China Internet - Research

l Equity Research l
China | Internet
19 June 2014
China Internet
Alibaba Group overview
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Baidu – ADS
Ctrip.com International – ADS
Kingsoft Corp
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Qihoo 360 Technology
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Tencent Holdings
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Mkt cap rating
Price
(USD mn)
(lc)
1,907.4
63.51
61,801.7
176.68
9,292.0
61.69
3,758.8
23.90
9,932.4
76.28
11,209.2
91.56
3,164.1
46.72
2,281.0
59.26
140,017.2
116.20
Ticker
JOBS US
BIDU US
CTRP US
3888 HK
NTES US
QIHU US
SINA US
SOHU US
700 HK
Rec
IL
OP
UP
IL
OP
OP
OP
IL
OP
PT
(lc)
65.00
225.00
32.00
23.43
79.74
104.00
53.84
61.00
148.76
Up/(Dn)
side (%)
2.3
27.3
(48.1)
(2.0)
4.5
13.6
15.2
2.9
28.0
PER (x)
FY1E FY2E
19.8
16.7
31.5
19.6
44.9
35.8
29.6
17.2
11.8
10.3
40.2
24.8
39.7
16.2
nm
82.6
7.2
5.6
EV/EBITDA (x)
FY1E
FY2E
12.7
9.9
25.1
14.3
63.8
40.3
24.4
13.3
7.3
5.6
40.8
23.8
29.8
9.6
nm
12.1
4.0
2.7
Div yield (%)
FY1E
FY2E
0.0
0.0
0.0
0.0
0.0
0.0
0.7
1.1
2.0
2.3
0.0
0.0
0.0
0.0
0.0
0.0
1.2
1.4
Share prices as of 18 June 2014.
Source: Companies, FactSet, Standard Chartered Research estimates

Alibaba is the largest e-commerce company in the world by gross merchandise volume (GMV): in 2013, it
facilitated USD 248bn of online retail sales, compared to USD 125bn for Amazon. As of March 2014, it had 255mn
online shoppers and 8mn sellers on its platform, compared to 618mn Internet users and 57mn SMEs in China.

In FY14 (year ended March 2014), GMV on Tmall increased 100% YoY to RMB 505bn, while Taobao’s GMV rose
42% to RMB 1,173bn. The two platforms generated RMB 12bn in commission revenue and RMB 30bn of online
marketing service revenue.

Alibaba’s revenue and non-GAAP net profit increased 52% and 97%, respectively, in FY14, with gross
margin/non-GAAP net margin standing at 75%/49%. It had USD 8bn gross cash as of March 2014. In FY14, its
operating cash inflow and investment cash outflow were USD 4.4bn and USD 5.5bn, respectively.

Alibaba does not engage in direct sales, hold inventory or own physical logistic infrastructure. Instead, it works
with third-party logistics service providers through central logistics information system operated by Cainiao or
China Smart Logistics. Alibaba owns 48% of Cainiao and had invested RMB 1,680mn as of March 2014, and is
scheduled to make the remaining RMB 720mn of its capital commitment by May 2015. Alibaba has 14 strategic
delivery partners, which delivered 5.0bn packages from Alibaba’s marketplace in 2013. There were 11.3bn orders
placed on Alibaba’s retail platform during the year.

Risks include counterfeit products, and fraudulent transactions or phantom transactions conducted by sellers
with themselves or collaborators to artificially inflate their ratings. Alibaba has also conducted pay-forperformance marketing services through its WOFE without holding an ICP, licence and has not obtained China
Securities Regulatory Commission (CSRC) approval for its overseas listing.
Figure 1: Alibaba business model
Platform
Market
Business model
Revenue model
Taobao
China retail
C2C
P4P marketing fees; display marketing fees; Taobaoke commission;
storefront fees
Tmall
China retail
B2C
Commissions; P4P marketing fees; display marketing fees; Taobaoke
commission
Juhuasuan
China retail
Group buy
Commissions; placement fees
AliExpress
International retail
B2C
Commissions
Alibaba.com
International wholesale
B2B
Advertising; membership fees; value-added services
1688.com
China wholesale
B2B
Advertising; membership fees; value-added services
Source: Company
Wendy Huang, CFA
Betty Dai
+852 3983 8726
Equity Research
Standard Chartered Bank (HK) Limited
+852 3983 8536
Equity Research
Standard Chartered Bank (HK) Limited
Important disclosures can be found in the Disclosures Appendix
All rights reserved. Standard Chartered Bank 2014
http://research.standardchartered.com
Equity Research l China Internet
Company overview
Alibaba was the largest online and mobile commerce company in the world by GMV
in 2013, according to IDC’s GMV report. Alibaba operates its ecosystem as a
platform for third parties and does not engage in direct sales, compete with its
merchants, or hold inventory.
Alibaba started as online B2B platform with Alibaba.com in 1999. In 2003, it launched
online C2C marketplace Taobao, followed by escrow payment tool Alipay in 2004 to
resolve the issue of trust between buyers and sellers. In 2008, it introduced online
B2C marketplace Tmall. In 2010, it further expanded into groupbuy through its
groupbuy marketplace Juhuasuan.
Figure 2: Alibaba’s milestones
1999
• Alibaba founded in Jack Ma’s apartment
in Hangzhou
• Alibaba.com launched
• 1688.com launched
2003
• Taobao marketplace launched
2004
• Aliwangwang instant messenger
launched on Taobao marketplace
• Alipay launched
2007
• Alilmama monetization platform launched
• Taobao Marketplace started to monetize
2008
• Tmall launched
2009
• Alibaba Cloud Computing founded
2010
• Juhuasuan launched
• AliExpress launched
• Mobile Taobao App launched
2013
• Singles Day promotion recorded GMV settled
through Alipay of RMB 36bn (USD 5.8bn)
Source: Company
Alibaba is the dominant player in China in most of the e-commerce subsectors in
which it is present. In 2013, the company was the No.1 online retail platform in China
by GMV with an 84% market share, and No. 1 in China’s online B2B market, with a
38% revenue share according to data disclosed by the company and iResearch.
19 June 2014
2
Equity Research l China Internet
Figure 3: Alibaba China retail market share by GMV (2013)
Figure 4: Alibaba B2B revenue share (2013)
Alibaba B2B
38%
Alibaba China
retail
84%
Source: Company, iResearch
Source: Company, iResearch
In FY14, its three China retail marketplaces (Tmall, Taobao and Juhuasuan)
generated USD 270bn of GMV, of which USD 51bn was from mobile devices. It had
255mn online shoppers and 8mn sellers on its platform, compared to 618mn Internet
users and 57mn SMEs in China. In the three months ended 31 March 2014, Alibaba
accounted for 76% of total mobile retail GMV in China according to iResearch.
231
250
500
Mobile GMV penetration (RHS)
400
10.7%
100
0
1QCY14
4QCY13
3QCY13
2QCY13
1QCY13
4QCY12
3QCY12
2QCY12
0
7.4%
4.6%
5.6%
209
228
346
10%
294
345
374
3QCY13
50
15%
2QCY13
200
12.0%
1QCY13
100
20%
14.7%
300
529
430
Note: Annual active customer measures customers who purchased during the previous 12
months.
Source: Company
Source: Company
Figure 7: Mobile revenue and mobile revenue as % of
GMV
Figure 8: PC revenue and PC revenue as % of GMV
0.4%
147
240
332
1QCY13
2QCY13
3QCY13
Source: Company
19 June 2014
1,171 1,162
0.2%
0.0%
3.0%
2.5%
8,000
2.0%
6,000
1.5%
4,000
1.0%
2,000
0
4,986 5,540 9,448 6,607 8,427 8,313 14,978 8,209
1QCY14
140
4QCY13
60
4QCY12
0
42
3QCY12
200
2QCY12
400
3.5%
2.6%
0.5%
0.0%
1QCY14
0.6%
0.5%
0%
4.0%
3.5%
4QCY13
0.5%
0.6%
5%
10,000
3QCY13
0.4%
0.6%
0.8%
2QCY13
600
0.5%
12,000
PC revenue as % of GMV
3.0%
2.8%
2.6%
2.5%
2.5% 2.6%
1QCY13
RMB mn
1,000
800
14,000
1.0%
PC revenue
4QCY12
1.0%
16,000
2QCY12
1,200
Mobile revenue as % of GMV
1.2%
RMB mn
Mobile revenue
3QCY12
1.1%
1,400
30%
25%
19.7%
4QCY12
172
China retail GMV
3QCY12
133
160
185
27.4%
600
2QCY12
150
145
202
RMB bn
mn
200
255
1QCY14
300
Figure 6: Alibaba’s China retail GMV and mobile
penetration
4QCY13
Figure 5: Alibaba’s annual active customers in China’s
retail marketplace
Source: Company
3
Equity Research l China Internet
Business model
The company operates four retail platforms and two whole platforms. In FY14, it
generated 83% of revenue from its four retail platforms (Taobao, Tmall, Juhuasuan
and Aliexpress), up from 79.2% in FY13.
Alibaba has four revenue streams: (1) China commerce; (2) international commerce;
(3) cloud computing and Internet infrastructure; and (4) others.
 China commerce: China commerce revenue is Alibaba’s bread and butter,
accounting for 86% of total revenue in FY14. It is also the company’s fastest
growing business, with revenue up 104%/87% /55% in FY12/FY13/FY14.
 International commerce: International commerce revenue contributed 9% of total
revenue in FY14. Revenue growth has decelerated to 17% in FY14, from 31% in
FY11.
 Cloud computing and Internet infrastructure: Alibaba charges service fees for its
cloud computing and Internet infrastructure business. The business line accounted
for 1% of FY14 revenue, with revenue expanding 21%/26%/19% in
FY12/FY13/FY14. Alibaba Cloud Computing offers a complete suite of cloud
computing services, including elastic computing, database services and storage,
and large-scale computing services for its platforms and the platforms of related
companies, such as Alipay, to sellers on its marketplaces, and other third-party
customers, including start-up companies in mobile applications and Internet
gaming and established corporations in digital entertainment, consumer
electronics, financial services, mobile communications, healthcare and education.
It also provides Internet infrastructure services, such as web hosting and domain
name registration.
 Others: This revenue line mainly includes fees from micro-finance services. It
contributed about 3% of total revenue in FY14.
Figure 9: Alibaba’s revenue split (FY13)
Figure 10: Alibaba’s revenue split (FY 14)
China
wholesale
6.4%
China retail
78.1%
Int'l retail
1.1%
Int'l wholesale
10.9%
Cloud
computing and
Internet
finance
1.9%
Others 1.6%
Note: Others mainly includes fees from micro-finance business.
Source: Company
19 June 2014
China
wholesale
4.2%
Int'l retail
1.6%
China retail
82.7%
Int'l wholesale
7.2%
Cloud
computing and
Internet
finance
Others 2.9% 1.4%
Note: Others mainly includes fees from micro-finance business.
Source: Company
4
Equity Research l China Internet
Alibaba’s China retail marketplaces are Taobao marketplace, Tmall, Juhuasuan
and Aliexpress. Together they generated RMB 1,542bn (USD 248bn) of GMV in
2013, 78.6% of which was settled through Alipay. The platforms had 231mn active
buyers and 8mn active sellers on their platforms. The contribution from China mobile
transactions reached 27.4% in 1Q14, up from 10.7% in 1Q13. In addition, Alibaba
had a 76.2% share of China’s mobile commerce sector in 2013 (excluding virtual
items), based on iResearch data. Its China retail marketplaces contributed 82% of
Alibaba’s group revenue in FY14. They generate revenues from the below means:
In FY14, GMV on Tmall increased 100% YoY to RMB 505bn, while Taobao GMV
rose 42% to RMB 1,173bn. The two marketplaces generated RMB 12bn of
commission revenue and RMB 30bn of online marketing service revenue. Groupbuy
marketplace Juhuasuan generated RMB 58.2bn of GMV, in FY14.
Figure 11: China retail market GMV breakdown
Taobao
600
Tmall
500
183
RMB bn
400
135
300
88
91
99
71
42
49
167
179
255
223
257
275
346
295
2QCY12
3QCY12
4QCY12
1QCY13
2QCY13
3QCY13
4QCY13
1QCY14
200
100
0
Source: Company
1) Online marketing services:
 Pay-for-performance (P4P) marketing services: Sellers bid for keywords that
match product or service listings in search or browser results on a cost-per-click
(CPC) basis at prices on an online auction system. P4P marketing services are
both on marketplaces and through third-party marketing affiliates;
 Display marketing: Sellers bid for display positions on the relevant marketplaces
or through third-party marketing affiliates at fixed prices or prices established by
a real-time bidding system on a cost-per-thousand impression (CPM) basis;
 Taobaoke program: Sellers on Taobao marketplace and Tmall pay commissions
based on a percentage of GMV for transactions settled through Alipay from users
sourced from third-party marketing affiliates;
 Placement services: Sellers pay placement fees to purchase promotional slots
on Juhuasuan marketplace for a specific period.
2) Transaction commissions: Sellers on Tmall and Juhuasuan pay a commission
based on 0.3-5% of GMV for transactions settled through Alipay.
3) Storefront fees: Monthly subscription fees for Wangpu, Alibaba’s storefront
software that helps to manage online stores.
19 June 2014
5
Equity Research l China Internet
Figure 12: Commission rate of major online B2C platforms’ marketplace
JD.com
Tmall (Alibaba)
Jumei.com
QQ Mall (Tencent)
Amazon
Apparel
5-9%
5%
14%
5%
15%
Baby and maternity products
1-8%
2-5%
NA
2-5%
15%
Beauty
3-8%
4%
10%
(excluding 9% that is
for fulfilment)
4%
15%
Consumer electronics
6%
2%
NA
2%
8%
Food
2-5%
2-3%
NA
1%
15%
Media
NA
2%
NA
NA
15%
Phone credit recharge
NA
0.3%
NA
NA
NA
Source: Companies
Alibaba’s presence in China’s wholesale market is the online B2B marketplace
1688.com. In FY14, 1688.com accounted for 4% of Alibaba Group revenue. It earns
revenue from:
1) Membership fees and valued-added services: Alibaba sells China TrustPass
membership, which allows wholesalers to host premium storefronts on 1688.com.
Alibaba charges RMB 3,688 per year for China TrustPass membership; competitor
HC International charges RMB 1,994 for its equivalent services. Alibaba also makes
revenue from value-added services such as premium data analytics. As of 1Q14,
Alibaba had 700,000 paying members on its China wholesale platform.
2) Online marketing services: This mainly consists of P4P marketing services and
keyword bidding.
In the international retail market, Alibaba generates revenue from commissions
through its international site AliExpress. The commission rate is c.5% of GMV for
transactions settled through Alipay. In FY14, AliExpress contributed 2% of Alibaba’s
total revenue and generated USD 3.7bn in GMV, USD 2.4bn of which was settled
through Alipay.
The international wholesale market (in which Alibaba is present through
Alibaba.com) contributed 7% of Alibaba Group revenue in FY14. It generates
revenue through membership fees and advertising. According to its IPO filing,
Alibaba plans to expand this marketplace by growing the number of paying members,
and offering additional value-added services such as customs clearance, VAT rebate
services and cross-border logistic solutions.
1) Membership fees and value-added service fees: Alibaba offers Gold Supplier
membership for sellers to host premium storefronts. The basic annual membership
for Gold Supplier is RMB 29,800, compared to RMB 33,700 charged for an
equivalent service by its peer Global Sources. It also provides value-added services
such as product showcasing, customs clearance, value-added tax refund services
and other import/export business solutions. As of March 2014, Alibaba had 123,000
paying members on its international wholesale platform. It had a field sales force of
3,474 people in 78 cities across mainland China, Hong Kong and Taiwan as of end2013, selling membership packages to SMEs who want to establish storefronts on
this marketplace.
2) Online marketing services: Alibaba derives revenue from P4P marketing services.
19 June 2014
6
Equity Research l China Internet
Addressable market
In its IPO filing documents, Alibaba highlights the below points regarding China’s
addressable online retail market:
 The rising disposable spending of Chinese citizens: In 2013, China’s real
consumption accounted for 36.5% of total GDP versus 66.8% in the US
(Euromonitor).
 Online shopping could further penetrate more Internet users: There were 302mn
online shoppers versus 618mn Internet users in China in 2013 (China Internet
Network Information Center).
 Online product categories and service types expansion: Customers are
increasingly accepting more types of products online.
 Growing mobile Internet penetration could foster new e-commerce opportunities,
especially online to offline (O2O) opportunities.
 China’s underdeveloped offline retail infrastructure makes shoppers leapfrog
offline channels in favour of online and mobile channels (retail space per capita:
0.6sqm in China, versus 2.6sqm in the US, 1.3sqm in the UK, 1.3sqm in Japan
and 1.5sqm in Germany, per Euromonitor)
 Logistics continue to improve, which helps to drive e-commerce growth.
Figure 13: Operating metrics comparison
JD.com
Alibaba
Group
Amazon
eBay
Dang
VIPS
Suning
GOME
Jumei
MAU (March 2014, mn)
72
331
NA
NA
37
37
25
23
23
Active customers (2013, mn)
47
231
NA
NA
21
9
NA
NA
11
38.3%
86.3%
NA
NA
41.5%
24.7%
63.3%
84.5%
86.2%
323
11,300
NA
NA
64
49
NA
NA
36
54
23
NA
NA
16
34
NA
NA
27
SKUs (2013, ‘000)
25,700
NA
NA
NA
1,000+
NA
NA
NA
10
Gross GMV (2013, USD mn)
20,917
248,000
125,003
262,993
1,630
2,226
17,549
9,400
984
YoY growth
71.2%
41.0%
28.5%
19.0%
45.2%
171.0%
7.1%
17.8%
150.0%
Agency platform as % of total GMV (2013)
25.3%
100.0%
51.3%
100.0%
38.2%
12.4%
NA
NA
49.4%
Mobile GMV as % of total GMV (2013)
15.0%
19.7%
NA
26.0%
10.0%
23.0%
NA
NA
38.4%
9.9%
75.2%
27.2%
68.6%
17.4%
24.0%
15.2%
15.1%
41.3%
(8)
3,622
274
2,856
(24)
52
62
149
16
Summary
Monthly repeat purchase rate, March 2014
Number of orders (2013, mn)
Average order size, USD 2013
GPM (2013)
Net income / loss (2013, USD mn)
Note: Monthly repeat purchase rate measures the percentage of customers who place orders more than once during the month.
Source: Companies, iResearch
19 June 2014
7
Equity Research l China Internet
Corporate structure
Figure 14: Alibaba corporate structure
Alibaba Group structure
Businesses in list co.
Businesses not in list co.
Small and Micro Finance
Service Company
Taobao
(C2C)
Tmall
(B2C)
Juhuasuan
(Group buy)
Alipay
(related company)
Alibaba Financial
(microfinance)
AliExpress
(Global B2C)
Alibaba.com
(Export B2B)
1688.com
(Domestic B2B)
Alibaba Cloud
China Smart Logistics
(48% owned by Alibaba Group)
Note: Jack Ma holds a substantial majority of the voting power and a significant minority direct equity ownership of the Small and Micro Financial Services Company.
Source: Company
Alipay
The Alibaba Group established its payment subsidiary Alipay in 2004. In 2011, Alipay
was transferred out of the Alibaba Group to comply with any potential future
government shareholder requirements necessary to obtain a payment licence. Jack
Ma holds a substantial majority of voting power and a significant minority direct equity
ownership in the Small and Micro Finance Services Company, which holds Alipay.
Alibaba Group has a framework agreement, a commercial agreement and an
intellectual property and technology agreement to govern its relationship with Alipay.
Since 2011, the Alibaba Group no longer controls or has an ownership interest in
Alipay, although it continues to participate in some of the economic benefits of Alipay
through contractual arrangements.
19 June 2014
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Equity Research l China Internet
 Alibaba’s relationship with Alipay is primarily governed through the framework
agreement dated 29 July 2011, as amended on 15 November 2012 and further
amended on 3 May 2014. The agreement terminates at the earlier of: (1) the
payment in full of the liquidity event payment; and (2) such time when termination
might be required by applicable regulatory authorities in connection with an initial
public offering of Alipay. Upon a liquidity event of Alipay, Small and Micro Financial
Services Company will pay Alibaba an amount equal to 37.5% of Alipay’s equity
value, with a minimum payment of USD 2bn and a maximum of USD 6bn, subject
to changes if no liquidity event occurs by 2017. The agreement implies a USD 5.316bn valuation for Alipay. If a liquidity event has not occurred by 2021, Alibaba has
the right to demand a liquidity event as soon as possible.
 Alipay pays Alibaba a fee equal to the product of an expense reimbursement plus
a royalty and software technology services fee equal to 49.9% of the consolidated
pre-tax income of Alipay and its subsidiaries, subject to downward adjustments
upon certain dilutive equity issuances by Small and Micro Financial Services
Company or Alipay, but in no case below 30.0%.
 In FY12/FY13/FY14, Alibaba recognised royalty and software technology services
fee income, net of costs of RMB 27mn/RMB 277mn/ RMB 1764mn, as other
income.
 In 2013, total GMV on Alipay was USD 519bn, of which USD 195bn was related to
Tmall and Taobao. In other words, 79% of Tmall and Taobao’s GMV was
processed through Alipay. Alipay also settled RMB 74.5bn of GMV for Alibaba’s
China wholesale marketplace 1688.com and USD 2bn for Alibaba’s global retail
marketplace AliExpress in 2013. In FY14, Alipay’s pre-tax income was about RMB
8,242mn
Figure 15: Fee arrangement between Alibaba and Alipay (RMB mn)
Years ended 31 March
FY12
FY13
FY14
FY12
Alibaba paid to Alipay – bank processing fee
1,307
1,646
2,349
1,307
Net payment from Alipay to Alibaba
27
277
1,764
27
Royalty and software technology service fee from Alipay to Alibaba
1,334
1,923
4,113
1,334
Alipay's pre-tax income
2,673
3,854
8,242
2,673
Source: Company
Separately, sellers on Tmall and Taobao are required to contribute and maintain a
consumer fund for the benefit of buyers. The minimum deposit requirement is RMB
50-150k for Tmall sellers and RMB1-10k for Taobao sellers. As of -2013, the
consumer protection funds deposited in Alipay accounts by sellers’ totalled over RMB
12bn.
China Smart Logistics
In May 2013, Alibaba formed China Smart Logistics (CSL) with five major express
delivery companies in China and firms specialising in real estate development. It
committed RMB 2.4bn out of CSL’s RMB 5bn registered capital for a 48% stake. CSL
is an information system that links a network of 14 logistics providers and integrates
an extensive warehouse network and strong data analytics. The network covers 600
cities and 31 provinces in China with more than 1,700 distribution centres and 100K
delivery stations.
19 June 2014
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Equity Research l China Internet
In 2013, the logistics system ensured the delivery of an average of approximately
13.7mn packages per day. To support the expected growth of Alibaba’s ecosystem
over the longer term, CSL plans to build a network of key logistics hubs across
China, including distribution centres, warehouses and other supply chain facilities. Its
goal is to enable China’s logistics and supply chain management industries to
support the delivery of over 100mn packages per day to consumers’ anywhere in
China within 24 hours of an order being placed.
As the build-out of the logistics network is capital intensive, CSL will need to invest in
logistics developments together with third parties that could provide debt and passive
equity financing on a project-by-project basis. Alibaba expects this capital structure
for project development by CSL to result in significant financial leverage for the 48%
of equity capital it has invested in CSL.
Figure 16: China Smart Logistics
China Smart Logistics (Cainiao)
48%
Tmall
Intime Group
Jack Ma as
Cainiao
Chairman
Guojun Shen as
Cainiao
CEO
Forchn
Express delivery
companies
Fosun
Shun Feng
Shen Tong
Yuan Tong
Zhong Tong
Yun Da
Source: Company, Standard Chartered Research
Alibaba partnership
The Alibaba partnership was formed in July 2010. It consists of 27 members, 22 are
Alibaba managers, four are members of the management of Small and Micro
Financial Services Company, and one is a manager of China Smart Logistics. Two
partners who are members of Alibaba management are also members of the
management of Small and Micro Financial Services Company.
New partners are elected annually based on criterion including not less than five
years of tenure and 75% approval of all partners. Each partner has one vote. Each
partner is required to maintain a minimum amount of equity interest in Alibaba during
their tenure as a partner. Alibaba partnership has the exclusive rights to nominate for
shareholder approval a simple majority of the board members. As a result, the
Alibaba partners together have the controlling power in board decisions. If an Alibaba
partnership nominee is not elected by shareholders, the Alibaba partnership has the
right to appoint a different person as interim partner until the next shareholder
meeting.
19 June 2014
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Equity Research l China Internet
VIE structure
Alibaba generates a majority of its revenue directly through its wholly-foreign owned
enterprises, without relying on contractual arrangements to transfer such cash flow
from the variable interest entities to the wholly-foreign owned enterprises. In FY14,
RMB 6.2bn (11.8% of its revenue) was generated by its variable interest entities. As
of 31 March 31 2014, RMB 18.9bn (16.9% of its assets) was held by its variable
interest entities. These assets included RMB 13bn in micro loans Alibaba made in
connection with its SME loan business. These loans were principally funded by
borrowings of RMB 10bn.
Shareholder structure
Figure 17: Alibaba’s shareholder structure
Pre-IPO shareholding
SoftBank Corp.
Strategic investor
34.4%
Yahoo!
Strategic investor
22.6%
Founder, Executive Chairman
8.9%
Executive Vice-chairman
3.6%
Jack Yun Ma
Joseph C. Tsai
Source: Company
In 2000, a group of investors led by SoftBank invested USD 20mn in Alibaba. In
2003, Alibaba established a JV with SoftBank for the development of the predecessor
entity of Taobao Marketplace. Through a series of investments totalling USD 50mn,
SoftBank subscribed for shares in the Taobao predecessor entity. In 2003, SoftBank
purchased USD 30mn in Alibaba convertible notes, which SoftBank subsequently
converted into ordinary shares.
In 2005, Yahoo invested a total of USD 1bn in cash and contributed Yahoo China to
the Alibaba Group for a 40% stake in the Alibaba Group. Yahoo purchased USD
570mn in ordinary shares from certain shareholders and USD 70mn in newly issued
ordinary shares from Alibaba. In conjunction with the strategic investment, Yahoo
also purchased a portion of SoftBank’s shares in the Taobao predecessor entity for
an aggregate amount of USD 360mn, which Yahoo subsequently exchanged for
ordinary shares. SoftBank also exchanged its remaining stake in the Taobao
predecessor entity for ordinary shares and reinvested USD 180mn in convertible
bonds in Alibaba, which were subsequently converted into our ordinary shares.
In October 2005, Alibaba entered into the Technology and Intellectual Property
Licensing Agreement with Yahoo (the Yahoo TIPLA), pursuant to which Alibaba pays
royalty fees to Yahoo. In September 2012, Alibaba restructured the Yahoo TIPLA for
a lump sum payment to Yahoo of USD 550mn.
In 2012, Alibaba also repurchased 523mn of Alibaba’s shares (Yahoo retains a 24%
stake in Alibaba after the transaction) from Yahoo for USD 7,082mn. Alibaba and
Yahoo’s agreement also requires Yahoo to sell an additional 261.5mn ordinary
shares at Alibaba’s IPO, which was amended to 208mn shares in October 2013.
19 June 2014
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Equity Research l China Internet
Financial analysis
Figure 18: Alibaba income statement (RMB mn)
Years ending 31 March
FY10
FY11
FY12
FY13
FY14
Revenue
6,670
11,903
20,025
34,517
52,504
78%
68%
72%
52%
YoY
China commerce
3,716
YoY
As % of revenue
56%
7,665
15,637
29,167
45,132
106%
104%
87%
55%
64%
78%
85%
86%
13,422
26,970
42,832
101%
59%
Retail
YoY
67%
78%
82%
Online marketing service
As % of revenue
9,804
19,697
29,729
Commission
2,915
6,161
12,023
703
1,112
1,080
2,215
2,197
2,300
-1%
5%
Others
Wholesale
YoY
As % of revenue
International commerce
2,620
YoY
As % of revenue
39%
11%
6%
4%
3,433
3,765
4,160
4,851
31%
10%
10%
17%
29%
19%
12%
9%
223
392
938
Retail
Wholesale
3,542
3,768
3,913
(1,634)
(3,497)
(6,554)
(9,719)
(13,369)
5,036
8,406
13,471
24,798
39,135
76%
71%
67%
72%
75%
OPEX
(5,909)
(7,084)
(8,456)
(14,047)
(14,215)
Product development
(1,135)
(2,062)
(2,897)
(3,753)
(5,093)
-17%
-17%
-14%
-11%
-10%
(2,335)
(3,154)
(3,058)
(3,613)
(4,545)
-35%
-26%
-15%
-10%
-9%
(1,000)
(1,724)
(2,211)
(2,889)
(4,218)
As % of revenue
-15%
-14%
-11%
-8%
-8%
Operating profit
(873)
1,322
5,015
10,751
24,920
OPM
-13%
11%
25%
31%
47%
Net income to parent shareholders
(802)
1,183
4,228
8,404
23,076
NA
NA
5,482
13,150
25,920
1,077
1,678
Cost of revenue
Gross profit
GPM
As % of revenue
Sales and marketing
As % of revenue
General and administrative
Non-GAAP net income
Metrics
China retail GMV
YoY
Taobao GMV
YoY
Tmall GMV
YoY
Tmall commission rate
China retail revenue as % of GMV
RMB bn
%
RMB bn
56%
824
%
RMB bn
1,173
42%
253
%
505
100%
%
2.4%
2.4%
%
2.5%
2.6%
Source: Company
19 June 2014
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Equity Research l China Internet
Figure 19: Alibaba quarterly income statement (RMB mn)
Years ending 31 March
Revenue
1Q FY13
2Q FY13
3Q FY13
4Q FY13
1Q FY14
2Q FY14
3Q FY14
4Q FY14
6,793
7,457
11,593
8,674
10,778
10,950
18,745
12,031
59%
47%
62%
39%
5,601
6,152
10,172
7,242
9,193
9,213
16,761
9,965
64%
50%
65%
38%
YoY
China commerce
YoY
As % of revenue
Retail
82%
82%
88%
83%
85%
84%
89%
83%
5,028
5,600
9,588
6,754
8,667
8,645
16,149
9,371
72%
54%
68%
39%
74%
75%
83%
78%
80%
79%
86%
78%
573
552
584
488
YoY
As % of revenue
Online marketing service
Commission
Others
Wholesale
YoY
526
568
612
594
-8%
3%
5%
22%
As % of revenue
8%
7%
5%
6%
5%
5%
3%
5%
International commerce
974
1,049
1,094
1,043
1,117
1,176
1,264
1,294
15%
12%
16%
24%
YoY
As % of revenue
14%
14%
9%
12%
10%
11%
7%
11%
(2,158)
(2,373)
(2,911)
(2,277)
(2,727)
(3,001)
(4,171)
(3,470)
4,635
5,084
8,682
6,397
8,051
7,949
14,574
8,561
68%
68%
75%
74%
75%
73%
78%
71%
Retail
Wholesale
Cost of revenue
Gross profit
GPM
OPEX
(2,290)
(6,190)
(3,622)
(1,945)
(2,631)
(2,701)
(5,773)
(3,110)
Product development
(848)
(888)
(1,163)
(854)
(1,018)
(1,168)
(1,707)
(1,200)
As % of revenue
-12%
-12%
-10%
-10%
-9%
-11%
-9%
-10%
Sales and marketing
(869)
(974)
(1,249)
(521)
(713)
(657)
(1,897)
(1,278)
As % of revenue
-13%
-13%
-11%
-6%
-7%
-6%
-10%
-11%
General and administrative
(514)
(537)
(804)
(1,003)
(545)
(865)
(793)
(2,046)
As % of revenue
-8%
-11%
-9%
-6%
-8%
-7%
-11%
-4%
Operating profit
2,345
(1,106)
5,060
4,452
5,420
5,248
8,801
5,451
35%
-15%
44%
51%
50%
48%
47%
45%
Net income to parent shareholders
1,722
(1,560)
4,045
4,197
4,384
4,883
8,266
5,543
Non-GAAP net income
2,001
2,389
4,338
4,422
4,780
5,747
8,925
6,468
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
209
228
346
294
345
374
529
430
65%
64%
53%
46%
OPM
Metrics
China retail GMV
YoY
Taobao GMV
167
179
255
223
YoY
Tmall GMV
42
49
91
71
YoY
257
275
346
295
54%
54%
36%
32%
88
99
183
135
110%
102%
101%
90%
2.5%
2.3%
3.1%
2.2%
Tmall commission rate
China retail revenue as % of GMV
2.4%
2.5%
2.8%
2.3%
Source: Company
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Equity Research l China Internet
 Gross margin: As a pure marketplace, Alibaba has a high gross margin. The
company’s gross margin was 67%/72%/75% in FY12/FY13/FY14.
 Operating margin: Alibaba’s operating margin was 25%/31%/47% in
FY12/FY13/FY14. Operating margin has expanded significantly over the years,
due to operational leverage and tight control of sales and marketing expense.
Sales and marketing expenses as a percentage of revenue dropped to 9% in FY14
from 15% in FY12.
 Non-GAAP net profit: Excluding share-based compensation, Alibaba generated
RMB 5.5bn (USD 3.5bn) of non-GAAP net profit in FY12, RMB 13.1bn (USD
2.2bn) in FY13, and RMB 25.9bn (USD 4.3bn) in FY14.
 In FY14, G&A expenses included an equity-settled donation expense of RMB
1,269mn (USD 204mn) relating to the grant of options to purchase 50mn ordinary
shares to a non-profit organisation designated by Jack Ma and Joe Tsai.
Figure 20: Alibaba’s balance sheet (RMB mn)
Years ending 31 March
Current assets
Cash and equivalents and short-term investments
Non-current assets
FY10
FY11
FY12
FY13
FY14
NA
NA
27,899
43,162
67,833
-
-
25,056
36,373
48,553
NA
NA
19,311
20,624
43,716
Total liabilities
15,208
9,413
12,797
52,740
70,731
Total equities
26,499
28,417
34,413
11,046
40,818
Source: Company
Figure 21: Alibaba’s cash flow (RMB mn)
Years ending 31 March
FY12
FY13
FY14
Operating cash flow
9,275
14,476
26,379
Investing cash flow
(125)
545
(32,997)
475
(1,406)
9,364
Financing cash flow
Source: Company
Alibaba generated positive operating cash flow of RMB 26bn (USD 4.4bn) in FY14. It
had USD 8.1bn gross cash and USD 6.5bn net cash as of end-FY14.
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Equity Research l China Internet
Financing history and investment smmary
Figure 22: Alibaba’s financing history
Time
Investors
Amount invested
Shareholding
1999
Investor group led by Goldman Sachs
USD 5mn
Undisclosed
2000
Investor group led by SoftBank
USD 25mn
30%
2004
SoftBank, Fidelity, GGV Capital, TDF
USD 82mn
Undisclosed
2005
Yahoo
USD 1bn + Yahoo China
40%
2007
Alibaba B2B IPO
USD 1.5bn
NA
2012
China Development Bank, Citic Capital, Boyu Capital
USD 7.6bn
20%
Source: Media reports
Alibaba Group has raised a total of USD 10bn since its founding, with the largest sum
the USD 7.6bn raised in 2012.
In 2012, Alibaba obtained a USD 4bn credit facility to fund the privatisation of
Alibaba.com and to partially finance the repurchase of ordinary shares from Yahoo in
September 2012. In April 2013, Alibaba obtained another USD 8bn credit facility from
a group of banks. As of March 2014, USD 5bn had been drawn down. In April 2014,
Alibaba drew down the remaining USD 3bn.
As of March 2014, the company had USD 8.1bn gross cash. The investment cash
outflow was USD 5.5bn for FY14. In the table below, we list a number of Alibaba’s
strategic investments in mobile Internet companies in China and overseas as
disclosed by Alibaba’s IPO filing.
Alibaba has accelerated its acquisitions, especially in the mobile and O2O sectors,
since 2013. In a series of transactions between September 2009 and June 2014,
Alibaba acquired 100% of mobile browser UC Web for a total consideration of USD
1.8bn. In the final transaction, Alibaba paid USD 479mn in cash and 12.3mn
restricted share units (RSU) in June 2014 for a 34% stake in UCWeb, implying a
valuation of USD 3.2bn for the company. UCWeb had 264mn monthly active users
globally as of March 2014. Alibaba thinks UCWeb’s mobile user base should add
benefits to its mobile traffic access.
19 June 2014
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Equity Research l China Internet
Figure 23: Alibaba’s major investments over the past two years
Sub-sector
Mobile
O2O
Digital media
Category
expansion
Country
Alibaba's
holding
Deal size
(USD mn)
Mobile web browser
China
100%
1,780
4/29/2013 & 4/2014 Weibo
Social networking
China
30%
1,035
4/2014
TangoMe
Mobile messaging
US
20%
217
5/2013 and 4/2014
AutoNavi
Map content provider
China
28%
1,426
3/2014
Intime retail
Department store
China
10% (with CB to
increase to 26%
upon conversion)
213
4/2014
Youku Tudou
Online video
China
16.5%
1,090
3/2014
ChinaVision Media
Movie and TV content producer
China
60%
801
4/2014
Wasu Media
Digital media broadcasting and
distribution
China
not disclosed
Undisclosed
4/2014
Citic 21CN
Product identification,
authentication and tracking system
China
38%
119
5/2013
Cainiao
Logistics infrastructure and
information system
China
48%
400
3/2014
Haier Electronics
Electrical appliances manufacturer
and distributor
China
2%
193
FY14
ShopRunner
e-commerce
US
39%
202
6/2014
Guangzhou Evergrande
Football club
Football Club
China
50%
200
Time
Investee
Investee's nature
9/2009, 4/2013,
4/2014, 6/2014
UCWeb
Logistics
e-commerce
Football
Source: Company
On 9 December 2013, Alibaba formed a strategic investment with Haier (1169 HK,
Outperform, PT HKD 25.00) with the below arrangements: (1) Alibaba invests HKD
1,857mn (USD 238mn) in Haier’s logistics business unit Goodaymart Logistics and
form a JV with Goodaymart Logistics; (2) Alibaba subscribes for a 9.9% stake in
Goodaymart Logistics for HKD 541mn (USD 69mn); (3) Alibaba subscribes for
Haier’s newly issued shares (c.2% of enlarged capital); (4) Alibaba subscribes for a
three-year convertible bond totaling HKD 1,316mn (USD 169mn). The CB can be
converted into a 24% stake in Goodaymart Logistics or shares in Haier Electronics in
the future.
Figure 24: Haier’s end-to-end logistics solution tailored for customers
Manufacturing
Distribution
Point of Purchase
Consumption
Truckload
Less than
Truckload
Last mile
Source: Company
19 June 2014
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Equity Research l China Internet
Risks
 Counterfeit products: As a marketplace, Alibaba has limited means of controlling
counterfeit product problems.
 The ever-evolving mobile Internet sector could pose challenges for Alibaba.
 Competition from other Chinese Internet giants and their affiliates such as Tencent
and JD.com.
 Alibaba relies on Alipay to conduct all payment processing and escrow services.
Alipay’s business is subject to regulatory risk.
 Fraudulent transactions or ‘phantom transactions’ conducted by sellers with
themselves or collaborators in order to artificially inflate their own ratings on the
marketplaces.
 Potential risk associated with the SME micro-loan business.
 Alibaba partnership structure.
 In 2006, six China regulatory agencies adopted the M&A Rules, which require that
an offshore special purpose vehicle formed for the purpose of an overseas listing
of a Chinese company obtain the approval of the CSRC prior to the listing. Alibaba
believes that it does not require the CSRC approval as its first foreign-invested
enterprise was established in 1999 and it did not acquire any equity interest or
assets of a Chinese company owned by its controlling shareholders, Chinese
companies or individuals. The CSRC could take actions requiring Alibaba to halt
the offering before settlement.
 Alibaba conducts its P4P marketing services through its wholly-foreign owned
enterprises in China, which are not qualified to operate an online ad business and
do not hold an ICP licence. Alibaba believes its P4P services are currently not
classified as a form of online ad in China. If new regulations characterise P4P as a
form of online advertising or as part of ICP services requiring an ICP licence or
other licences, Alibaba could have to conduct its P4P business through the
variable interest entities.
19 June 2014
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Equity Research l China Internet
Disclosures appendix
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard
Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, ”SCB”)
and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES.
Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and
attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other
subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views
contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
Where “disclosure date” appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the
date of the report, unless otherwise stated.
Recommendation and price target history for Haier Electronics Group
HKD
26.00
8
21.82
9
6 7
17.64
4 5
13.46
3
1
2
9.28
5.10
Jul-11
Date
1 4 Feb 12
Oct-11
Jan-12
Recommendation
Apr-12
Price target
Jul-12
Date
Oct-12
Jan-13
Recommendation
Apr-13
Jul-13
Price target
Oct-13
Date
Jan-14
Recommendation
Apr-14
Jul-14
Price target
OUTPERFORM
12.00
4 6 Aug 13
OUTPERFORM
16.00
7 31 Oct 13 OUTPERFORM
18.90
2 23 Aug 12 OUTPERFORM
11.30
5 29 Aug 13 OUTPERFORM
15.70
8 10 Dec 13 OUTPERFORM
26.00
18.30
9 28 Apr 14 OUTPERFORM
25.00
3 14 Jan 13 OUTPERFORM
13.50 6 8 Oct 13
Source: FactSet prices, SCB recommendations and price targets
OUTPERFORM
Recommendation Distribution and Investment Banking Relationships
% of covered companies
currently assigned this rating
% of companies assigned this rating with which SCB has provided
investment banking services over the past 12 months
OUTPERFORM
54.4%
12.7%
IN-LINE
35.4%
11.5%
UNDERPERFORM
As of 31 March 2014
10.2%
7.7%
Research Recommendation
Terminology
OUTPERFORM (OP)
IN-LINE (IL)
UNDERPERFORM (UP)
Definitions
The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months
The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next
12 months
The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months
SCB uses an investment horizon of 12 months for its price targets.
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Equity Research l China Internet
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