




Net income (loss) 741 1,393 3,765 5,022 5,767 7,524

Adjustments for cash generated from operating activities:

Share-based compensation 199 203 457 952 1,196 1,499

Equity-settled donation expense 0 0 204 0 0 0

Depreciation and amortization of PP&E and land use rights 114 130 215 283 398 546

(Gain) Loss on disposal of equity investees (4) (11) 0 (2,820) 0 0

Realized and unrealized loss (gain) related to investment securities 22 (13) (14) 0 0 0

Change in fair value of other assets and liabilities 42 39 3 0 0 0

Loss (Gain) on disposal of other subsidiaries 0 (1) (62) 0 0 0

Amortization of intangible assets 25 21 51 92 300 413

Impairment of goodwill and intangible assets 21 28 7 0 0 0

Loss on disposal of PP&E 0 0 0 0 0 0

Share of results of equity investees 4 1 33 160 193 193

Deferred income tax 24 17 236 0 0 0

Allowance for doubtful accounts relating to micro loans 1 19 71 0 0 0

Changes in operating assets and liabilities net of effects of acquisition

Restricted cash (18) (157) (214) (193) 0 0

Loan receivables (36) (455) (1,476) 2,121 0 0

Prepayments, receivables and other assets (38) (57) (574) (764) (681) (654)

Income tax payable 37 (19) 162 95 110 105

Escrow money payable 15 157 216 198 230 221

Accrued expenses, accounts payable and other liabilities 212 589 642 1,254 1,119 1,066

Merchant deposits 93 376 262 352 408 392

Deferred revenue and customer advances 20 70 258 333 532 511

Net cash generated from operating activities 1,474 2,331 4,243 7,085 9,573 11,817

Cash flows from investing activities:

Decrease (Increase) in short term investments 592 417 (1,336) 744 0 0

Increase (decrease) in restricted cash (335) 54 32 0 0 0

Decrease (Increase) in trading investment securities 27 (2) (24) 0 0 0

Acquisition of available-for-sale and held-to-maturity investment securities (81) (10) (478) (74) 0 0

Disposal of available-for-sale investment securities 312 4 60 0 0 0

Acquisition of property and equipment and intangible assets (119) (168) (528) (1,486) (1,635) (1,844)

Acquisition of land use rights and construction in progress (225) (235) (240) (50) (68) (85)

Disposal of property and equipment 0 48 0 0 0 0

Cash paid for business combination, net of cash acquired (30) (8) (118) 0 0 0

Deconsolidation and disposal of subsidiaries, net of cash proceeds (3) 89 (7) 0 0 0

Loans to employees, net ot repayment (48) (55) (34) 0 0 0

Acquisition of equity investees (121) (73) (2,649) (1,092) 0 0

Disposals of equity investees 12 27 14 0 0 0

Net cash used in investing activities (20) 88 (5,308) (1,958) (1,703) (1,929)

Net cash generated from (used in) financing activities 75 (226) 1,506 9,624 0 0

Exchange rate effect on cash and cash equivalents (9) (12) (16) 0 0 0

Net increase in cash and cash equivalents 1,521 2,180 426 14,750 7,870 9,888

Cash and cash equivalents at beginning of the year 1,158 2,714 4,890 5,327 20,077 27,947

Cash and cash equivalents at end of the year 2,678 4,895 5,316 20,077 27,947 37,835

Free cash flow 1,391 3,180 5,191 3,478 7,938 9,973

FCF/share 0.55 1.33 2.23 1.41 3.19 4.00

FCF Yield 0.6% 1.5% 2.5% 1.6% 3.6% 4.5%

BABA

Initiating Coverage

27 October 2014




BABA

Initiating Coverage

27 October 2014



Appendix

BABA

Initiating Coverage

27 October 2014



FY2Q15 (CY3Q14) Results Preview Alibaba is expected to announce FY2Q15 results on November 4, 2014 at 7:30am U.S.

Eastern Time / 8:30pm Hong Kong Time.

Dial-in information:

U.S. Toll-free: 1 (844) 421-0599

Hong Kong: (852) 3011-4522

International: 1 (716) 247-5797

Conference ID: 24286757

We estimate total revenue to reach RMB16bn, +46.3% YoY, driven by continued solid

growth in China commerce, as well as rapid growth of interest income from micro loans.

We expect China commerce retail revenue to grow 48.6% YoY to RMB12.8bn, driven by

strong commission revenue growth.

We expect total GMV to reach RMB541bn in FY2Q15, +44.5% YoY, driven by rapid

growth of Tmall GMV.

We forecast Alibaba Group to post a RMB10.6bn non-GAAP gross profit and RMB5.4bn

non-GAAP operating profit in FY2Q15, implying a non-GAAP gross margin of 66%,

-8.7pcpt QoQ, and non-GAAP operating margin of 43.7%, -8pcpt QoQ.

FY2Q15 non-GAAP net income should reach RMB6.4bn, with a net margin of 40.2%,

-6.2pcpt QoQ, based on our estimates.

BABA

Initiating Coverage

27 October 2014



Chart 141: FY2Q15 (CY3Q14) results preview (in RMB mn)

Source: Company data, Jefferies estimate

Note: Non-GAAP quarterly financials of FY14 is based on our estimates.

FY1Q14A FY2Q14A FY3Q14A FY4Q14A FY1Q15A FY2Q15E FY3Q15E FY4Q15E

Total Revenue (in RMB mn) 10,778 10,950 18,745 12,031 15,771 16,021 27,720 17,300

QoQ % Change 24.3% 1.6% 71.2% -35.8% 31.1% 1.6% 73.0% -37.6%

YoY % Change 58.7% 46.8% 61.7% 38.7% 46.3% 46.3% 47.9% 43.8%

Gross profit 8,051 7,949 14,574 8,561 11,186 9,868 17,455 10,332

QoQ % Change 25.9% -1.3% 83.3% -41.3% 30.7% -11.8% 76.9% -40.8%

YoY % Change 73.7% 56.4% 67.9% 33.8% 38.9% 24.1% 19.8% 20.7%

Gross margin 74.7% 72.6% 77.7% 71.2% 70.9% 61.6% 63.0% 59.7%

Non-GAAP cost of revenue 2,576.0 2,650.4 3,903.6 3,085.0 3,992.0 5,447.3 9,424.7 5,968.4

Non-GAAP Gross profit 8,202 8,300 14,841 8,946 11,779 10,574 18,295 11,331

QoQ % Change 26.9% 1.2% 78.8% -39.7% 31.7% -10.2% 73.0% -38.1%

YoY % Change 73.8% 58.9% 69.2% 38.4% 43.6% 27.4% 23.3% 26.7%

Non-GAAP Gross margin 76.1% 75.8% 79.2% 74.4% 74.7% 66.0% 66.0% 65.5%

Operating Profit - GAAP 5,420 5,248 8,801 5,451 6,844 5,439 10,280 5,693

QoQ % Change 21.7% -3.2% 67.7% -38.1% 25.6% -20.5% 89.0% -44.6%

YoY % Change 131.1% -574.5% 73.9% 22.4% 26.3% 3.6% 16.8% 4.4%

Operating margin 50.3% 47.9% 47.0% 45.3% 43.4% 33.9% 37.1% 32.9%

Non-GAAP Operating Profit 5,851 6,195 10,852 6,494 8,151 7,001 11,809 7,525

QoQ % Change 24.4% 5.9% 75.2% -40.2% 25.5% -14.1% 68.7% -36.3%

YoY % Change 120.0% 115.1% 95.2% 38.1% 39.3% 13.0% 8.8% 15.9%

Non-GAAP Operating margin 54.3% 56.6% 57.9% 54.0% 51.7% 43.7% 42.6% 43.5%

Net Income 4,384 4,883 8,266 5,543 12,344 4,739 9,003 4,977

QoQ % Change 4.5% 11.4% 69.3% -32.9% 122.7% -61.6% 90.0% -44.7%

YoY % Change 154.6% -413.0% 104.4% 32.1% 181.6% -2.9% 8.9% -10.2%

Net margin 40.7% 44.6% 44.1% 46.1% 78.3% 29.6% 32.5% 28.8%

Non GAAP Net Income 4,583 5,943 10,386 6,699 7,317 6,441 10,705 7,027

QoQ % Change -0.2% 29.7% 74.8% -35.5% 9.2% -12.0% 66.2% -34.4%

YoY % Change 109.8% 130.9% 129.9% 45.8% 59.7% 8.4% 3.1% 4.9%

Non-GAAP net margin 42.5% 54.3% 55.4% 55.7% 46.4% 40.2% 38.6% 40.6%

Non-GAAP EPADS, diluted (in RMB) 1.99 2.55 4.45 2.87 3.07 2.59 4.30 2.82

QoQ % Change 3.4% 28.2% 74.8% -35.5% 6.8% -15.8% 66.2% -34.4%

YoY % Change 117.5% 136.6% 135.5% 49.4% 54.4% 1.5% -3.5% -1.8%

Non-GAAP EPADS, diluted (in USD) 0.32 0.41 0.72 0.46 0.49 0.42 0.69 0.45

QoQ % Change 3.3% 28.2% 74.8% -35.5% 7.1% -15.8% 66.2% -34.4%

YoY % Change 117.2% 136.3% 135.3% 49.2% 54.7% 1.7% -3.3% -1.6%

BABA

Initiating Coverage

27 October 2014



Chart 142: FY2Q15 (CY3Q14) results preview (in USD mn)


Note: Non-GAAP quarterly financials of FY14 is based on our estimates.

FY1Q14A FY2Q14A FY3Q14A FY4Q14A FY1Q15A FY2Q15E FY3Q15E FY4Q15E

Total Revenue (in USD mn) 1,734 1,761 3,015 1,935 2,542 2,583 4,468 2,789

QoQ % Change 24.1% 1.6% 71.2% -35.8% 31.4% 1.6% 73.0% -37.6%

YoY % Change 58.5% 46.7% 61.5% 38.6% 46.6% 46.6% 48.2% 44.1%

Cost of revenue 438.7 482.8 671.0 558.2 739.1 991.8 1,654.6 1,123.2

Gross profit 1,295 1,279 2,344 1,377 1,803 1,591 2,814 1,665

QoQ % Change 25.7% -1.3% 83.3% -41.3% 30.9% -11.8% 76.9% -40.8%

YoY % Change 73.5% 56.2% 67.7% 33.7% 39.2% 24.4% 20.0% 20.9%

Gross margin 74.7% 72.6% 77.7% 71.2% 70.9% 61.6% 63.0% 59.7%

Non-GAAP cost of revenue 414.4 426.4 628.0 496.3 643.5 878.1 1,519.2 962.1

Non-GAAP Gross profit 1,319 1,335 2,387 1,439 1,899 1,705 2,949 1,827

QoQ % Change 26.7% 1.2% 78.8% -39.7% 31.9% -10.2% 73.0% -38.1%

YoY % Change 73.6% 58.7% 69.0% 38.2% 43.9% 27.7% 23.5% 26.9%

Non-GAAP Gross margin 76.1% 75.8% 79.2% 74.4% 74.7% 66.0% 66.0% 65.5%

Operating Profit - GAAP 872 844 1,416 877 1,103 877 1,657 918

QoQ % Change 21.6% -3.2% 67.7% -38.1% 25.8% -20.5% 89.0% -44.6%

YoY % Change 130.9% -574.0% 73.8% 22.3% 26.5% 3.8% 17.0% 4.6%

Operating margin 50.3% 47.9% 47.0% 45.3% 43.4% 33.9% 37.1% 32.9%

Non-GAAP Operating Profit 941 997 1,746 1,045 1,314 1,129 1,904 1,213

QoQ % Change 24.3% 5.9% 75.2% -40.2% 25.8% -14.1% 68.7% -36.3%

YoY % Change 119.7% 114.9% 95.0% 38.0% 39.6% 13.2% 9.0% 16.1%

Non-GAAP Operating margin 54.3% 56.6% 57.9% 54.0% 51.7% 43.7% 42.6% 43.5%

Net Income 705 786 1,330 892 1,990 764 1,451 802

QoQ % Change 4.3% 11.4% 69.3% -32.9% 123.2% -61.6% 90.0% -44.7%

YoY % Change 154.3% -412.7% 104.1% 31.9% 182.2% -2.7% 9.1% -10.0%

Net margin 40.7% 44.6% 44.1% 46.1% 78.3% 29.6% 32.5% 28.8%

Non GAAP Net Income 737 956 1,671 1,078 1,179 1,038 1,726 1,133

QoQ % Change -0.3% 29.7% 74.8% -35.5% 9.5% -12.0% 66.2% -34.4%

YoY % Change 109.6% 130.7% 129.7% 45.7% 60.0% 8.6% 3.3% 5.1%

Non-GAAP net margin 42.5% 54.3% 55.4% 55.7% 46.4% 40.2% 38.6% 40.6%

Non-GAAP EPADS, diluted (in RMB) 1.99 2.55 4.45 2.87 3.07 2.59 4.30 2.82

QoQ % Change 3.4% 28.2% 74.8% -35.5% 6.8% -15.8% 66.2% -34.4%

YoY % Change 117.5% 136.6% 135.5% 49.4% 54.4% 1.5% -3.5% -1.8%

Non-GAAP EPADS, diluted (in USD) 0.32 0.41 0.72 0.46 0.49 0.42 0.69 0.45

QoQ % Change 3.3% 28.2% 74.8% -35.5% 7.1% -15.8% 66.2% -34.4%

YoY % Change 117.2% 136.3% 135.3% 49.2% 54.7% 1.7% -3.3% -1.6%

BABA

Initiating Coverage

27 October 2014



Alibaba’s M&A Investment Summary

Table 4: Alibaba’s M&A activities – disclosed by company

Business area Date Target Deal Details Target Company Description Implied Strategies

Mobile June,

2014

UCWeb

(Private)

Alibaba acquired 66%

economic interest in

UCWeb over several

rounds of investments,

the last of which

completed in April

2014. It then acquired

all remaining shares for

USD458mn in cash

plus restricted shares

and RSUs in the

aggregate number of

12.3mn.

- China's largest mobile browser

company in terms of MAUs, according to

iResearch.

- UCWeb had 264mn active users

globally during June 2014, according to

company data

- "Shenma" had more than 6bn monthly

mobile search queries as of April 2014,


- Enhance mobile offerings beyond e-

Commerce, such as general mobile

search

-Access UCWeb's large base of mobile

users and offer existing user base with

additional mobile solutions

Apr,

2014/

Apr,

2013

Weibo

(NASDAQ: WB)

USD1,035mn in

aggregate for approx.

30% stake on a fully-

diluted basis. (Initial

investment of

USD586mn for 18%

stake, followed by

USD449mn in April

2014 with Alibaba

exercising its option to

increase its stake upon

Weibo's IPO)

- A leading social media platform in

China, with 156.5mn MAUs and 69.7mn

DAUs as of Jun 2014, according to

company data.

- Its total revenue grew 105% YoY to

USD77.3mn in 2Q14.

- Gain access to and capture integration

benefits from the user data base of

Weibo, enhancing Alibaba's platform

and data base

-Cooperate on content, behavior data

integration and marketing solution

-Develop a social commerce model by

converting traffic from the social media

platform onto Alibaba's e-Commerce

platforms

Apr,

2014/

Mar,

2014

TangoMe

(Private)

USD217mn in

aggregate for 20%

stake on a fully-diluted

basis

- A leader in mobile messaging services

based in the United States offering free

voice, video and text messaging to

consumers globally, similar to Skype of

Microsoft and Apple's FaceTime.

- Its total registered users were 200mn

with MAUs of over 70mn as of Dec 2013,

according to the Wall Street Journal.

-Improve mobile messaging technology

and solution;

-Expand customer reach to overseas

market

O2O Jul,

2014/

May,

2013

Autonavi

(Private;

delisted from

NASDAQ in July

2014)

USD1,326mn in

aggregate for 100%

stake (Initial

investment:

USD294mn for 28%

stake; Follow-on

investment:

USD1,032mn for the

remaining stake)

- A leading provider of digital map

content, navigation and location-based

solutions in China.

- Over 200mn mobile app users with

92mn MAU as of Dec 2013

- Its total revenue declined by 11.3% YoY

to USD141.7mn in FY13.

- Develop and enhance location-based

O2O services to Alibaba's m-Commerce

user base, leveraging on Autonavi's

mapping technology and massive

database including POI and merchants'

locations, hence promoting more

targeted marketing

Jul, 2014 Intime Retail

Group ("银泰商

业", HKSE:

1833 HK)

HKD5,368mn

(USD692.5mn) for

9.9% equity stake and

convertible bonds

which would increase

Alibaba's stake to 26%

upon conversion.

- One of China’s leading department

store operators. Its total revenue grew

3.3% YoY to RMB2.35bn in 1H14.

- As of Jun 2014, the group operated and

managed a total of 30 department stores

and 10 shopping centres with a total

gross floor area of 2.12mn sqm.

-Develop an "offline-to-online" multi-

channel retailing model that enables

users to purchase online inventory

through mobile devices while shopping

in physical stores

-Establish a joint venture with Intime, in

which Alibaba Group paid approx.

USD13mn for an 80.1% interest, to

develop an O2O business in China

relating to shopping mall, department

stores and supermarkets.

Digital Media

and

Entertainment

Jul, 2014 Evergrande FC

("恒大足球俱乐

部", private)

RMB1.2bn

(USD192.9mn) for 50%

stake

- One of the most popular soccer teams

in China and China's first ever winner of

the Asian Football Confederation

Champions League Cup.

-Provide a marketing platform with

access to millions of soccer fans across

China

BABA

Initiating Coverage

27 October 2014





May,

2014

Youku Tudou

(NYSE: YOKU)

USD1.09bn for 16.5%

stake on a fully-diluted

basis (Yunfeng Capital

invested USD132mn to

purchase an additional

2% stake)

- One of China's leading online video

companies, with over 500mn monthly

unique visitors across screens, according

to the company.

- Total revenue increased by 27% YoY to

USD154.5mn in 2Q14.

- Ranked No.2 with 17.9% PC market

share in terms of monthly time spent in

Jul 2014, according to iResearch.

-Advance "live @ Alibaba" vision of

making digital media entertainment

available to customers anywhere,

anytime

-Enhance the quality of services to users

and improve targeted marketing for

online marketing customers

June,

2014

Alibaba

Pictures

(formerly

known as

ChinaVision,

HKSE: 1060

HK)

HKD6,244mn

(USD805.7mn) in cash

for 60% stake

-A company primarily engaged in media

related business, mainly including

planning, production, publication,

investment, distribution of TV drama

series and films and organising cultural

and artistic exchange activities.

-Total revenue declined by 5.3% YoY to

HKD751mn in FY13, net profit

attributable to shareholders grew 16.3%

YoY to HKD206mn in FY13.

-Gain access to movie and television

program content

-Potentially expand Alibaba's products

and offerings in the digital media

entertainment sector

Apr,

2014

Wasu*

("华数", SZSE:

000156 CH)

RMB6.54bn

(USD1.05bn)

investment through

Hangzhou Yunxi for

approx. 20% stake

interest.

-An operator of digital media

broadcasting and distribution in China.

Wasu is one of seven operators approved

by the state to deliver multimedia

content to households.


RMB1.15bn and net profit attributable to

shareholders increased by 23.3% YoY to

RMB166.9mn in 1H14.

-Wasu's IPTV services currently reach

12mn users in over 120 cities in 28

provinces in China, according to Wall

Street Journal.

-Enhance Alibaba's digital

entertainment strategy in original

content development, video

communication, games, music, etc.

-Cooperate on online content and

Internet TV development

Logistics Jul, 2014 Singapore Post

Limited

(SGX: S08 SG)

SGD313mn

(USD249mn) for 10.3%

stake

-The national postal service provider in

Singapore and a leading provider of e-

Commerce logistics solutions in the Asia-

Pacific region.


SGD821mn, and its net profit

attributable to shareholders increased by

4.8% YoY to SGD136.5mn as of the year

ended Mar 31, 2014.

-Improve its international logistics

solution

-Facilitate purchase of overseas products

by domestic consumers

Mar,

2014

Haier

Electronics

Group

(HKSE: 1169

HK)

HKD2.8bn

(USD364mn) for 2%

stake in Haier, 9.9%

stake in Goodaymart, a

wholly-owned

subsidiary of Haier

engaged in logistics,

and additional 24%

stake in Goodaymart

upon conversion of all

convertible bonds

-Haier Electronics Group is a company

engaged in R&D, manufacturing and

sale of electrical appliances, especially

large electrical appliance.

-Goodaymart Logistics ("日日顺物流"), a

wholly-owned subsidiary of Haier,

mainly focused on large format goods

delivery and installation of home

appliance, furniture and sanitary ware for

Haier and third-party branded products

-Established a logistic joint venture with

Haier specializing in the delivery,

installation and servicing of large format

goods such as home appliance,

furniture and sanitary ware.

-Provide high quality after-sale customer

service to consumers who shop for

appliances on Tmall Marketplace

-Leverage on Goodaymart's expertise,

experience and infrastructure of

distribution capacity across China

especially in tier 3 and tier 4 cities.

BABA

Initiating Coverage

27 October 2014





May,

2013

Zhejiang

Cainiao Supply

Chain

Management

Co, Ltd ("菜鸟")

or China Smart

Logistics

(Private)

RMB2.4bn


stake in the Joint

Venture with Intime

Group, Fosun

International and other

five major express

delivery companies.

(Alibaba has invested

RMB1.68bn as of Mar

2014, and will invest

the remaining capital

over a two-year period)

-An operator of a nationwide logistics

infrastructure and information system in

China. Alibaba Group holds 48% stake of

China Smart Logistics.

-In the 12 months ended Jun 30, 2014,

the logistics system ensured the

successful delivery of an average of

approximately 16.6mn packages per

day.

-Enhance user experience by offering

efficient logistics and delivery services.

-China Smart Logistics plans to build a

network of key logistics hubs across

China, including distribution centers,

warehouses and other supply chain

facilities, which could support the

delivery of over 100mn packages per

day to consumers' doorsteps anywhere

in China within 24 hours in the long

term.

e-Commerce

infrastructure

and service

May,

2014/

Nov,

2010

Shenzhen

OneTouch

Business

Services ("深圳

一达通",

private)

Approx. RMB1.35bn

(USD217mn) in

aggregate for 100%

stake acquisition.

(Initial investment:

approx. RMB560mn for

65% stake; Follow-on

investment:

RMB790mn for the

remaining stake.)

-OneTouch is a provider of

comprehensive export-related services

tailored to the needs of small business in

China.

-Shenzhen OneTouch was ranked No.5

in terms of exported value among

general trade enterprises in 2013 in

China, behind Huawei and ZTE,

according to China National Customs

Information Center.

-Provide comprehensive export-related

service to SMEs, including customs

clearance, logistics, cargo insurance,

currency exchange, tax refund,

financing and certification, etc.

Overseas Mar,

2014

ShopRunner

(Private)

USD202mn for 39%

stake interest

-A company that operates a members-

only service for online shoppers in US,

offering free 2-day shipping with no

minimum order.

-The e-Commerce platform has more

than 1mn members and offers two-day

delivery for retailers, according to Wall

Street Journal.

-Enable Chinese consumers to shop for

authentic American products directly.

-Develop cross-border commerce

opportunities.

Healthcare Apr,

2014

CITIC 21

(HKSE: 0241

HK)

HKD932mn


stake interest. (Yunfeng

Capital acquired

another 16% stake in

CITIC 21 in the amount

of HKD395mn)

-A leading developer of product

identification, authentication and

tracking systems for pharmaceuticals and

medical products in China.

-Total revenue grew 279% YoY to

HKD60.2mn for the year ended Mar 31,

2014. Total profit grew by 389.4% YoY

to HKD9.6mn for the year ended Mar 31,

2014.

-Explore e-Commerce opportunities in

the pharmaceutical and healthcare

categories.

-Foster consumer trust through the sale

of genuine pharmaceuticals through the

company's verification and

authentication technology.

Source: Company data, Jefferies.

BABA

Initiating Coverage

27 October 2014



Table 5: Alibaba’s M&A activities – reported by public news sources


Mobile Oct, 2014 Peel

Technologies

(Private)

Strategic investment of

USD50mn

-Peel is a smart remote control app maker,

enabling users to access to their TV shows

and movies.

-Has a number of mobile device

partnerships, including with Samsung,

HTC and ZTE. Those partnerships have

helped Peel to reach more than 75mn

users that have activated the app in Jun

2014, according to the News released by

Gigaom.

-According to Peel CMO's estimate,

accumulate users will reach 120mn-

125mn by 2014, and total revenue is

expected to reach USD8mn in FY14E, and

USD20mn-25mn in FY15E.

-Help Alibaba to extend to Media

and Entertainment areas.

-Gain access to Smart Home area

Dec, 2013 LBE Security

Master ("LBE 安

全大师", private)

Undisclosed A mobile security app for Android

platform, accounting for 11.6% mobile

security market share in terms of monthly

time spent in Jun 2014, according to

iResearch.

-Strengthen its presence on

mobile

-Potentially cooperate on

expanding service offerings on

app distribution platform and

Alipay Wallet

Oct, 2013 Quixey

(Private)

Alibaba led a USD50mn

funding

A mobile app search engine, which allows

users to find apps based on functionality

search

-Strengthen its mobile search

technology

Apr, 2013 Umeng ("友盟",

private)

Acquisition for

USD80mn

-A service provider of applications data

statistical analysis, similar to Google

Analytics for mobile applications in China.

-It has served over 100K mobile apps

across all major mobile platforms

including iOS, Android and Windows

Phone, with more than 50 percent of

Chinese developers using the service,


-Help to better understand

mobile users data and in-app

behavior

-Strengthen its advertising

technology on mobile e-

Commerce

Oct, 2012 MoMo

("陌陌", private)


USD40mn

-A location-based social network app with

over 100mn registered users, according to

the company as of Feb 2014.

-MAUs and DAUs of Momo reached

18.8mn and 5.1mn in Jul 2014, according

to iResearch.

-Enhance its positioning on LBS

mobile social network as a

supplement to Taobao's overall

local lifestyle service offering

O2O Apr, 2014 Lyft (Private) Alibaba led a

USD250mn funding.

A ride-sharing app developer -Enhance mobile service offering

-Help to increase mobile user

stickiness

Nov, 2013/

Jun, 2013

KuaiDi DaChe ("

快的打车",

private)

Strategic investment,

Alibaba led a

USD100mn funding

-A Chinese taxi booking app.

-It accounted for 53.6% market share in

terms of registered accounts in 2Q14 in

China, according to Analysys

International.

-Expand footprint in O2O market

-Enhance mobile user stickiness

Nov, 2012 DDmap ("丁丁地

图", private)


no details disclosed

-A local lifestyle service provider in China.

DDcoupon, a mobile coupon app offered

by DDmap, allows users to search for

nearby discounts.

-Its accumulated users exceeded 20mn as

of Feb, 2013, according to company.

- Expand footprint in O2O market

by investing in one of China's top

local O2O startups

Jul, 2011 Meituan

("美团", private)


(approx. 10-15% stake,

according to founder)

-China's leading group buy website.

-It accounted for 52.4% of group buying

market share in 2013 in China, with total

GMV of RMB16bn, and is expected to

exceed RMB40bn in 2014, according to

management.

- Complement offerings of

Alibaba's "Juhuasuan" group-

buying site, which mostly offers

tangible products, with

Meituan's focus on service

instead

- Acquire additional users outside

of Alibaba's internal e-commerce

ecosystem

BABA

Initiating Coverage

27 October 2014





Oct, 2006 Koubei

("口碑", private)



Leading Chinese classified listing and

community website on accommodation,

catering, etc.

- Complement Alibaba's e-

commerce portfolio with the rich

community contents of Koubei

- Merged Koubei into Taobao in

pursuance of the "Big Taobao"

strategy in August 2009

Digital Media

and

Entertainment

Jun, 2014 Huxiu.com (1)

(“虎嗅”, private)

Shanghai Yunxi, a

company fully owned

by Small and Micro

Financial Services

Company (formerly

known as Zhejiang

Alibaba e-Commerce)

Strategic investment -Gain access to media content

Jul, 2014 Kabam

(Private)


USD120mn

-An interactive entertainment company

that develops and publishes massive

multiplayer social games.

-According to Wall Street Journal, mobile

accounted 70% of its total users, and its

revenue is expected to reach more than

USD550mn in FY14.

-Reach a partnership to publish

and distribute mobile games.

-Plan to launch 10 games over

the next three years

Jun, 2014 21st Century

Media ("21 世纪

传媒", private)


RMB500mn

(USD80.4mn)

-One of the largest professional media

operators in Chinese financial and

business media industry, including 21st

Century Business magazine, Forbes,

Global Enterpreneur maganize,

21cbh.com and Licai Weekly.

-Gain access to media content

Dec,

2013/Oct,

2012

Ttpod ("天天动

听", private)



-One of the top mobile music players in

China.

-Its total MAUs and DAUs reached 30.5mn

and 6mn in Jul 2014, respectively,


-Gain access to music content

-Expand its mobile offering to

customers

Jan, 2013 Xiami

("虾米", private)

Acquisition, no details

disclosed

A major free music streaming website -Improve Taobao user experience

given the integration of Xiami's

music-streaming services onto

Taobao platform

-Gain access to content from

music

e-Commerce

infrastructure

and service

Sept, 2013 Kanbox

("酷盘", private)

Acquisition, no details

disclosed

A leading personal cloud storage service

provider in China

-Expand Aliaba's products offered

to customers

-Enable customers to access their

content and media across

different platforms

Jun, 2013/

Nov, 2011/

Apr, 2010

Taotaosou ("淘

淘搜", private)


with initial investment

of RMB3mn

(USD0.48mn), and

further investment

undisclosed

-An image search-based shopping

platform in China.

-According to company data, accumulated

users and online merchants has exceeded

100mn and 1mn, respectively

-Improve buyers' user experience

by facilitating their product

search process

May, 2011 CNZZ

(Private)

Acquisition of

USD15mn

A network service provider engaged in

Internet data monitoring and analysis

-Enhance its service capabilities to

merchants

Jan, 2010 Baozun ("

宝尊", private)



An e-commerce service provider for

merchants including IT, marketing, client

service, logistics, etc.

- Enhance Taobao's service

capabilities to consumers and

enterprises

Sept, 2009 net.cn

("万网", private)

Acquisition of

RMB540mn

(USD86.8mn)

-A leading domain registeration and cloud

computing service provider.

-Net.cn is China's largest domain service

provider with 20.57% market share in Apr,

2014, according to WebHosting.

- Gain access to net.cn's massive

SME data base and client

resources.

- Merged Aliyun with

www.net.cn to form a new

Aliyun business division on Jan.6,

2013

- Enhance data and cloud

computing technologies

BABA

Initiating Coverage

27 October 2014





Overseas Jan, 2014 1 stdibs

(Private)


USD15mn

-A New York-based luxury e-Commerce

company, established in 2001.

-It has about 2mn monthly unique visitors,

with an average purchase price of over

USD2K, according to 1stdibs mgmt.

-Enable Chinese consumers to

shop for authentic American

products directly from U.S.

-Enhance Alibaba's presence in

overseas e-Commerce market

Online Travel Sept, 2014 Beijing Shiji

Information

Technology ("北

京中长石基",

SZSE: 002153

CH)


RMB2.81bn


stake interest

-Founded in 1995, Shiji is the leading IT

service provider and system integrator for

hotels. It has serviced over 400 hotels and

has been selected as the preferred vendor

for many international hotel group such as

Grand Hyatt, Sheraton, Hilton, Shangri-la

and Marriott.

-Data connection between

Taobao Travel and hotel

information system, as well as

Taodiandian and restaurant

enterprise management system.

-Help Taobao Travel to build a

closed-loop O2O ecosystem in

hotel and F&B industries.

-In-depth cooperation in hotel

system integration, after-sales,

membership and payment

service.

Mar, 2014 Bai Cheng Travel

Network ("百程

旅行网", private)

Jointly invested with

CBC Capital of

USD20mn

A Chinese outbound travel service

provider, including hotel reservation,

travel document processing, etc.

-Provide users with high quality

travel-related services and

content

Jul, 2013 Qyer

("穷游网",

private)



An outbound travel site. Total users

reached 40mn with 10mn on mobile as of

Jun 2014, according to company.

-Complement own travel-

booking website Taobao Travel

with high-quality outbound

travel information and service

-Capture potential synergy

among travel, local lifestyle

service and payment to amass

big data and explore

opportunities in O2O

Mar, 2013 117go.com

("在路上",

private)



-A mobile travel journal and experience-

sharing app with total users of 20mn as of

May, 2014, according to mgmt.

-It launched a mobile commerce product

Taozailushang (“淘在路上”) recently, with

mobile daily transaction volume

exceeding RMB2mn.

-Capture potential synergy

among travel, local lifestyle

service and payment to amass

big data and explore

opportunities in O2O

Online

Education

Feb, 2014 TutorGroup

(Private)

Jointly invested

USD100mn with

Temasek and Qiming

Venture Partners

An online education platform for

language learning.

-Potentially expand service

offerings into online education

Financial

Services

Oct, 2013 Tian Hong Asset

Management (2)

("天弘基金",

private)

RMB1.18bn

(USD189.7mn)

invested through

Zhejiang Alibaba e-

Commerce for 51%

stake interest

-Tian Hong Asset Management is an asset

management company in China.

-YueBao, the money market fund

launched by Alipay and Tianhong, is the

largest fund in China which has attracted

more than 100mn customers and raised

RMB574.2bn as of Jun 2014, according to

company data.

-Enhance Alibaba's positioning in

Internet finance

-Enable buyers to take money

from their Alipay accounts and

invest in a money-market fund,

which will increase buyers'

stickiness in Taobao, Tmall and

Alipay

Apr, 2014 Hundsun (3)

("恒生电子",

SHSE: 600570

CH)

RMB3.3bn

(USD530.5mn)

invested by Zhejiang

Rongxin Network

Technology for 20.62%

stake interest

-China's leading supplier of financial

software and network services including

securities, futures, funds, banks, trust

fund, insurances and financial

management.

-Hundsun's total revenue grew by 9.8%

YoY to RMB462.7mn in 1H14, net profit

reached RMB113.9mn in FY13, +43% YoY.

-Expand into financial services

-Leverage on Hundsun’s software

technology to integrate more

financial-related services in

Alibaba’s mobile apps

Source: Bloomberg, Wall Street Journal, Sina News, NetEase News, Tech in Asia, Tech Crunch, Tech Web and Tencent News.

Note: (1) Investment in Huxiu was completed through Shanghai Yunxi, a company fully owned by Small and Micro Financial Services

Company (2) Investment in Tian Hong was done through Small and Micro Financial Services; (3) Investment in Hundsun was completed

through Zhejiang Rongxin Network Technology, a company owned by Jack Ma and Simon Xie with 99.1% and 0.9% stake, respectively

BABA

Initiating Coverage

27 October 2014



Company Description

Alibaba is the largest online and mobile commerce company in the world in terms of gross merchandise volume in 2013, according toindustry sources. The company operates its marketplaces as a platform for third parties, and does not engage in direct sales, compete withits merchants or hold inventory.

Analyst Certification:I, Cynthia Meng, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Brian Pitz, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subjectcompany(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or viewsexpressed in this research report.I, Brian Fitzgerald, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Karen Chan, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Nick Wang, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Qin Wang, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Cynthia Meng is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

Registration of non-US analysts: Karen Chan is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

Registration of non-US analysts: Nick Wang is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

Registration of non-US analysts: Qin Wang is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.

Company Specific DisclosuresFor Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Meanings of Jefferies RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more withina 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock priceconsistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperformrated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-month period.

BABA

Initiating Coverage

27 October 2014



https://javatar.bluematrix.com/sellside/Disclosures.action

https://javatar.bluematrix.com/sellside/Disclosures.action

NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions onthe investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it underperforms the S&P by 15% or more since inclusion.Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pickfalls within an investment style such as growth or value.

Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• Alibaba Group Holding Limited (BABA: $95.76, BUY)• Amazon.com, Inc (AMZN: $287.06, BUY)• Baidu Inc. (BIDU: $222.55, BUY)• eBay, Inc. (EBAY: $51.12, HOLD)• HC International Inc. (2280 HK: HK$9.94, BUY)• JD.com, Inc. (JD: $24.02, BUY)• Ourgame International Holdings (6899 HK: HK$4.10, BUY)• Qihoo 360 (QIHU: $68.19, BUY)• Renren Inc. (RENN: $3.41, UNDERPERFORM)• Sina Corp. (SINA: $39.84, HOLD)• Tencent Holdings Ltd. (700 HK: HK$119.50, BUY)• Tian Ge Interactive Holdings (1980 HK: HK$4.93, BUY)• Vipshop Holdings Limited (VIPS: $213.59, BUY)

BABA

Initiating Coverage

27 October 2014



Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 1008 52.26% 263 26.09%HOLD 781 40.49% 139 17.80%UNDERPERFORM 140 7.26% 6 4.29%

BABA

Initiating Coverage

27 October 2014



Other Important Disclosures

Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) groupcompanies:

United States: Jefferies LLC which is an SEC registered firm and a member of FINRA.

United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England andWales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)207029 8010.

Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; locatedat Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong.

Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2,Singapore 048624, telephone: +65 6551 3950.

Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a memberof the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 52516100; facsimile +813 5251 6101.

India: Jefferies India Private Limited (CIN - U74140MH2007PTC200509), which is licensed by the Securities and Exchange Board of India as a MerchantBanker (INM000011443) and a Stock Broker with Bombay Stock Exchange Limited (INB011491033) and National Stock Exchange of India Limited(INB231491037) in the Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-Kurla Complex, Bandra (East) Mumbai 400051, India; Tel +91 22 4356 6000.

This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information setforth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any obligationunder applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless prohibited by theprovisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies LLC, a US-registeredbroker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of1934. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and European EconomicArea this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by persons who have, or havebeen assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. JefferiesInternational Limited has adopted a conflicts management policy in connection with the preparation and publication of research, the details of whichare available upon request in writing to the Compliance Officer. Jefferies International Limited may allow its analysts to undertake private consultancywork. Jefferies International Limited’s conflicts management policy sets out the arrangements Jefferies International Limited employs to manage anypotential conflicts of interest that may arise as a result of such consultancy work. For Canadian investors, this material is intended for use only byprofessional or institutional investors. None of the investments or investment services mentioned or described herein is available to other personsor to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). In Singapore, Jefferies Singapore Limited isregulated by the Monetary Authority of Singapore. For investors in the Republic of Singapore, this material is provided by Jefferies Singapore Limitedpursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert orinstitutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connectionwith this material, please contact Jefferies Singapore Limited, located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +656551 3950. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. In Hong Kong, this report isissued and approved by Jefferies Hong Kong Limited and is intended for use only by professional investors as defined in the Hong Kong Securities andFutures Ordinance and its subsidiary legislation. In the Republic of China (Taiwan), this report should not be distributed. The research in relation tothis report is conducted outside the PRC. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC.PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses,verifications and/or registrations from the relevant governmental authorities themselves. In India this report is made available by Jefferies India PrivateLimited. In Australia this information is issued solely by Jefferies International Limited and is directed solely at wholesale clients within the meaning ofthe Corporations Act 2001 of Australia (the "Act") in connection with their consideration of any investment or investment service that is the subject ofthis document. Any offer or issue that is the subject of this document does not require, and this document is not, a disclosure document or productdisclosure statement within the meaning of the Act. Jefferies International Limited is authorised and regulated by the Financial Conduct Authorityunder the laws of the United Kingdom, which differ from Australian laws. Jefferies International Limited has obtained relief under Australian Securitiesand Investments Commission Class Order 03/1099, which conditionally exempts it from holding an Australian financial services licence under theAct in respect of the provision of certain financial services to wholesale clients. Recipients of this document in any other jurisdictions should informthemselves about and observe any applicable legal requirements in relation to the receipt of this document.

This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion orestimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no obligationto maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective officers, directors,and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned ordescribed herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized research products or servicesto certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying time horizons orunder differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term viewsexpressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. This materialdoes not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individualclients. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate,seek professional advice, including tax advice. The price and value of the investments referred to herein and the income from them may fluctuate. Pastperformance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchangerates could have adverse effects on the value or price of, or income derived from, certain investments. This report has been prepared independently ofany issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of securities. Noneof Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make any representations or warranty on behalf of the issuer(s).Jefferies policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior

BABA

Initiating Coverage

27 October 2014



to the publication of a research report containing such rating, recommendation or investment thesis. Any comments or statements made herein arethose of the author(s) and may differ from the views of Jefferies.

This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproductionand distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party contentproviders do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible forany errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party contentproviders give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose oruse. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequentialdamages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content,including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. Theydo not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice.

Jefferies research reports are disseminated and available primarily electronically, and, in some cases, in printed form. Electronic research issimultaneously available to all clients. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent ofJefferies. Neither Jefferies nor any officer nor employee of Jefferies accepts any liability whatsoever for any direct, indirect or consequential damagesor losses arising from any use of this report or its contents.

For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 1.888.JEFFERIES

© 2014 Jefferies Group LLC

BABA

Initiating Coverage

27 October 2014



Alibaba Jeffrries

Documents

Transcript of Alibaba Jeffrries