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COMPANY NOTE

Initiating Coverage

27 October 2014

CHN | Technology | Internet

BUY
Price target $118.00
Price $95.76

The Powerful E-Commerce Ecosystem


Connecting Half of China; Initiate at Buy
Key Takeaway
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
Chinese population will be shopping on Alibabas platforms in 10 years. Initiate
with Buy; PT USD118.
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, Chinas e-Commerce growth for the
next decade benefit from: 1) changing Internet user demographics towards 30+ year old
age groups; 2) accelerating structural shift to online from traditional retail; 3) Chinese
governments 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.
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 the
Chinese population in 10 years, up from less than 25% now. We estimate FY14-17E revenue
CAGR of 36%, driven by continued commission revenues from Tmall. Alibabas mobile
GMV accounted for 32.8% of total GMV in FY1Q15, +21pcpt YoY. We expect the mobile
monetization rate to narrow the gap with that of PC.

Financial Summary
Book Value (MM):
Book Value/Share:
Net Debt (MM):
Return on Avg. Equity:
Long-Term Debt (MM):
Cash & ST Invest. (MM):

Market Data
52 Week Range:
$99.70 - $82.81
Total Entprs. Value (MM):
$238,140.2
Market Cap. (MM):
$238,557.3
Insider Ownership:
12.8%
Institutional Ownership:
54.6%
Shares Out. (MM):
2,491.2
Float (MM):
NA
Avg. Daily Vol.:
NA
Cynthia Meng *
Equity Analyst
+852 3743 8033 cmeng@jefferies.com

Brian Pitz
Equity Analyst

Cross-border e-Commerce provides 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 Chinese online shoppers.

(212) 336-7413 bpitz@jefferies.com

Brian Fitzgerald
Equity Analyst
(212) 284-2491 bfitzgerald@jefferies.com

Karen Chan *
Equity Associate
+852 3743 8017 kchan2@jefferies.com

Nick Wang *
Equity Associate

Valuation/Risks
Our 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-Commerce
peer group. Risks: limited ability to influence corporate matters by individual shareholders
and potential conflict of interest arising from the companys corporate structure.
RMB

Prev.

2014A

Prev.

2015E

2016E

2017E

Chg (% YoY)

--

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 NonGAAP

-- 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%

--

$1.90

--

$2.06

--

$2.92

--

$3.79

--

46.3%

-- 105,040.0

Prev.

-- 52,504.0
52.1%

-- 76,812.0

Prev.

Rev. (MM)

--

36.7%

-- 132,115.0
--

25.8%

EPS
FY Dec
FY P/E

Rmb40,818.0
Rmb17.50
(Rmb2,557)
106.5%
Rmb30,711.0
Rmb43,632.0

+852 3743 8059 nick.wang@jefferies.com

Qin Wang *
Equity Associate
+852 3743 8016 qin.wang@jefferies.com

* Jefferies Hong Kong Limited


Jefferies LLC

Price Performance
100

95

90

85

50.4x

46.5x

32.8x

25.3x

80
SEP-14

OCT-14

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 a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment
decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 126 to
130 of this report.

EQUITY RESEARCH CHINA

Alibaba (BABA)

BABA
Initiating Coverage

Alibaba Group

27 October 2014

BUY: USD118 Price Target

Target Investment Thesis

Upside Scenario

Downside Scenario

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 Chinas eCommerce market

M-Commerce shows stronger-thanexpected growth.

PT of USD143 derived from DCF based


on WACC of 10%, terminal growth rate
of 6% and long-term EBIT margin of
47.3%

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%

Long Term Analysis


1 Year Forward P/E

Stronger-than-expected GMV growth


driven by successful execution of
lower-tier city penetration and crossborder business

Long Term Financial Model Drivers

Share price

LT Earnings CAGR

100

38x
95

36x

85

Source: Bloomberg, Jefferies

150%

82.1x

80x
70x
60x

40x

Vipshop

100%

50x
35.3x

40.1x

30x

50%

20x

Amazon

Alibaba

16.0x

10x
0x

Alibaba

Vipshop

Amazon

eBay

Source: Bloomberg, Jefferies.

Catalysts

Stronger-than-expected mobile
monetization

Successful execution of cross-border eCommerce business

Deepening lower-tier city/rural


penetration

Economic benefits from growing


Internet finance business of Small and
Micro Financial Services Company

PT of USD75 derived from DCF based


on WACC of 11.5%, terminal growth
rate of 4% and long-term EBIT margin
of 37.8%

Recommendation / Price Target

30x

90x

Execution of cross-border business and


mobile e-Commerce growth are below
expectation.

Earnings Growth vs P/E

0%
-12%

80

Peer Group
Group CY15 P/E

Note: our LT earnings CAGR & organic revenue


growth is annualised growth from FY14-17E.
Operating margin expansion calculated from
FY14-17E.

32x

Operating Margin Expansion

70

GMV growth slows down as a result of


market share loss to competitors

Chinas 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, eCommerce sales is expected to account
for 10.4% of total retail sales in 2014 and
16.6% in 2018.

36%

Acquisition Contribution

75

Other Considerations

28%

Organic Revenue Growth

34x

90

THE LONG VIEW

Scenarios

0%
0.0x

Ticker

Rec.

PT

BABA US

Buy

USD118

VIPS US

Buy

USD280

JD US

Buy

USD38

AMZN US

Buy

USD380

Hold

USD55

EBAY US

eBay
20.0x

40.0x

60.0x

80.0x

100.0x

Source: Bloomberg, Jefferies.

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.

page 2 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

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

page 3 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

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page 4 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

Alibaba Group Investment Summary


We are initiating coverage of Alibaba at Buy, with a price target of USD118.
Chinas 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 Alibabas 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, Chinas 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 governments 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 mobiletargeted promotional efforts, Alibabas 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
Alibabas large and growing ecosystem is supported by its expanding logistics platform
and Alipay which accounted for 48.8% of Chinas 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.

page 5 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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
Chinas e-Commerce players given that JD.com operates an online direct sales model
while Vipshop focuses on a niche flash sales market. Among Chinas 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. Chinas 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 Chinas 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.

page 6 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 1: DCF Analysis
Fiscal Year
Revenue (in RMB mn)

2015E

2016E

2017E

76,812

105,040

132,115

% Y/Y Growth

46.3%

D&A

1,755

Depr % revenue

36.7%
2,468

2.3%

EBIT

34,486

2.3%
46,382

25.8%
3,388
2.6%
58,467

2018E

2019E

2020E

2021E

2022E

2023E

161,715

193,170

225,734

258,603

292,029

327,119

22.4%
4,451
2.8%
71,566

19.5%
5,658

16.9%

2.9%
85,100

14.6%

7,000

12.9%

8,459

3.1%

114,185

3.4%

400,313

11.1%

11,644

128,068

2025E

363,403

12.0%

10,012

3.3%

99,446

2024E

3.6%

15,153

3.7%

142,475

157,188

44.9%

44.2%

44.3%

44.3%

44.1%

44.1%

44.2%

43.9%

43.6%

43.3%

% Y/Y Growth

17.3%

34.5%

26.1%

22.4%

18.9%

16.9%

14.8%

12.2%

11.2%

10.3%

29,919

Implied Taxes on Operations

(4,567)

% Effective Tax Rate

39,425
(6,957)

13.2%

Capital Expenditures

(9,526)

% of sales

15.0%
(10,564)

12.4%

Change in Net Working Capital

21,068

% of sales

10.1%
10,659

27.4%

Unlevered Free Cash Flow

43,217

10.1%

41,988

49,697
(8,770)
15.0%
(11,965)
9.1%
10,180
7.7%

51,299

60,831

72,335

84,529

97,057

108,858

121,104

(10,735)

(12,765)

(14,917)

(17,128)

(19,210)

(21,371)

15.0%
(14,323)
8.9%
11,327
7.0%

62,287

15.0%
(16,915)

15.0%
(19,654)

8.8%
12,045

8.7%

4.5%
2,749,245

5.0%
3,014,883

5.5%
3,337,344

6.0%
3,737,045

(25,134)

8.7%

84,339

95,705

106,546

9.4%
(25,793)

15.0%
(30,914)

8.6%

15.0%
(33,853)

8.5%

13,448

4.4%

43.0%
146,160

(23,578)

(27,990)

12,810

4.9%

133,610

15.0%

8.6%

12,575

5.5%

Perpetuity Growth Rate / Terminal Value at 10.2% WACC

15.0%

(22,386)

12,464

6.2%

73,124

15.0%

3.8%
171,953

% Margin
EBIT*(1-tax)

10.2%

13,359

8.5%

13,906

4.1%

14,146

3.8%

118,206

129,962

3.5%

141,606

Implied Terminal Value / Terminal EBITDA Multiple

6.5%

19.3x

4,245,514

Median DCF Valuation

21.2x

2,749,245

3,014,883

WACC

23.4x
3,337,344

26.2x
3,737,045

29.8x
4,245,514

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

2,491

12.2%

76.1

78.9

82.2

85.9

90.3

No. of ADS outstanding (mn)


Implied Equity Value per Share (RMB)

729.0

Spot Exchange Rate

0.16

Implied Equity Value per Share (US$)


WACC Calculation
Target Debt/Total Cap. Ratio

$117.6

28.0%

10-year T-bond yield


Risk-free rate (Rf)

2.2%
2.2%

Applied Beta
Equity risk premium (ERP)

1.2
9.0%

Cost of equity (Re)


(CAPM: Re= Rf + adj x ERP)

13.1%

Weighted average yield of debt (Rd)

3%

Effective tax rate (Tc)


Rwacc
=

15%

= [Re x E/V] + [(1-Tc) x Rd x D/V]


10.2%

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. Paypals 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 Paypals EV/S and our estimated Small and
Micro Financial Services Companys 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.

page 7 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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
Scenario

#1

#2

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


Premium/(Discount) to Paypal

#5

10%

20%

-10%

2.9x

3.2x

EV/S assumption
EV of Small and Micro Financial Services Co. (USD mn)

(2)

3.6x

3.9x

4.3x

43,382

48,805

54,227

59,650

65,073

14,316

16,105

19,684

21,474

6.7%

7.3%

(3)

Incremental equity value to Alibaba (USD mn)

33%

Alibaba's current target market cap (USD mn)


Upside with 33% equity interest of Small and Micro

0%
15,132

Co. (USD mn)

Financial Services Company

#4

-20%

Estimated revenue of Small and Micro Financial Services

Equity interest to be acquired by Alibaba

#3
3.6x

17,895
292,892

4.9%

5.5%

6.1%

Note: (1) Paypals 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. Alibabas two major
shareholders, SoftBank and Yahoo, have also agreed to vote their shares in favor of the
partnerships 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
Alibabas 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 Alibabas reputation.

page 8 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 3: Alibaba forward P/E band

Source: Bloomberg, Jefferies

page 9 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 4: Peer Comparison Table
Ticker

Company

FX

Last Close

BABA US

Alibaba

USD

95.8

JD US

JD.com

USD

VIPS US

Vipshop

JMEI US

Market Cap
USD mn

PE

EV/Sales

Price to Sales

PEG

ROE

Rating

FY14

FY15

FY16

FY14

FY15

FY16

FY14

FY15

FY16

FY14

FY15

FY16

FY14

FY15

FY16

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

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

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

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

China e-Commerce Average

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

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%

ASC LN

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


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
Buy

China Game Average

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%

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

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

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%

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

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%

Note: Alibabas 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

page 10 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

Changing Demographics and Mobile Support ECommerce in the Next Decade


Chinas 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 Chinas E-Commerce Power published on
Sept 19, 2014, Chinas 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.

Chinas 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.cns 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.

page 11 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

Changing Demographics and Mobile Support ECommerce in the Next Decade


Chinas 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, Chinas 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)
Chinas 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%.

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


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

B2C market is estimated to account


for 48% of total online retail sales in
2014 and 62% in 2018.

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

page 12 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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 governments 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,
Chinas 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: Chinas population and urbanization rate
According to the National Bureau of
Statistics, Chinas 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.

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: Chinas disposable income per capita of urban residents

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.

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.

page 13 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 9: Chinas urban household distribution by annual income
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.

<RMB10,000
RMB10-20K
RMB20-30K
RMB30-40K
RMB40-50K
RMB50-60K
RMB60-70K
RMB70-80K
RMB80-90K
RMB90-100K
% of household with annual
income between RMB50-100K

2005
4.9%
23.7%

2006
3.3%
19.2%

2007
2.1%
13.4%

2008
1.5%
9.9%

2009
0.9%
7.6%

2010
0.7%
5.5%

2011 2011 vs. 2005


0.4%
-4.5%
3.6%
-20.1%

26.8%
18.3%
10.7%
5.9%
3.5%
2.0%
1.3%
0.9%

25.3%
19.8%
12.3%
7.3%
4.3%
2.7%
1.7%
1.1%

21.9%
20.2%
14.4%
9.5%
6.1%
3.9%
2.5%
1.6%

17.7%
18.3%
15.0%
10.8%
7.8%
5.3%
3.7%
2.6%

14.8%
17.0%
15.5%
11.7%
8.9%
6.5%
4.5%
3.1%

11.8%
15.5%
15.3%
12.5%
9.6%
7.4%
5.4%
4.1%

8.4%
12.8%
13.8%
12.8%
10.7%
8.3%
6.3%
4.7%

-18.4%
-5.4%
3.1%
6.9%
7.3%
6.3%
5.0%
3.8%

13.6%

17.1%

23.6%

30.1%

34.8%

39.0%

42.9%

29.3%

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 Chinas 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

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.

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%.

page 14 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 11: Average spending per online shopper in China

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 201318 CAGR of 12%.

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


Low penetration of Internet, consumption, e-Commerce and online shoppers
Chinas relatively low penetration of Internet, consumption, e-Commerce and online
shoppers compared to developed countries suggests ample room for growth. Chinas
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. Chinas 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

Chinas 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.

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


Chinas 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.

page 15 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 13: Chinas household consumption expenditure
growth (2003-2013)

Chart 14: Comparison of household consumption


expenditure in China Vs. US (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 Chinas National
Bureau of Statistics.

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 owneroccupied 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 Chinas online penetration of retail
sales reaching 10.1% in 2Q14. Chinas e-Commerce market growth is expected to
continue outpace that of the U.S. We estimate Chinas 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.

China surpassed the U.S. to be the


largest e-Commerce market by GMV
in 2013, according to iResearch and
eMarketer estimates, with Chinas
online penetration of retail sales
reaching 10.1% in 2Q14.
Chinas e-Commerce market growth
is expected to continue outpace that
of the U.S. We estimate Chinas eCommerce to account for 10.4% of
total retail sales by YE2014,
compared to 6.4% in the U.S. as
estimated by eMarketer.
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.

page 16 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 16: E-Commerce penetration of population and Internet users
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.

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

Chart 17: Summary of key penetration statistics in China


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%

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%

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%

16.7%

12.1%

7.6%

9.2%

8.6%

4.5%

4.4%

3G/4G (% of total mobile subs)

YoY%

Smartphone
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%

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

page 17 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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 Chinas
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
We estimate Chinas 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.

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


Chart 19: Chinas wireless penetration as percent of population

We expect wireless penetration in


China to reach 105% by 2016,
14pcpt higher than that in 2013,
driven by multiple connected
devices.

Source: Company data, MIIT, Jefferies

page 18 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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: Chinas m-Commerce market size by GMV

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 eCommerce market, and
RMB2,174bn in 2015, +130% YoY.

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 eCommerce 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 Chinas 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 yearover-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 Chinas total retail sales

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.

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

page 19 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 22: 1H14 offline retail company ranking
Retail stores

Ranking
1

3
4
5
6
7
8
9
10
11
12
13
14
Department
store

15
16

17

18
19
20
21
22
23
24
25
26
27
28
29
30

Revenue

YoY %

Net profit

(RMB bn)

change

(RMB bn)

YoY %

Company (CN)

Company (EN)

Dashang Co., Ltd (SHA: 600694)

17.0

-3.3%

0.8

7.6%

Chongqing Department Store Co., Ltd(SHA: 600729)

15.1

-5.4%

0.4

-9.6%

Department store

7.4

-2.3%

Supermarket

4.6

-11.3%

Electronics superstore

change

2.6

-6.6%

Wanda Department Store

11.1

62.0%

Shanghai Yuyuan Tourist Mart Co., Ltd(SHA: 600655)

10.0

-25.3%

0.3

-36.8%

Parkson Department (HKEX: 3368 HK)

10.0

-4.5%

0.3

-22.1%

Beijing Wangfujing Department Store (SHA: 600859)

9.4

-6.0%

0.4

2.1%

Wuhan Department Store Group Co., Ltd (SHE: 000501)

8.6

0.6%

0.4

37.3%

Rainbow Department Store Co., LTD (SHE:002419)

8.2

0.6%

0.3

-6.2%

Golden Eagle Retail Group (HKEX: 3308 HK)

7.9

-7.9%

0.5

-23.2%

Intime Retail Group Co.,Ltd (HKEX: 1833 HK)

7.9

1.7%

0.5

-30.7%

Silver Plaza Group Co., Ltd (SHA:600858)

7.2

-1.1%

0.2

-5.2%

Commercial revenue

7.1

0.1%

Beijing Capital Retailing Group Co.,Ltd (SHA: 600723)

6.0

-3.0%

0.1

-41.7%

Springland International Holding Ltd (HKEX: 1700 HK)

5.8

0.2%

0.4

-4.5%

Department store

4.4

-1.7%

Supermarket

1.4

6.6%

ChangChun Ouya

5.8

11.6%

0.1

18.7%

Maoye International HoldingsLimited (HKG: 0848)

5.6

-3.2%

0.4

7.2%

Hefei Department Store Group Co., Ltd (SHE: 000417)

5.3

-2.4%

0.2

-6.8%

Lifestyle International Holding Ltd (HKEX: 1212 HK)

5.2

0.8%

0.8

-7.2%

Hong Kong Business

0.4

5.0%

Suzhou Jiuguang

3.2

0.3%

Shanghai Jiuguang

7.3

-5.6%

31.0%

Dalian Jiuguang

-17.6%

Beiren Group

4.3%

Wuxi Commercial Mansion Grand Orient Co., Ltd (SHA:600327)

4.4

-0.5%

0.1

Guangzhou Grandbuy Co., Ltd (SHE: 002187)

3.9

-3.0%

0.1

7.5%

Xinjiang Youhao (Group) Co.,Ltd (SHA: 600778)

3.9

-22.9%

0.1

-75.9%

Nanjing Central Emporium (SHA: 600280)

3.8

-5.6%

0.3

16.1%

AEON Stores (Hong Kong) Co., Ltd (HKEX: 0984 HK)

3.5

5.9%

0.1

411.4%

Mainland China

2.0

11.3%

Hong Kong

1.5

-0.4%

Yinchuan Xinhua Commercial Group Co., Ltd (SHA: 600785)

3.4

2.3%

0.2

39.9%

Hunan Friendship & Apollo Commercial Co., Ltd (SHE: 002277)

3.1

-3.8%

0.3

-9.8%

Wuhan Zhongnan Commercial Group Co., Ltd (SHE: 000785)

2.2

1.2%

0.0

-23.0%

Changsha Tongcheng Holding Co., Ltd (SHE: 000419)

2.2

2.5%

0.1

-16.1%

Beijing Cuiwei Tower Co., Ltd (SHA: 603123)

2.2

-12.0%

0.1

-34.7%

Xi'an Minsheng Group Co., Ltd (SHE: 000564)

2.0

2.8%

0.0

-4.0%

Zhejiang China Commodities City Group Co., Ltd (SHA: 600415)

2.0

10.6%

0.2

-50.3%

Xi'an Kaiyuan Investment Group Co., Ltd (SHE: 000516)

2.0

4.2%

0.1

51.0%

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


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

page 20 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 23: 1H14 offline retail company ranking (contd)
Retail stores

Ranking
31
32
33
34
35
36
37
38
39
40
41

Department

42

store

43
44
45
46
47
48
49
50
51
52
53
54

3
4
5
6
Supermarket

7
8
9
10
11
12
13
14

home
appliance
stores

1
2
3
4
5

Net profit

change

(RMB bn)

YoY %

Dalian Friendship Group Co., Ltd (SHE: 000679)

1.8

5.7%

0.1

0.8%

Guangzhou Friendship Group Co., Ltd (SHE: 000987)

1.7

-20.0%

0.1

-23.2%

Zhongxing Shenyang Commercial Building Group Co., Ltd (SHE: 000715)

1.7

-10.6%

0.0

-15.2%

Shanghai Yimin Commerce Group Co., Ltd (SHA: 600824)

1.7

1.2%

0.1

5.1%

Shanghai New World Co., Ltd

1.6

-1.1%

0.1

-3.1%

Haining China Leather Market Co., Ltd (SHE: 002344)

1.4

-16.6%

0.6

2.1%

Nanning Department Store Co., Ltd (SHA: 600712)

1.3

-12.8%

0.0

-53.0%

Beijing Urban Rural Trade Centre Co., Ltd (SHA: 600861)

1.2

-10.2%

0.0

-2.4%

Chengshang Group Co., Ltd (SHA: 600828)

1.1

1.7%

0.2

99.3%

Shanghai Xujiahui Commercial Co., Ltd

1.0

-4.1%

0.1

2.0%

Kunming Sinobright (Group) Co., Ltd (SHE: 000560)

1.0

13.3%

0.1

411.7%

Shenyang Commercial City Co. Ltd (SHA: 600306)

0.8

-17.1%

(1.2)

-12.7%

Hangzhou Jiebai Group Co., Ltd (SHA: 600814)

0.8

-18.6%

0.0

-43.6%

Lanzhou Minbai Shareholding (Grp) Co (SHA: 600738)

0.6

-16.3%

0.1

-978.0%

Century Ginwa Retail Holdings Ltd (HKG: 0162)

0.7

-7.0%

0.1

-49.0%

Hit Shouchuang Technology Co., Ltd (SHA: 600857)

0.6

-28.0%

0.0

47.9%

Shirble Department Store Holdings China Ltd (HKEX: 0312 HK)

0.6

-8.0%

0.0

118.0%

Baida Group Co., Ltd (SHA: 600865)

0.5

-23.0%

0.1

110.0%

JiahuaStores Holdings Limited (HKG:0602)

0.4

-5.4%

0.2

-16.0%

Tianjin Quanyechang (SHA: 600821)

0.4

-27.8%

0.0

Renhe Commercial Holdings Company Ltd (HKEX: 1387)

0.3

5.0%

(0.9)

-385.9%

Minsheng Holdings Co., Ltd (SHE: 000416)

0.2

-5.1%

0.0

174.0%

Changchun Department Jituan Store Co., Ltd (SHA: 600856)

0.2

-5.3%

0.0

-86.6%

Junefield Department Store Group Ltd (HKG: 0758)

0.1

275.0%

(0.1)

-371.0%

206.7

-2.0%

7.7

-20.6%

Sun Art Retail Group Ltd (HKEX: 6808 HK)

48.0

7.9%

1.7

8.5%

China Resource Vanguard Co., Ltd

41.7

9.8%

0.6

9.9%

Yonghui Superstores Co., Ltd (SHA: 601933)

17.7

22.8%

0.5

16.4%

ZhuhaiHoldings Investment GroupLtd (HKG: 0908)

15.0

-3.7%

0.1

-48.8%

Wumart Store Inc (HKEX: 1025 HK)

10.4

9.2%

0.3

-9.8%

Zhongbai Holdings Group Co Ltd (SHE: 000759)

8.8

3.2%

0.1

-10.9%

Beijing Hualian Hypermarket Co., Ltd (SHA: 600361)

6.8

5.6%

0.1

276.5%

Better Life Commercial Chain Share Co., Ltd (SHE: 002251)

6.4

11.4%

0.3

13.3%

Renrenle Commercial Group Co., Ltd (SHE: 002336)

6.3

-3.8%

0.0

17.0%

CP Lotus Corp (HKEX: 0121 HK)

5.5

1.8%

(0.0)

17.0%

Beijing Jingkelong Company Ltd (HKEX: 0814 HK)

5.4

6.8%

0.0

-39.3%

New Huadu Supercenter Co., Ltd (SHE: 002264)

3.7

-3.6%

0.0

164.9%

Chengdu Hongqi Chain Co., Ltd (SHE: 002697)

2.4

9.1%

0.1

3.1%

Sanjiang Shopping Club Co., Ltd (SHA: 601116)

2.3

-5.3%

0.1

-24.4%

(+)

Subtotal

Electronics &

YoY %

(RMB bn)

Company (EN)

Subtotal

Revenue
Company (CN)

change

14.3%

180.5

7.3%

3.8

Suning Commerce Group Co., Ltd (SHE: 002024)

51.2

-7.9%

(0.7)

-202.1%

GOME Electrical Appliances Holdings Ltd (HKEX: 0493 HK)

29.1

7.4%

0.7

115.2%

Jiangsu Hongtu High Technology Co., Ltd. (SHA: 600122)

6.2

5.1%

0.1

-5.9%

Huiyin Household Appliances Holdings Co., Ltd (HKEX: 1280 HK)

1.5

16.9%

0.0

-60.3%

Sanlian Commercial Co., Ltd (SHA: 600898)

Subtotal
Total

5.8%

0.4

5.2%

0.0

23.3%

88.4

-2.0%

0.1

-93.9%

475.6

1.3%

11.6

-20.3%

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


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

page 21 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Due to the wide disparity of consumer taste and purchasing power among regions,
Chinas 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, Chinas 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

Retail space per capita of 0.6 square


meters in China was also
significantly lower than other
developed countries, according to
Euromonitor International.

Source: Euromonitor International, Jefferies

page 22 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 25: Scenario analysis of Chinas e-Commerce market size
Market size data (in RMB bn)

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 Chinas e-Commerce
market size estimates.

Overall China retail sales

2013

2014E

2015E

23,781

26,590

29,999

YoY growth %
Traditional retail sales

11.8%

12.8%

21,889

23,830

26,219

8.9%

10.0%

1,892

2,760

3,780

45.8%

37.0%

YoY growth %
E-Commerce sales
YoY growth %

Scenario

#1

#2

#3

#4

#5

YoY growth assumption of traditional retail sales

5%

2%

0%

-2%

-5%

25,022

24,307

23,830

23,353

22,639

4,977

5,692

6,169

6,645

7,360

80%

106%

124%

141%

167%

32%

51%

63%

76%

95%

2015 Traditional retail sales (RMB bn)


Implied 2015 e-Commerce sales
YoY growth %
Upside to 2015 e-Commerce market est.

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 Chinas eCommerce 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,
implied e-Commerce market size will reach RMB6,645bn, representing 76% upside to
current market estimate.
Results of scenario five: assuming traditional retail sales decline by 5% YoY in 2015,
implied e-Commerce market size will reach RMB7,360bn, representing 95% upside to
current market estimate.

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

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BABA
Initiating Coverage
27 October 2014

Alibaba - The Powerful E-Commerce


Ecosystem Connecting Half of China

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BABA
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27 October 2014

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BABA
Initiating Coverage
27 October 2014

Alibabas 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: Alibabas e-Commerce ecosystem
Alibabas 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.

Source: Company data, Jefferies


Note: Alipay, SME loan and Yue 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

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.

Rank

Company

Country

GMV (USD bn)

Alibaba

China

248.0

Amazon

U.S.

116.4

eBay

U.S.

87.5

JD.com

China

20.7

Rakuten

Japan

16.5

Staples

U.S.

10.4

Walmart

U.S.

10.0

Otto Group

Germany

8.3

MercadoLibre

Argentina

7.8

10

Groupon

U.S.

5.8

Source: IDC as of May 2014, Jefferies

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BABA
Initiating Coverage
27 October 2014
Alibabas 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: Alibabas revenue mix in FY1Q15


China and international commerce
accounted for 84.6% and 9.3% of
Alibabas FY1Q15 revenue
respectively, with the remaining
contributed by cloud computing,
Internet infrastructure and others
(mainly interest income from micro
loans).

Source: Company data, Jefferies


Chart 29: Alibabas China commerce revenue mix in
FY1Q15

Chart 30: Alibabas international commerce revenue mix in


FY1Q15

Source: Company data, Jefferies


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

Source: Company data, Jefferies


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

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BABA
Initiating Coverage
27 October 2014
China commerce retail (94.7% of FY1Q15 China commerce revenue)
Taobao, Tmall, Juhuasuan
Alibabas China commerce retail business, comprising Taobao Marketplace, Tmall and
Juhuasuan, in aggregate contributed 81.6% of Alibabas 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 (), can get access to a suite of
store management and decoration tools, including store logo, customized
storefront, product recommendation column.

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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.
Tmalls 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 Tmalls


revenue in the long term.
Juhuasuan
Launched in 2010, Juhuasuan is Chinas 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.
Juhuasuans 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
typically ranging from 0.3% to 5% of GMV for transactions settled through
Alipay depending on the product category.

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

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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
commerce revenue)

wholesale

(75.6%

of

FY1Q15

international

Alibaba.com (international B2B)


Launched in 1999, Alibaba.com is the first online commerce platform and Chinas 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%.

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BABA
Initiating Coverage
27 October 2014
Chart 31: Alibabas monetization model (as of FY14A)
China commerce revenue (86%)
Retail B2C (94.9%)
Online marketing
(69.4%)
Tmall
Taobao
Juhuasuan

Commission (28.1%)

Storefront fee (2.5%)

Tmall
Juhuasuan

Taobao

Wholesale B2B (5.1%)


Membership fee
Online marketing (mainly
(74.1%)
P4P) (25.9%)
1688.com
1688.com

International commerce revenue (9.2%)


Retail B2C (19.3%)
Third-party marketing
(20.5%)
AliExpress

Commission (79.5%)
AliExpress

Wholesale B2B (80.7%)


Membership fee
Online marketing (mainly
(87.6%)
P4P) (12.4%)
Alibaba.com
Alibaba.com

Cloud computing and Internet infrastructure (1.5%)

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

Source: Company data, Jefferies

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 Alibabas M&A
investments, please refer to p.120.

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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 Alibabas 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.
In this section, we discuss the following:
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.

Taobaos 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 Juhuasuans ability in
bringing aboard well-known brands and monitoring product quality.

4.

1688.com, Alibabas 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, Alibabas proprietary online marketing platform, offers pay-forperformance (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.

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BABA
Initiating Coverage
27 October 2014

A Strong Self-reinforcing Network Effect


Clear leadership in Chinas 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: Chinas overall online shopping market share (2013 vs. 1H14)
Alibabas 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%.

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 Chinas e-Commerce market. As of June 30, 2014, Alibaba has an
active buyer base of 279mn, 7x that of JDs 38mn and a far distance ahead of other eCommerce players. Alibabas 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 Alibabas marketplaces
generates huge user traffic which in turn attracts more merchants onto the platforms. We
see this as Alibabas core competence and key competitive edge.

As of June 30, 2014, Alibaba has an


active buyer base of 279mn, 7x that
of JDs 38mn and a far distance
ahead of other e-Commerce players.

Chart 33: No. of active buyers across major e-Commerce players in China (as
of June 30, 2014)

Source: Company data. Note: Alibabas active buyer base represents those on its China
commerce retail business (Tmall, Taobao, Juhuasuan)

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BABA
Initiating Coverage
27 October 2014
Chart 34: Alibabas self-reinforcing network effect
Alibabas 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 Alibabas marketplaces
generates huge user traffic which in
turn attracts more merchants onto
the platforms.

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: Chinas C2C market share by GMV (2013 vs. 1H14)

Taobao is the largest C2C platform


in China with a dominant market
share of 97.6% in 2013, up 1.5pcpt
YoY.

Source: Company data, iResearch, Jefferies


Taobaos 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.
Taobaos 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.

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BABA
Initiating Coverage
27 October 2014
Chart 36: Top factors driving repeat purchase on Taobao Marketplace (2013)

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.

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 Taobaos 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)

Chart 38: Taobao GMV estimates (calendar year)

Source: Company data, Jefferies estimates

Source: Company data, Jefferies estimates

Deepening penetration in lower tier cities and rural areas


Taobaos 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 Alibabas 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 Alibabas 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.

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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 (
). 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 eCommerce 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. Chinas 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

Chart 40: Chinas rural e-Commerce market size estimates

Source: AliResearch as of Oct 2014, Jefferies

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: Chinas B2C market share by GMV in 2013
(including platform)

Chart 42: Chinas B2C market share by GMV in 2Q14


(including platform)

Source: iResearch as of Jan 2014, Jefferies

Source: iResearch as of Aug 2014, Jefferies


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

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BABA
Initiating Coverage
27 October 2014
There are three types of store structures on Tmall:

Flagship store (): for brands with a trademark (either or )


ownership
Authorized store ( ): 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 (): for merchants who have two or more brands
within one of Tmalls 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


Tmalls 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

Chart 44: Page view 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

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


Source: iResearch as of Oct 2014, Jefferies

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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
Tmall categories

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.

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

0%/2%/3%

30,000/300,000/600,000/700,000

Auto & accessories


Electronic ticket vouchers
Household goods
Mother, baby products & toys

0.5%

30,000

2.5%/5%

30,000/60,000

2%/5%

30,000/60,000

Food

2%

30,000

Nutritional and medical products

3%

30,000

3C

2%

30,000

2%/5%

30,000

0.5%

10,000

0.3%/0.5%

10,000

2%/up to RMB100 per order

15,000

Home appliance
Game cards
Pre-paid phone cards
Online travel

Source: Company data, Jefferies


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: Chinas B2C market share by GMV in 2Q14
Apparels

Chart 47: Chinas B2C market share by GMV in 2Q14


Mother & baby products

Source: Analysys International as of July 2014, Jefferies

Source: Analysys International as of July 2014, Jefferies

page 39 of 130

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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.
Alibabas 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)

Source: Company data, Jefferies

Source: Company data, Jefferies

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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 Tmalls 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: Tmalls GMV trend (fiscal year)

Chart 51: Tmalls GMV trend (calendar year)

Source: Company data, Jefferies estimates

Source: Company data, Jefferies estimates

Chart 52: Commission revenue trend (fiscal year)

Chart 53: Commission revenue trend (calendar year)

Source: Company data, Jefferies estimates

Source: Company data, Jefferies estimates

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.

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BABA
Initiating Coverage
27 October 2014
Chart 54: Alibabas China commerce retail GMV transacted on annual Nov 11
Singles Day promotions

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.

Source: Company data, Jefferies estimates


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 ( ): 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 ( ): 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 (): 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 (): 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 (): Major categories include
domestic and outbound travel package, hotel reservation, scenic spot tickets as
well as Visa application services.

page 42 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

Group buying for general merchandise (): 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


Merchants on Juhuasuan platform
can choose to pay fixed deposit, prorata deposit, or after-sale insurance
for product quality guarantee.

Deposit

Terms

Refunds

Fixed deposit

RMB500K

Refundable after 12 months

Pro-rata deposit

After-sale insurance

-GMV<RMB100K, deposit=GMV;
-RMB100KGMV<RMB300K, deposit=RMB100K;
Refundable 30 days after the
-RMB300KGMV<RMB1mn, deposit=RMB300K;
completion of group buy events
-GMVRMB1mn, deposit=RMB500K.
Merchants pay 0.3% of pro-rata deposit as insurance fee,
Not refundable
up to RMB1,500.

Source: Company data, Jefferies

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
typically ranging from 0.3% to 5% of GMV for transactions settled through
Alipay depending on the product category.

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
Juhuasuans ability in bringing aboard well-known brands and monitoring product quality.
Chart 32: Comparison between ladygo.tmall.com and Vipshop
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.

Metrics

Ladygo.tmall.com

Vipshop

No. of sales events per day

15-20

100-200

Product categories

Women's and men's apparels, shoes


and bags, accessories

Women's and men's apparels, shoes and


bags, accessories, cosmetics, home dcor,
3C, sporting goods, food

Brands

Mainly domestic

Delivery

Free shipping on order size over RMB268 Free shipping on order size over RMB288

Product return

7-day return with full reimbursement of


shipping fee

Domestic and international

7-day return with RMB10 credit rebate

Source: Company data, Jefferies

page 43 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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: Chinas B2B market share in 2013

According to Analysys International,


Alibaba (alibaba.com and 1688.com
combined) accounted for 46.4%
market share in 2013.

Source: Analysys International as of Feb 2014, Jefferies


Alibabas 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
Alibabas 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)

Source: Company data, Jefferies estimates

Source: Company data, Jefferies estimates

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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)

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.

Source: Company data, iResearch as of July 2014, Jefferies


Launched in 2007, Alimama is Alibabas 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 realtime 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.

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BABA
Initiating Coverage
27 October 2014
Chart 59: Overview of Alibabas online marketing ecosystem

Source: Company data, Jefferies


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 () 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.

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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 Groups P4P service on Taobao Marketplace

Source: Company data, Jefferies

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BABA
Initiating Coverage
27 October 2014
Diamond Showcase
Diamond Showcase (), 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 Groups Diamond Showcase ads on China retail marketplace

Source: Company data, Jefferies

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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 Alibabas 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

Source: Company data, Jefferies

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BABA
Initiating Coverage
27 October 2014
Wangxiaobao
Wangxiaobao ( ) 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 Groups WangXiaoBao ads on China wholesale marketplace

Source: Company data, Jefferies

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BABA
Initiating Coverage
27 October 2014
Juhuasuan Promotional Slot
Juhuasuan ( ) promotional slots: sellers pay placement fees to purchase
promotional slots on Juhuasuan marketplace for a specified period.
Chart 64: Screenshot of Alibaba Groups ads placement on Juhuasuan platform

Source: Company data, Jefferies

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Moderating ad revenue growth impacted by increasing mobile contribution
Alibabas 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)

Source: Company data, Jefferies estimates

Source: Company data, Jefferies estimates


We expect Alibabas 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.

page 52 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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
Chinas m-Commerce market accounting for 84.2% of total mobile retail GMV in 2Q14,
according to iResearch.
In this section, we discuss the following:
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.

Alibabas 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 mobilebased 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.

Alibabas 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.

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

Extending Mobile Leadership


As discussed in our sector note, A Taste of Domestic Consumption: The Unleashing of
Chinas 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 Chinas m-Commerce market with 84.2% of total mobile retail GMV in 2Q14,
according to iResearch.
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: Chinas m-Commerce market size by GMV

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 eCommerce market, and
RMB2,174bn in 2015, +130% YoY.

Source: iResearch as of July 2014, Jefferies estimates


Alibaba (Taobao + Tmall) led Chinas 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 Tencents 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.

page 54 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 68: Chinas m-Commerce market share in 2Q14
Alibaba (Taobao + Tmall) led Chinas
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.

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 Alibabas 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 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.

Source: Company data, Jefferies

page 55 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 70: Top 10 e-Commerce mobile apps by MAU (August Chart 71: Top 10 e-Commerce mobile apps by DAU (August
2014)
2014)
No.
App
DAU (mn)
No.
App
MAU (mn)
1
Ta oba o
60.1
1
Ta oba o
133.4
2
Tma l l
18.0
2
JD.com
54.8
3
JD.com
11.7
3
Tma l l
46.6
4
Suni ng Yi gou
3.8
4
Suni ng Yi gou
15.7
5
Yi ha odi a n
3.6
5
Yi xun
14.9
6
Yi xun (Tencent)
3.0
6
Yi ha odi a n
13.7
7
Xi a omi
2.2
7
Xi a omi
12.1
8
Vi ps hop
2.2
8
Vi ps hop
11.9
9
Da
ngda
ng
1.9
9
Da ngda ng
11.7
10
Ama zon
1.3
10
Ama zon
8.7
Source: iResearch as of Oct 2014, Jefferies

Source: iResearch as of Oct 2014, Jefferies

Chart 72: Top 10 group buy mobile apps by MAU (August


Chart 73: Top 10 group buy mobile apps by DAU (August
2014)
2014)
No.
App
DAU (mn)
No.
App
MAU (mn)
1
Mei tua n (Alibaba holds minority stake)
9.2
1
Mei tua n (Alibaba holds minority stake)
38.6
2
Juhua s ua n
4.7
2
Juhua s ua n
21.3
3
Nuomi (owned by Ba i du)
4.7
3
Nuomi (owned by Baidu)
19.6
4
Tua n800
3.5
4
Tua n800
13.0
5
Ba i du Group Buy
2.7
5
Ba i du Group Buy
12.9
6
La s hou Group Buy
1.4
6
La s hou Group Buy
9.1
7
Di a npi ng Group Buy
1.4
7
Di a npi ng Group Buy (Tencent holds 20% stake)
7.7
8
55tua n
1.3
8
55tua n
7.4
9
Ma oya n movi e group-buy
0.5
9
Ma oya n movi e Group Buy
3.5
10
Mei tua n Mercha nt
0.1
10
Mei tua n Mercha nt
0.4
Source: iResearch as of Oct 2014, Jefferies

Source: iResearch as of Oct 2014, Jefferies

Alipay Wallet acts as mobile traffic gateway


Alibaba offers seamless mobile transaction experience through Alipay Wallet, Alipays
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)

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.

No.
1
2
3
4
5
6
7
8
9
10

App
Wei xi n (Wecha t)
QQ
Al i pa y
UC Brows er
Sougou Input
Ta oba o
Youku
Si na Wei bo
360 Mobi l e Sa fe
i Qi yi

MAU (mn)
298.6
266.4
161.4
135.6
133.5
133.4
120.0
112.8
105.4
96.8

Source: iReseach as of Oct 2014, Jefferies

page 56 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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.
Source: Company data, Jefferies
Alibabas 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
Alibabas mobile apps.
Alibabas 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 Alibabas 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 Alibabas m-Commerce market share of 88% in 2014 and 79% in 2015.
Alibabas wide variety of mobile
apps supported by Alipay Wallet and
its various mobile promotional
campaigns drove surging mobile
GMV growth. Alibabas mobile GMV
reached RMB319bn in FY14,
accounting for 19% of total GMV, 4x
that of FY13.

Chart 76: Alibabas mobile GMV annual trend

We estimate Alibabas 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.
Source: Company data, Jefferies estimates

page 57 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 77: Alibabas m-Commerce market share estimates
Calender year

We currently estimate Alibabas mCommerce market share of 88% in


2014 and 79% in 2015.

China's m-Commerce market size (in RMB bn)


as % of total e-Commerce
YoY growth %
Alibaba's mobile GMV (in RMB bn)
as % of total GMV

2012

2013

2014E

2015E

69

274

945

2,174

3,696

5.8%

14.5%

34.3%

57.5%

77.5%

490.3%

297.4%

245.0%

130.0%

70.0%

48

232

832

1,709

2,532

5.7%

15.0%

37.1%

55.7%

64.9%

324.1%

258.7%

105.4%

48.1%

84.7%

88.0%

78.6%

68.5%

YoY growth %
Alibaba's m-Commerce market share

69.5%

2016E

Source: Company data, Jefferies estimates

Narrowing monetization gap between PC and mobile


Alibabas 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, Alibabas
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).
Alibabas 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 Alibabas
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 Alibabas 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.

page 58 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 78: Alibabas PC, mobile and overall monetization rates
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.

Source: Company data, Jefferies


Chart 79: Alibabas mobile revenue annual trend
We estimate mobile revenue to reach
RMB19.7bn in FY15, +576.6% YoY,
representing 30.3% of Alibabas
China commerce retail revenue and
implying a monetization rate of
1.84%, +0.93pcpt YoY.

Source: Company data, Jefferies


Note: Alibabas 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,
according to iResearch.
UCWeb: UCWeb, fully acquired by Alibaba in June 2014, is Chinas 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.

page 59 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 80: Top 10 mobile browser by MAU June 2014

No.
1
2
3
4
5
6
7
8
9
10

App
UCWeb
QQ Brows er
Ba i du Brows er
360 Mobi l e Brows er
Opera Brows er
Chrome
Li eba o Brows er
Ma xthon Brows er
2345 Brows er
Sougou Brows er

Chart 81: Screenshot of search results on Shenma

MAU (mn)
133.5
74.7
29.5
28.3
18.1
8.9
6.6
6.0
3.7
3.5

Source: iReseach as of September 2014, Jefferies

Source: Company data, Jefferies

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 audiences
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
Alibabas 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 Chart 83: Screenshot of Momo
2014
No.
1
2
3
4
5
6
7
8
9
10

App
Sina Weibo
Qzone
Ba idu Tieba
Renren
Momo
Qius hiba ike
Tecent Weibo
Weis hi
DSCJ8888
Ba ihe

MAU (mn)
112.8
55.5
28.9
19.7
19.5
13.3
10.9
10.2
7.9
5.6

Source: iResearch as of September 2014, Jefferies

Source: Company data, Jefferies

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 Alibabas cross-border e-Commerce initiatives and fill up its capability
gap in mobile messaging.

page 60 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Umeng: Public news sources reported Alibabas 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
No.
1
2
3
4
5
6
7
8
9
10

App
360 Mobi l e Sa fe
Tencent Mobi l e Ma na ger
LBE Secrui ty Ma s ter
Ba i du Mobi l e Sa fe
Ki ngs oft Mobi l e Sa fe
Ki ngs oft Mobi l e Anti -Vi rus
SECUREi t
Anti -KungFu Vi rus
Ba i du Sa fe
360 Pri va cy Sa fety

Chart 85: Screenshot of Umeng

MAU (mn)
105.4
39.6
28.1
20.1
10.6
5.5
4.9
2.7
2.0
1.9

Source: Company data, Jefferies

Source: Company data, Jefferies

Table 1: Alibabas mobile investments Disclosed by the company


Date

Target

Deal Details

Target Company Description

Implied Strategy

June, 2014

UCWeb
(Private)

Weibo
(NASDAQ:
WB)

- 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,
according to the company.
- 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.

- Enhance mobile offerings beyond eCommerce, 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

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.
USD1,035mn in aggregate for
approx. 30% stake on a fullydiluted 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)

Apr, 2014/
Mar, 2014

TangoMe
(Private)

USD217mn in aggregate for 20% - A leader in mobile messaging services


stake on a fully-diluted basis
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.

- 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 eCommerce platforms
-Improve mobile messaging
technology and solution;
-Expand customer reach to overseas
market

Source: Company data, Jefferies

page 61 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Table 2: Alibabas mobile investments reported by public news sources
Date

Target

Deal Details

Target Company Description

Implied Strategy

Dec, 2013

LBE Security
Master ("LBE
",
private)
Quixey
(Private)
Umeng ("",
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

Alibaba led a
USD50mn funding
Acquisition for
USD80mn

A mobile app search engine, which allows users


to find apps based on functionality search
-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.
-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.

-Strengthen its mobile search technology

Oct, 2013
Apr, 2013

Oct, 2012

MoMo
Strategic investment
("", private) of USD40mn

-Help to better understand mobile users


data and in-app behavior
-Strengthen its advertising technology on
mobile e-Commerce

-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.

page 62 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

Building the Largest Ecosystem


Alibabas large and growing ecosystem is supported by its expanding logistics platform,
payment settlement services and Internet finance business.
In this section, we discuss the following:
1.

Investing in Smart Logistics: Alibabas 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 Alibabas 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 Chinas 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, Yue 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.

page 63 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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 thirdparty 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 Alibabas China retail marketplace
(Taobao, Tmall and Juhuasuan), accounting for 54.4% of total package delivery.
Chart 86: Number of packages delivered in China

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 Alibabas China
retail marketplace (Taobao, Tmall
and Juhuasuan), accounting for
54.4% of total package delivery.

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 Alibabas 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.

page 64 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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.

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.

Chart 87: Top 15 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.
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
() , 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 Alibabas capability
gap in large-sized item and door-to-door installation services. Goodaymarts 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 countrys 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.

page 65 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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 others 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 Alibabas footprint in lower-tier cities where online
shopping activities are rapidly rising.

Table 3: Alibabas M&A investments in logistics


Date
Jul, 2014

Target
Singapore Post
Limited
(SGX: S08 SG)

Deal Details
SGD313mn (USD249mn) for
10.3% stake

Mar, 2014

Haier Electronics
Group
(HKSE: 1169 HK)

-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.
RMB2.4bn (USD385.9mn) for -An operator of a nationwide logistics
-Enhance user experience by offering efficient
48% stake in the Joint Venture infrastructure and information system in logistics and delivery services.
with Intime Group, Fosun
China. Alibaba Group holds 48% stake of -China Smart Logistics plans to build a network
International and other five
China Smart Logistics.
of key logistics hubs across China, including
major express delivery
-In the 12 months ended Jun 30, 2014,
distribution centers, warehouses and other
companies. (Alibaba has
the logistics system ensured the
supply chain facilities, which could support the
invested RMB1.68bn as of Mar successful delivery of an average of
delivery of over 100mn package per day to
2014, and will invest the
approximately 16.6mn packages per
consumers' doorsteps anywhere in China
remaining capital over a two- day.
within 24 hours in the long term.
year period)

May, 2013 Zhejiang Cainiao


Supply Chain
Management Co.,
Ltd ("") or
China Smart
Logistics (Private)

Target Company Description


-The national postal service provider in
Singapore and a leading provider of eCommerce logistics solutions in the AsiaPacific 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.
HKD2.8bn (USD364mn) for
-Haier Electronics Group is a company
2% stake in Haier, 9.9% stake engaged in R&D, manufacturing and
in Goodaymart, a whollysale of electrical appliances, especially
owned subsidiary of Haier
large electrical appliance.
engaged in logistics, and
-Goodaymart Logistics (""), a
additional 24% stake in
wholly-owned subsidiary of Haier, mainly
Goodaymart upon conversion focused on large format goods delivery
of all convertible bond
and installation of home appliance,
furniture and sanitary ware for Haier and
third-party branded products

Company Stated/Industry Experts View


-Improve its international logistics solution
-Facilitate purchase of overseas products by
domestic consumers

Source: Company data, Jefferies

page 66 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Building a closed-loop ecosystem with payment
M-Commerce, O2O and Internet finance drives payment market growth
Chinas 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 Yue Bao.
Chinas 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 mCommerce development, Chinas 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: Chinas third party PC online payment market size by GMV

Chinas 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 Yue Bao.

Source: iResearch as of Apr 2014, Jefferies


Chart 89: Chinas third party mobile payment market size
by GMV

Chart 90: Chinas third party mobile payment market


breakdown

Source: iResearch as of Apr 2014, Jefferies estimates

Source: iResearch as of Apr 2014, Jefferies estimates

page 67 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 91: Chinas third party mobile online payment market size

Benefitting from accelerating mCommerce development, Chinas


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.

Source: iResearch as of Jul 2014, Jefferies estimates


Chart 92: Chinas overall third party online payment market size

We estimate Chinas overall third


party online payment market
(including PC and mobile) to reach
RMB11.5trn in 2014, +76.9% YoY.

Source: iResearch as of Jul 2014, Jefferies estimates


Alipay leading online payment solution for Chinas e-Commerce
Launched in 2004, Alipay, the payment processing and escrow service provider of
Alibabas 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.

page 68 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 93: Chinas 3rd party online payment market share in 2Q14

Alipay, the payment processing and


escrow service provider of Alibabas
marketplaces, dominated Chinas
third party online payment market
with 48.8% market share by GMV in
2Q14, according to iResearch.

Source: iResearch as of Jul 2014, Jefferies


Chart 94: Chinas 3rd party mobile online payment market share in 2Q14

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.

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 stateowned banks and 9 joint-stock commercial banks and more than 110 other financial
institutions, including urban commercial bank, Rural Credit Cooperatives and foreignfunded 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. Yue Bao, donation)

Location-based service (e.g. taxi hailing, food ordering)

Social-based service (e.g. split the bill, face-to-face transfer)

page 69 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 95: Summary of applications enabled by Alipay

Source: Company data, Jefferies


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, Alibabas China retail marketplace
accounted for 29.7% of Alipays total payment volume.
In the twelve months ended June 30, 2014, 78.1% of GMV on Alibabas 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 Alibabas 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.

page 70 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 96: Operation metrics comparison across payment tools
Alipay

PayPal

TenPay

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.

519

778

180

203

n.a.

n.a.

0.7%-2% (2)

0.7%-2%

3.5%

1%

1%

27.9%

n.a.

n.a.

n.a.

n.a.

Total payment volume (in USD bn)


Commission rate
Mobile as % of total payment volume

3.7%

(3)

15.0%

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) Alipays commission rate refers to the fees charged to merchants
(excluding Alibabas 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) PayPals 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 Paypals 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 Alibabas
marketplaces) based on GMV settled through Alipay on PC
Compared to 0.18-0.19% charged to
internal merchants, Alipay charges
merchants outside of its Alibabas
marketplaces a commission fee
ranging from 0.7%-1.2% on PC,
according to company data.

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%

Source: Company data, Jefferies


Chart 98: Commission charged to merchants (excluding Alibabas
marketplaces) based on GMV settled through Alipay on mobile
Alipay charges merchants outside of
its Alibaba marketplaces a
commission fee ranging from 1.8%2% on mobile, according to
company data.

Transaction Volume (RMB)

Commission rate

0-1mn

2.0%

Above 1mn

1.8%

Source: Company data, Jefferies


Chart 99: Annual payment package available for merchants (excluding
Alibabas marketplaces) based on GMV settled through Alipay on PC

Alipay also provides annual payment


package offering discounted
commission rate to merchants upon
making a prepayment.

Prepayment (RMB)

Transaction volume(RMB)

Commission rate

600

60K

1.0%

1,800

200K

0.9%

3,600

450K

0.8%

Source: Company data, Jefferies


Note: Any additional transaction volume above the maximum allowance will be charged a
1.2% commission rate

page 71 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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 Alibabas 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.

page 72 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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. Tenpays 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

Source: Company data, Jefferies

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 Alibabas
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 Tenpays 0.75%.

page 73 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 101: Commission rates charged by Tenpay
Prepayment (RMB)
0
480
1680
3750
7000
12K
25K
45K

Transaction volume (RMB) Commission rate


unlimited
1%
5K
0.96%, 1% for the volume exceeding 5K
200K
0.84%, 1% for the volume exceeding 200K
500K
0.75%, 1% for the volume exceeding 500K
1mn
0.7%, 1% for the volume exceeding 1mn
2mn
0.6%, 1% for the volume exceeding 2mn
5mn
0.5%, 1% for the volume exceeding 5mn
10mn
0.45%, 1% for the volume exceeding 10mn

Source: Jefferies, company data


Lakala
Lakala, founded in 2005, is Chinas 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 ( ). 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: Lakalas fixed-line POS

Chart 103: Lakalas mobile POS

Source: company data, Jefferies

Source: company data, Jefferies


In addition to payment terminal, Lakala also launched Kaidianbao (), an eCommerce platform integrated with community related services such as utility bill
payment, financial services, ticket reservation and mobile top-up.

page 74 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 104: Lakalas 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 NFCenabled 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.

page 75 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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: Chinas 3rd party online payment market breakdown

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.

Source: iResearch as of April 2014, Jefferies


Yue Bao innovating the way of wealth management
In June 2013, Alibaba launched Yue Bao (), also known as Zeng Li Bao (), an
online money market fund managed by Tianhong Asset Management ( ).
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.
Yue 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. Yue Bao
offered a return rate as high as 6.73% in Jan 2014 when liquidity in Chinas 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. Yue 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 Yue Bao
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.

As of end of
AUM (in RMB bn)

2Q13

3Q13

4Q13

1Q14

2Q14

4.8

55.7

185.3

541.3

574.2

1057%

233%

192%

QoQ
YoY
No. of users (in mn)

2.5

QoQ

13.7

43.0

81.0

443%

215%

88%

YoY
Average AUM per user (RMB)
QoQ

6%
11837%
114.1
41%
4438%

1,912

4,071

4,307

6,683

113%

6%

55%

YoY

5,030
-25%
163%

Source: Data disclosed by Tianhong Asset Management, Jefferies

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BABA
Initiating Coverage
27 October 2014

According to Sina Finance, Yue 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.

Chart 107: Top asset management companies in terms of AUM in China in


1H14
Assets under
Ranking Company
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
Source: Sina Finance, Jefferies
In our view, the high liquidity and convenience offered by Yue 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 Yue 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.

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BABA
Initiating Coverage
27 October 2014
Chart 108: AUM of Yue Bao

Chart 109: Number of Yue Bao users

Source: Data disclosed by Tianhong Asset Management, Jefferies

Source: Data disclosed by Tianhong Asset Management, Jefferies

Chart 110: Comparison across Alibabas Yue bao, Tencents Licaitong and Baidus Baifa
Company

Product name

Alibaba

Yu'E Bao

Peak 7-day

Latest 7-day

annualized

annualized

rate of return

rate of return

Tian Hong Asset Management ( )

6.763%

4.230%

China Asset Management ( )

7.902%

4.571%

Payment tool

Alipay

Fund partners

China Universal Asset Management


Tencent

Baidu

Licaitong

Baifa

Weixin Payment

Baidu Wallet

()

5.254%

4.851%

E Fund Management ( )

5.405%

5.311%

GF Fund Management ( )

5.823%

5.394%

8.004%

n.a.

China Asset Management ( ) and


Harvest Fund Management ( )

AUM (as of Jun


30, 2014)
RMB574.2bn
(USD92.6bn)
RMB62.2bn
(USD10bn)
RMB4.5bn
(USD725.8mn)
RMB0.94bn
(USD151.6mn)
RMB11.1bn
(USD1.8bn)
RMB3bn
(USD483.9mn)

No. of users
(as of Jun 30,
2014)

Average AUM
per user

Launch date

114mn

RMB5,030

17-Jun-13

n.a.

n.a.

22-Jan-14

n.a.

n.a.

25-Mar-14

n.a.

n.a.

17-Apr-14

n.a.

n.a.

17-Apr-14

n.a.

n.a.

28-Oct-13

Note: latest 7-day annualized rate of return as of Sept 28, 2014


Source: Company data, Jefferies
SME loan business
Launched in 2010, Alibabas 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, Alibabas 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 Alibabas VIEs and the micro loan-derived interest revenue is
therefore recognized under Alibabas 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%.

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BABA
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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 Alibabas economic benefits received from Small and Micro Financial Services
Company based on the following assumptions:
Payment processing revenue: We estimate Alipays payment volume of RMB6,684bn
in FY15, +72.6% YoY, and RMB9,730bn in FY16, +45.6% YoY. We expect Alipays
transactions contributed by Alibabas 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 Alipays 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 Alipays total revenue
of RMB44.7bn in FY15, +60% YoY, and RMB67.8bn in FY16, +51.8% YoY.
Yue Bao management fee: As disclosed by Tian Hong Asset Management and Alipay,
Yue 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 Alipays management fee received from Yue 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 Alibabas 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
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BABA
Initiating Coverage
27 October 2014
view, Alibabas 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

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.

Source: Company data, Jefferies


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 Chinas 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 Alibabas 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.

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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 21CNs drug data and
Alibabas 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, Alibabas 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
Chinas 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 Alibabas location-based
service offerings to its mobile users leveraging on Autonavis mapping
technology. Its data has already been integrated into Alibabas 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.

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BABA
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27 October 2014

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BABA
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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.
In this section, we discuss the following:
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
OneTouchs 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.

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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 () 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

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.

Source: Nielsen as of Jun 2013, Jefferies


Chart 113: Top five cross-border online shopping destinations in China

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.

Source: Nielsen as of Jun 2013, Jefferies

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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

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.

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.

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BABA
Initiating Coverage
27 October 2014
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.

Chart 115: Requirements in setting up a shop on Tmall vs. Tmall Global


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

Source: Company data, Jefferies


We conducted a scenario analysis on the potential revenue upside from cross-border eCommerce 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
Scenario

Based on a 30-70% Alibaba market


share assumption, our analysis
shows a 5-12% CY16 revenue upside
to our current estimate.

#1

#2

#3

Alibaba's market share assumption

30.0%

40.0%

Alibaba's cross-border GMV (RMB bn)

183.7

244.9

2016 China's cross-border online shopping market

Commission rate assumption

50.0%

60.0%

70.0%

306.2

367.4

428.7

12.9

15.0

3.5%

Alibaba's cross-border revenue (RMB bn)

6.4

8.6

Current 2016 revenue estimate (RMB bn)


Current 2016 revenue estimate + cross-border
% upside

#5

612

size estimate (RMB bn)

revenue upside (RMB bn)

#4

10.7
127.2

133.6

135.8

137.9

140.1

142.2

5%

7%

8%

10%

12%

Source: Nielsen as of Jun 2013, Jefferies estimates


Note: (1) 2016 Chinas 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 Macys, 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

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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 Chinas SMEs with global wholesale buyers
Launched in 1999, Alibaba.com is Alibabas 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 () 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.

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BABA
Initiating Coverage
27 October 2014
Chart 117: Screenshot of Alibaba global B2B marketplace Integrated export service platform for SMEs

Source: Company data, Jefferies


Chart 118: Monthly active user trends of global B2B
websites in China

Chart 119: Page view trends of global B2B websites in


China

Source: iResearch as of Oct 2014, Jefferies

Source: iResearch as of Oct 2014, Jefferies

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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-inChina 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, Alibabas 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.

Chart 121: Top five cross-border online shopping


destinations from UK

Source: Nielsen as of Jun 2013, Jefferies

Source: Nielsen as of Jun 2013, Jefferies

Chart 122: Top five cross-border online shopping


destinations from Brazil

Chart 123: Top five cross-border online shopping


destinations from Australia

Source: Nielsen as of Jun 2013, Jefferies

Source: Nielsen as of Jun 2013, Jefferies

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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

Source: Company data, Jefferies

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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.

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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 Chinas legal restrictions on foreign
ownership in the operation of Internet content providers, operation of Alibabas
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 Alibabas China investment team. Zhejiang Taobao Network is 90%owned by Jack Ma and 10%-owned by Simon Xie. Alibaba Group, through its whollyforeign 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 whollyforeign owned enterprises.
Chart 125: Alibabas 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

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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.
Alibabas 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: Alibabas 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 overallotment 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

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BABA
Initiating Coverage
27 October 2014

Partnership System
The Alibaba Partnership
The Alibaba Partnership currently is comprised of 30 members including 24 members of
Alibabas management, 4 members of management of Small and Micro Financial Services
Company and 1 member of management of China Smart Logistics. Two members of
Alibabas 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).

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BABA
Initiating Coverage
27 October 2014
Chart 127: Members of the Alibaba Partnership
Name

Year Joined

Age

Gender

Jingxian Cai ()

37

2000

Principle Engineer

Current position with Alibaba Group or related/affiliated companies

Li CHENG ()

39

2005

Chief Architect, Small and Micro Financial Services Company

Trudy Shan DAI ()

38

1999

Chief Customer Officer

Luyuan FAN ()

41

2007

President, China Business, Small and Micro Financial Services Company

Yongxin FANG (

40

2000

Directo Human Resources

Simon Xiaoming HU ( )

44

2005

Risk Manager, SME Loan Business; Chief Risk Officer, Small and Micro Financial Services Company

Fang JIANG ()

40

1999

Vice President, Corporate Integrity and Human Resources

Peng JIANG ()

41

2000

President, Alibaba Cloud Computing, YunOS and Digital Entertainment; Deputy Chief Technology Officer

Jianhang JIN ()

44

1999

Senior Vice President, Corporate Affairs

Eric Xiandong JING ()

41

2007

Chief Financial Officer, Small and Micro Financial Services Company

Zhenfei LIU ()

42

2006

Vice President, Infrastructure Operations

Jonathan Zhaoxi LU ()

44

2000

Chief Executive Officer

Jack Yun MA ()

50

1999

Executive Chairman

Xingjun NI (

37

2003

Principle Engineer Small and Micro Financial Services Company

Lucy Lei PENG ()

41

1999

Chief People Officer, Alibaba Group; Chief Executive Officer, Small and Micro Financial Services Company

Sabrina Yijie PENG ( )

36

2000

Vice President, International, Small and Micro Financial Services Company

Xiaofeng SHAO ()

48

2005

Chief Risk Officer

Timothy A. STEINERT

54

2007

General Counsel and Corporate Secretary

Judy Wendong TONG ( )

43

2000

Chief Operating Officer, China Smart Logistics

Joseph C. TSAI ()

50

1999

Executive Vice Chairman

Jian WANG ()

51

2008

Chief Technology Officer

Shuai WANG ()

40

2003

Senior Vice President, China Corporate Communications and Marketing

Sophie Minzhi WU ()

38

2000

President, Alibaba.com and 1688.com

Maggie Wei WU ()

46

2007

Chief Financial Officer

Eddie Yongming Wu ( )

39

1999

Senior Vice President, Corporate Development

Sara Siying YU ( )

40

2005

Associate General Counsel, China

Ming ZENG ()

44

2006

Senior Vice President, Corporate Strategy

Jeff Jianfeng ZHANG ()

41

2004

President, Taobao Marketplace

Daniel Yong ZHANG ( )

42

2007

Chief Operating Officer

Yu ZHANG ()

44

2004

Vice President, Corporate Development

Alibaba Group

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 Alibabas 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.

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BABA
Initiating Coverage
27 October 2014
Chart 128: Alibaba Groups Board of Directors
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

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 Alibabas board of directors,
provided that its shareholding stays at 15% or above of Alibabas outstanding
shares;

SoftBank will agree to vote its shares in favor of the election of the Alibaba
Partnerships director nominees at each annual general shareholders meeting
and to grant the voting power of any portion of its shareholdings exceeding
30% of Alibabas 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
Partnerships director nominees and the SoftBank director nominee at each
annual general shareholders meeting until SoftBanks shareholding declines
below 15% of Alibabas outstanding shares and to grant the voting power over
any shares it owns, up to 121.5 million of Alibabas 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 SoftBanks shareholding
declines below 15% of Alibabas outstanding ordinary shares.

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BABA
Initiating Coverage
27 October 2014
Alibabas 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 Alibabas 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
Yahoos 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: Alibabas history with Yahoo
Date

Milestone

Number of ordinary

Yahoo's stakeholding

shares Yahoo holds

of Alibaba

Yahoo completed a strategic investment in Alibaba with a


2005

USD1bn cash payment and contributed Yahoo China to

1,047mn

40.0%

1,047mn

40.0%

Alibaba Group.
May, 2012

Alibaba entered into a Share Repurchase and Preference


Share Sale Agreement with Yahoo
Alibaba Group repurchased 523mn ordinary shares
owned by Yahoo with a total consideration of USD7.1bn,

Sep, 2012

including a USD6.3bn cash payment and USD800mn

523.5mn

22.5%

(1)

523.5mn

22.5%

(1)

523.5mn

22.4%

(2)

383.6mn

15.4%

(3)

worth of Alibaba's redeemable preference shares


(redeemed by Alibaba in full in May 2013)
Alibaba Group and Yahoo amended and reached the
agreement that Alibaba is entitled to cause Yahoo to sell
Oct, 2013

(either directly to Alibaba Group or in the IPO) 208mn


ordinary shares, compared to 261.5mn prior to
amendment

Jul, 2014

The number of ordinary shares Alibaba is entitled to cause


Yahoo to sell is further revised down to 140mn

Post IPO

Yahoo sold 121.7mn ordinary shares and an additional

completion

18.3mn in over-allotment during Alibaba's IPO

Source: Company data, Jefferies


Note: (1) Stake calculation is based on Alibaba Groups 2,328mn ordinary shares outstanding as of Mar 31, 2014. (2) Stake calculation is
based on Alibaba Groups 2,342mn ordinary shares outstanding prior to IPO. (3) Stake calculation is based on Alibaba Groups 2,491mn
ordinary shares outstanding post IPO with full exercise of over-allotment option.

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BABA
Initiating Coverage
27 October 2014

Small and Micro Financial Services Company


Ownership structure
Alipay was established in Dec 2004 to operate Alibabas 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), Alipays 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.

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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.

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BABA
Initiating Coverage
27 October 2014

Alibabas Management Team


Chart 130: Alibaba Group's executive officers
Name

Age

Year Joined Position/Title

Jack Yun MA

50

Joseph C. TSAI

50

1999 Executive Chairman


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

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

Digital Entertainment; Deputy Chief Technology

Source: Company Data as of September 22, 2014


Jack Yun MA ( ) is Alibabas lead founder and, since May 2013, has served as the
companys executive chairman. From 1999 until May 2013, Mr. Ma served as Alibabas
chairman and chief executive officer. Mr. Ma currently serves on the board of SoftBank
Corp., one of Alibabas 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 Conservancys 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 Teachers Institute
with a major in English language education.
Joseph C. TSAI ( ) joined Alibaba in 1999 as a member of the Alibaba founding
team and has served as the companys 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 Swedens 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 Alibabas investee companies. Mr. Tsai is qualified to practice law
in the State of New York. He received his bachelors degree in Economics and East Asian
Studies from Yale College and a juris doctor degree from Yale Law School.
Jonathan Zhaoxi LU () 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 companys 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 Alipays 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 masters 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.

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Maggie Wei WU ( ) 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.coms 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 FinanceAsias annual poll
for Asias 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 bachelors degree in accounting from Capital
University of Economics and Business.

page 101 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

Financial Statements
Income Statement
We estimate Alibabas 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 Chinas 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-toGMV 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.

page 102 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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 Alipays payment processing fee, Yue 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 Alibabas 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 nonGAAP net profit of RMB45.1bn, +43.1% YoY, with a net margin of 42.9%, +1.9pcpt YoY.

page 103 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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


Alibabas 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.
Alibabas 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.

page 104 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 131: Key assumptions (Fiscal year ends on March 31, in RMB mn)
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%

78.1%

84.5%

86.0%

88.4%

91.2%

91.8%

13,422

26,970

42,832

64,819

92,010

116,954

As % of total revenue
Retail (Taobao, Tmall, Juhuasuan)
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%

As % of total revenue

67.0%

78.1%

81.6%

84.4%

87.6%

88.5%

Online Marketing Service

9,804

YoY % change

19,697

29,729

39,436

50,107

59,137

100.9%

50.9%

32.7%

27.1%

18.0%

69.4%

60.8%

54.5%

50.6%

As % China commerce retail

73.0%

73.0%

As % total revenue

49.0%

57.1%

56.6%

51.3%

47.7%

44.8%

2,915

6,161

12,023

24,532

41,223

57,272

111.4%

95.1%

104.0%

68.0%

38.9%

Commission
YoY % change
As % China commerce retail

21.7%

22.8%

28.1%

37.8%

44.8%

49.0%

As % total revenue

14.6%

17.8%

22.9%

31.9%

39.2%

43.4%

703

1,112

1,080

851

680

544

Others (primarily Wangpu storefront fee)


YoY % change

58.2%

-2.9%

-21.2%

-20.0%

-20.0%

As % China commerce retail

5.2%

4.1%

2.5%

1.3%

0.7%

0.5%

As % total revenue

3.5%

3.2%

2.1%

1.1%

0.6%

0.4%

Wholesale (1688.com)

2,215

YoY % change
As % of China Commerce
As % of total revenue
International Commerce
YoY % change
As % of total revenue
Retail (AliExpress)

14.2%

2,197

2,300

3,112

3,821

4,375

-0.8%

4.7%

35.3%

22.8%

14.5%

7.5%

5.1%

4.6%

4.0%

3.6%

11.1%

6.4%

4.4%

4.1%

3.6%

3.3%

3,765

4,160

4,851

6,562

7,873

9,182

9.7%

10.5%

16.6%

35.3%

20.0%

16.6%

18.8%

12.1%

9.2%

8.5%

7.5%

6.9%

223

392

938

1,847

2,605

3,402

75.8%

139.3%

96.9%

41.0%

30.6%
37.0%

YoY % change
As % of International Commerce

5.9%

9.4%

19.3%

28.1%

33.1%

As % of total revenue

1.1%

1.1%

1.8%

2.4%

2.5%

2.6%

Wholesale (Alibaba.com)

3,542

3,768

3,913

4,715

5,268

5,780

6.4%

3.8%

20.5%

11.7%

9.7%
63.0%

YoY % change
As % of International Commerce

94.1%

90.6%

80.7%

71.9%

66.9%

As % of total revenue

17.7%

10.9%

7.5%

6.1%

5.0%

4.4%

515

650

773

1,069

1,336

1,604

21.2%

26.2%

18.9%

38.3%

25.0%

20.0%

2.6%

1.9%

1.5%

1.4%

1.3%

1.2%

108

540

1,748

1,250

-71.6%

400.0%

223.7%

-28.5%

-100.0%

0.5%

1.6%

3.3%

1.6%

0.0%

0.0%

20,025

34,517

52,504

76,812

105,040

132,115

68.2%

72.4%

52.1%

46.3%

36.7%

25.8%

Cloud computing and internet infrastructures


YoY % change
As % of total revenue
Others (mainly interest income from micro loans)
YoY % change
As % of total revenue
Total Revenue (in RMB mn)
YoY % change
Operation Metrics - China Commerce Retail
Active Buyers

123

YoY % change
Orders fulfilled (in mn)
YoY % change

4,182

172

255

380

540

739

39.8%

48.3%

49.0%

42.0%

37.0%

7,224

12,750

22,037

35,361

53,289

72.7%

76.5%

72.8%

60.5%

50.7%

Source: Company data, Jefferies


Note: FY15 refers to fiscal year ended March 31, 2015
page 105 of 130

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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 132: Key assumptions (Fiscal year ends on March 31, in RMB mn) (contd)
GMV Metrics - China Commerce Retail
Total GMV (in RMB bn)

FY2012A FY2013A FY2014A


663

1,678

2,418

3,268

4,069

62.4%

55.8%

44.1%

35.1%

24.5%

824

1,173

1,502

1,781

2,003

49.8%

42.4%

28.0%

18.6%

12.4%

83.0%

76.5%

69.9%

62.1%

54.5%

49.2%

113

253

505

917

1,487

2,066

123.9%

99.6%

81.5%

62.2%

38.9%

17.0%

23.5%

30.1%

37.9%

45.5%

50.8%

2.02%

2.50%

2.55%

2.68%

2.82%

2.87%

3.0%

3.0%

3.0%

3.4%

3.6%

3.6%

16

79

319

1,068

1,922

2,730

386.9%

300.9%

235.4%

79.9%

42.1%

7.4%

19.0%

44.2%

58.8%

67.1%

389

2,905

19,657

44,402

73,605

YoY % change
Taobao Marketplace GMV

550

YoY % change
% of Total GMV
Tmall GMV
YoY % change
% of Total GMV
Overall monetization rate
Commission rate
Mobile GMV (in RMB bn)
YoY % change
% of Total GMV
Mobile Revenue (in RMB mn)

2.5%
-

YoY % change

646.8%

576.6%

125.9%

65.8%

1.4%

6.8%

30.3%

48.3%

62.9%

0.49%

0.91%

1.84%

2.31%

2.70%

0.5%

0.4%

0.9%

0.5%

0.4%

647

998

1,359

1,350

1,346

1,338

54.3%

36.3%

-0.7%

-0.3%

-0.6%

97.5%

92.6%

81.0%

55.8%

41.2%

32.9%

26,581

39,927

45,162

47,608

43,349

50.2%

13.1%

5.4%

-8.9%

98.6%

93.2%

69.7%

51.7%

37.1%

2.66%

2.94%

3.34%

3.54%

3.24%

2.7%

0.3%

0.4%

0.2%

-0.3%

As % of China Commerce retail revenue


Mobile Monetization rate
YoY % change
PC GMV (in RMB bn)
YoY % change
% of Total GMV
PC Revenue (in RMB mn)

FY2015E FY2016E FY2017E

1,077

YoY % change
As % of China Commerce retail revenue
PC Monetization rate
YoY % change
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%

9.5%

7.5%

4.3%

3.4%

2.7%

2.2%

6,554

9,719

13,369

27,970

37,413

44,434

48.3%

37.6%

109.2%

33.8%

18.8%

13,953

25,180

40,289

51,979

71,427

92,480

80.5%

60.0%

29.0%

37.4%

29.5%

5,015

10,751

24,920

28,255

37,960

47,703

114.4%

131.8%

13.4%

34.3%

25.7%

6,559

15,802

29,392

34,486

46,382

58,467

General and administrative expenses


Gross Profit
YoY % change
Non-GAAP Gross Profit
YoY % change
Operating profit
YoY % change
Non-GAAP Operating profit
YoY % change
Net Profit

140.9%

86.0%

17.3%

34.5%

26.1%

8,649

23,403

31,157

35,777

46,676

85.4%

170.6%

33.1%

14.8%

30.5%

9,154

13,869

27,610

31,489

45,060

58,541

229.5%

51.5%

99.1%

14.1%

43.1%

4,665

YoY % change
Non-GAAP Net Profit
YoY % change
Net Cash (net debt)

20,461

4,776

2,557

81,486

130,309

29.9%
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%

Source: Company data, Jefferies


Note: FY15 refers to fiscal year ended March 31, 2015
page 106 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 133: Key assumptions (Fiscal year ends on March 31, in USD mn)
FY2012A FY2013A FY2014A

FY2015E FY2016E FY2017E

China Commerce

2,484

4,697

7,260

10,950

YoY % change

15,448

19,558
26.6%

-67.6%

89.0%

54.6%

50.8%

41.1%

As % of total revenue

78.1%

84.5%

86.0%

88.4%

91.2%

91.8%

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%

As % of China Commerce

85.8%

92.5%

94.9%

95.4%

96.0%

96.4%

As % of total revenue

67.0%

78.1%

81.6%

84.4%

87.6%

88.5%

Online Marketing Service

1,558

YoY % change

3,172

4,782

6,357

8,077

9,533

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%

As % of total revenue

49.0%

57.1%

56.6%

51.3%

47.7%

44.8%

Commission

463

YoY % change

992

1,934

3,954

6,645

9,232

114.2%

94.9%

104.5%

68.0%

38.9%

As % of China Commerce Retail

21.7%

22.8%

28.1%

37.8%

44.8%

49.0%

As % of total revenue

14.6%

17.8%

22.9%

31.9%

39.2%

43.4%

112

179

174

137

110

88

60.3%

-3.0%

-21.1%

-20.0%

-20.0%

Others (primarily Wangpu storefront fee)


YoY % change
As % of China Commerce Retail

5.2%

4.1%

2.5%

1.3%

0.7%

0.5%

As % of total revenue

3.5%

3.2%

2.1%

1.1%

0.6%

0.4%

352

354

370

502

616

705

0.5%

4.6%

35.6%

22.8%

14.5%
3.6%

Wholesale (1688.com)
YoY % change
As % of China Commerce

14.2%

7.5%

5.1%

4.6%

4.0%

As % of total revenue

11.1%

6.4%

4.4%

4.1%

3.6%

3.3%

598

670

780

1,058

1,269

1,480

YoY % change

15.0%

12.0%

16.5%

35.5%

20.0%

16.6%

As % of total revenue

18.8%

12.1%

9.2%

8.5%

7.5%

6.9%

35

63

151

298

420

548

International Commerce

Retail (AliExpress)
YoY % change

78.2%

139.0%

97.3%

41.0%

30.6%

As % of International Commerce

5.9%

9.4%

19.3%

28.1%

33.1%

37.0%

As % of total revenue

1.1%

1.1%

1.8%

2.4%

2.5%

2.6%

Wholesale (Alibaba.com)

563

607

629

760

849

932

7.8%

3.7%

20.7%

11.7%

9.7%

As % of International Commerce

94.1%

90.6%

80.7%

71.9%

66.9%

63.0%

As % of total revenue

17.7%

10.9%

7.5%

6.1%

5.0%

4.4%

YoY % change

Cloud computing and internet infrastructures


YoY % change
As % of total revenue
Others (mainly interest income from micro loans)
YoY % change
As % of total revenue
Total Revenue (in USD mn)
YoY % change

82

105

124

172

215

258

27.1%

27.9%

18.8%

38.6%

25.0%

20.0%

2.6%

1.9%

1.5%

1.4%

1.3%

1.2%

17

87

281

202

-70.2%

406.8%

223.4%

-28.3%

-100.0%

0.5%

1.6%

3.3%

1.6%

0.0%

0.0%

3,182

5,558

8,446

12,382

16,932

21,296

76.4%

74.7%

52.0%

46.6%

36.7%

25.8%

Operation Metrics
Active Buyers

123

YoY % change
Orders fulfilled (in mn)
YoY % change

4,182

172

255

380

540

739

39.8%

48.3%

49.0%

42.0%

37.0%

7,224

12,750

22,037

35,361

53,289

72.7%

76.5%

72.8%

60.5%

50.7%

Source: Company data, Jefferies


Note: FY15 refers to fiscal year ended March 31, 2015

page 107 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 134: Key assumptions (Fiscal year ends on March 31, in USD mn) (contd)
GMV Metrics - China Commerce Retail
Total GMV (in USD bn)

FY2012A FY2013A FY2014A


105

YoY % change
Taobao Marketplace GMV

87

Commission rate

527

656

55.6%

44.4%

35.1%

24.5%

189

242

287

323

42.2%

28.3%

18.6%

12.4%

83.0%

76.5%

69.9%

62.1%

54.5%

49.2%

18

41

81

148

240

333

126.9%

99.4%

81.9%

62.2%

38.9%

YoY % change
% of Total GMV

390

64.6%
133

Tmall GMV

Overall monetization rate

270

51.8%

YoY % change
% of Total GMV

FY2015E FY2016E FY2017E

173

17.0%

23.5%

30.1%

37.9%

45.5%

50.8%

2.02%

2.50%

2.55%

2.68%

2.82%

2.87%

3.03%

3.04%

3.04%

3.43%

3.55%

3.55%

Mobile Metrics
Mobile GMV (in USD bn)

YoY % change
% of Total GMV
Mobile Revenue (in USD mn)

2.5%
-

13

51

172

310

440

393.4%

300.5%

236.1%

79.9%

42.1%

7.4%

19.0%

44.2%

58.8%

67.1%

63

467

3,169

7,158

11,865

YoY % change
As % of China Commerce retail revenue
Mobile Monetization rate
YoY % change
PC GMV (in USD bn)

103

YoY % change
% of Total GMV
PC Revenue (in USD mn)

646.0%

578.0%

125.9%

65.8%

1.4%

6.8%

30.3%

48.3%

62.9%

0.49%

0.91%

1.84%

2.31%

2.70%

0.5%

0.4%

0.9%

0.5%

0.4%

161

219

218

217

216

56.3%

36.1%

-0.5%

-0.3%

-0.6%

97.5%

92.6%

81.0%

55.8%

41.2%

32.9%

4,280

6,423

7,280

7,674

6,988

50.1%

13.3%

5.4%

-8.9%

98.6%

93.2%

69.7%

51.7%

37.1%

2.66%

2.94%

3.34%

3.54%

3.24%

2.7%

0.3%

0.4%

0.2%

-0.3%

YoY % change
As % of China Commerce retail revenue
PC Monetization rate
YoY pcpt change
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%

9.5%

7.5%

4.3%

3.4%

2.7%

2.2%

1,041

1,565

2,151

4,509

6,031

7,163

50.3%

37.4%

109.6%

33.8%

18.8%

2,217

4,055

6,481

8,379

11,514

14,908

82.9%

59.8%

29.3%

37.4%

29.5%

797

1,731

4,009

4,555

6,119

7,690

117.3%

131.6%

13.6%

34.3%

25.7%

2,545

4,728

5,559

7,477

9,425

General and Administrative Expenses


Gross Profit
YoY % change
Non-GAAP Gross Profit
YoY % change
Operating profit
YoY % change
Non-GAAP Operating profit

1,042

YoY % change
Net Profit

144.2%

85.8%

17.6%

34.5%

26.1%

741

1,393

3,765

5,022

5,767

7,524

87.9%

170.3%

33.4%

14.8%

30.5%

1,454

2,233

4,441

5,076

7,263

9,437

YoY % change
Non-GAAP Net Profit

-47.6%

53.6%

98.9%

14.3%

43.1%

29.9%

GAAP Gross Margin

YoY % change

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%

Source: Company data, Jefferies


Note: FY15 refers to fiscal year ended March 31, 2015
page 108 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 135: Income statement (Fiscal year ends on March 31, in RMB mn)
FY2012A FY2013A FY2014A
Total Revenue (in RMB mn)

34,517

68.2%

72.4%

52.1%

46.3%

36.7%

25.8%

6,072

9,337

12,215

24,832

33,613

39,634

Non-GAAP Gross Profit

13,953

25,180

40,289

51,979

71,427

92,480

Non-GAAP Gross Margin

69.7%

72.9%

76.7%

67.7%

68.0%

70.0%

5,015

10,751

24,920

28,255

37,960

47,703

279.3%

114.4%

131.8%

13.4%

34.3%

25.7%

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

YoY% change
Non-GAAP Cost of Revenue

Operating Profit (in RMB mn)


YoY% change
Operating Margin

Non-GAAP General and Administrative Expenses


Non-GAAP Operating Profit (in RMB mn)
YoY% change
Non-GAAP Operating Margin
Depreciation and amortization
Non-GAAP EBITDA (in RMB mn)
YoY% change
Non-GAAP EBITDA margin

52,504

FY2015E FY2016E FY2017E

20,025

76,812

105,040

132,115

1,893

2,585

2,243

2,618

2,807

2,950

6,559

15,802

29,392

34,486

46,382

58,467

173.5%

140.9%

86.0%

17.3%

34.5%

26.1%

32.8%

45.8%

56.0%

44.9%

44.2%

44.3%

715

805

1,339

1,755

2,468

3,388

7,274

16,607

30,731

36,242

48,850

61,855

141.7%

128.3%

85.0%

17.9%

34.8%

26.6%

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

604

455

1,210

2,612

4,648

6,300

-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

300

617

665

184

Royalty and software technology service fee income

27

277

1,764

Annual fee on micro loan

5,532

10,112

-842

-1,457

-25

Interest income
Others

Government grant and others

Net income before income tax and share of results of equity investees
Income Tax
Share of results of equity investees
Net (loss)/profit
Net income attributable to noncontrolling interests
Net (loss)/profit attributable to Alibaba Group (in RMB mn)
YoY% change
Net margin
Non-GAAP net profit (in RMB mn)
YoY% change

2,503

3,445

4,696

116

571

747

26,802

37,054

43,503

56,325

-3,196

-4,907

-6,525

-8,449

-6

-203

-990

-1,200

-1,200

4,665

8,649

23,403

31,157

35,777

46,676

-437

-117

-88

-34

4,228

8,532

23,315

31,123

35,777

257.4%

101.8%

173.3%

33.5%

15.0%

46,676
30.5%

21.1%

24.7%

44.4%

40.5%

34.1%

35.3%

9,154

13,869

27,610

31,489

45,060

58,541

229.5%

51.5%

99.1%

14.1%

43.1%

29.9%

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

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

Non-GAAP net margin

YoY% change

Source: Company data, Jefferies estimates


Note: FY15 refers to fiscal year ended March 31, 2015

page 109 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 136: Income statement (Fiscal year ends on March 31, in USD mn)
FY2012A FY2013A FY2014A
Total Revenue (in USD mn)

FY2015E FY2016E FY2017E

3,182

5,558

8,446

12,382

16,932

21,296

68.2%

72.4%

52.1%

46.3%

36.7%

25.8%

965

1,504

1,965

4,003

5,418

6,389

Non-GAAP Gross Profit

2,217

4,055

6,481

8,379

11,514

14,908

Non-GAAP Gross Margin

69.7%

72.9%

76.7%

67.7%

68.0%

70.0%

797

1,731

4,009

4,555

6,119

7,690

279.3%

114.4%

131.8%

13.4%

34.3%

25.7%

YoY% change
Non-GAAP Cost of Revenue

Operating Profit (in USD mn)


YoY% change

25.0%

31.1%

47.5%

36.8%

36.1%

36.1%

Non-GAAP Product Development Expenses

Operating Margin

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

1,042

2,545

4,728

5,559

7,477

9,425

173.5%

140.9%

86.0%

17.3%

34.5%

26.1%

32.8%

45.8%

56.0%

44.9%

44.2%

44.3%

114

130

215

283

398

546

1,156

2,674

4,944

5,842

7,874

9,971

141.7%

128.3%

85.0%

17.9%

34.8%

26.6%

36.3%

48.1%

58.5%

47.2%

46.5%

46.8%

41

265

1,429

749

1,016

96

73

195

421

749

1,016

-55

-67

70

1,008

-11

-253

-353

-462

-503

-503

Net Interest Income

85

-180

-158

-41

246

513

Others

52

144

391

452

647

877

48

99

107

30

45

284

403

555

757

19

92

120

Non-GAAP Operating Profit (in USD mn)


YoY% change
Non-GAAP Operating Margin
Depreciation and amortization
Non-GAAP EBITDA (in USD mn)
YoY% change
Non-GAAP EBITDA margin
Other Income
Interest and investment income
Interest income
Others
Interest expenses

Government grant and others


Royalty and software technology service fee income
Annual fee on micro loan
Net income before income tax and share of results of equity investees
Income Tax
Share of results of equity investees
Net (loss)/profit
Net income attributable to noncontrolling interests
Net (loss)/profit attributable to Alibaba Group (in USD mn)
YoY% change
Net margin
Non-GAAP net profit (in USD mn)
YoY% change
Non-GAAP net margin

4
-

879

1,628

4,311

5,973

7,012

9,079

-134

-235

-514

-791

-1,052

-1,362

-4

-1

-33

-160

-193

-193

741

1,393

3,765

5,022

5,767

7,524

-69

-19

-14

-5

672

1,374

3,751

5,017

5,767

7,524

257.4%

101.8%

173.3%

33.5%

15.0%

30.5%

21.1%

24.7%

44.4%

40.5%

34.1%

35.3%

1,454

2,233

4,441

5,076

7,263

9,437

229.5%

51.5%

99.1%

14.1%

43.1%

29.9%

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

2.06

Non-GAAP Earnings per ADS, diluted (in USD)

0.58

0.93

1.90

2.92

3.79

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

YoY% change

Source: Company data, Jefferies estimates


Note: FY15 refers to fiscal year ended March 31, 2015

page 110 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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

Investment securities

593

629

1,442

1,737

1,737

1,737

1,669

1,734

4,679

8,449

11,554

14,533

155

135

269

768

1,050

1,321

1,514

1,599

4,410

7,681

10,504

13,211

27,899

43,162

67,833

146,824

198,752

263,073

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

Prepayments, receivables and other assets


Accounts receivable, net
Prepayment and other assets
Total current asset
Non current asset

Land use rights, net


Goodwill
Prepayment, receivables and other assets

1,701

1,895

1,660

1,522

1,497

1,581

11,436

11,294

11,793

29,289

29,289

29,289

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
0

Current liabilities
Current bank borrowings
Secured borrowings
Accrued expenses, accounts payable and other liabilities
Accounts payable
Accrued expenses and other liabilities

1,283

3,350

1,100

2,098

9,264

4,659

8,961

11,887

17,743

23,949

29,858

198

697

649

844

840

793

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

4,350

4,929

6,496

8,449

11,554

14,533
66,124

Deferred revenue and customer advances


Total current-liabilities

11,751

23,995

37,384

38,828

52,783

Deferred revenue

529

389

428

538

735

925

Deferred tax liabilities

413

643

2,136

2,136

2,136

2,136

5,191

0
49,033

Redeemable preference shares


Non-current bank borrowings

22,462

30,711

49,033

49,033

104

60

72

1,997

2,731

3,435

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

Other liabilities
Total non-current liabilities

Source: Company data, Jefferies estimates


Note: FY15 refers to fiscal year ended March 31, 2015

page 111 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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

Investment securities

94

101

232

280

280

280

265

279

753

1,362

1,863

2,343

Prepayments, receivables and other assets


Accounts receivable, net
Prepayment and other assets
Total current asset

25

22

43

124

169

213

241

257

709

1,238

1,693

2,130

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

39

39

486

514

514

514
1,603

Investment securities
Intangible assets, net
Land use rights, net
Goodwill
Prepayment, receivables and other assets

56

54

307

1,001

1,378

270

305

267

245

241

255

1,817

1,819

1,897

4,721

4,721

4,721

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

204

539

177

338

1,490

740

1,443

1,912

2,860

3,861

4,813

Current liabilities
Current bank borrowings
Secured borrowings
Accrued expenses, accounts payable and other liabilities
Accounts payable
Accrued expenses and other liabilities

31

112

104

136

135

128

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

1,867

3,864

6,014

6,259

8,508

10,659

Total current-liabilities
Deferred revenue

84

63

69

87

119

149

Deferred tax liabilities

66

104

344

344

344

344

Redeemable preference shares

836

Non-current bank borrowings

3,617

4,940

7,904

7,904

7,904

Other liabilities

17

10

12

322

440

554

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

Total non-current liabilities

Source: Company data, Jefferies estimates


Note: FY15 refers to fiscal year ended March 31, 2015

page 112 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 139: Cash flow statement (Fiscal year ends on March 31, in RMB mn)
FY2012A FY2013A FY2014A
Net income (loss)

FY2015E FY2016E FY2017E

4,665

8,649

23,403

31,157

35,777

46,676

1,254

1,259

2,844

5,905

7,420

9,300

Adjustments for cash generated from operating activities:


Share-based compensation

1,269

715

805

1,339

1,755

2,468

3,388

(Gain) Loss on disposal of equity investees

(24)

(68)

Realized and unrealized loss (gain) related to investment securities

138

(80)

(90)

Change in fair value of other assets and liabilities

264

245

21

(387)

Equity-settled donation expense


Depreciation and amortization of PP&E and land use rights

Loss (Gain) on disposal of other subsidiaries

(8)

(17,496)

Amortization of intangible assets

155

130

315

572

1,862

2,564

Impairment of goodwill and intangible assets

135

175

44

Loss on disposal of PP&E


Share of results of equity investees
Deferred income tax
Allowance for doubtful accounts relating to micro loans

25

203

990

1,200

1,200

150

104

1,466

120

442

0
0

Changes in operating assets and liabilities net of effects of acquisition


Restricted cash

(113)

(974)

(1,329)

(1,197)

Loan receivables

(226)

(2,828)

(9,175)

13,159

Prepayments, receivables and other assets

(240)

(354)

(3,567)

(4,737)

230

(116)

1,008

587

681

653

976

1,344

1,231

1,430

1,371

1,332

3,657

3,992

7,781

6,940

6,613

583

2,338

1,628

2,181

2,533

2,429

Income tax payable


Escrow money payable
Accrued expenses, accounts payable and other liabilities
Merchant deposits
Deferred revenue and customer advances
Net cash generated from operating activities

94

(4,227)

0
(4,054)

128

437

1,606

2,063

3,303

3,168

9,275

14,476

26,379

43,951

59,387

73,308

3,728

2,589

4,617

Cash flows from investing activities:


Decrease (Increase) in short term investments
Increase (decrease) in restricted cash
Decrease (Increase) in trading investment securities
Acquisition of available-for-sale and held-to-maturity investment securities
Disposal of available-for-sale investment securities
Acquisition of property and equipment and intangible assets
Acquisition of land use rights and construction in progress
Disposal of property and equipment

(2,108)

334

(8,304)
199

167

(12)

(147)

(508)

(60)

(2,972)

1,966

26

372

(9,219)

(10,143)

(11,437)

(1,419)

(1,457)

(1,491)

(307)

(420)

(528)

301

(732)

(46)

551

Loans to employees, net ot repayment

(305)

(344)

(212)

Acquisition of equity investees

(761)

(452)

(16,468)

74

167

Net cash used in investing activities


Net cash generated from (used in) financing activities
Exchange rate effect on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Free cash flow

(3,285)

(20)

Disposals of equity investees

(1,046)

(52)

Deconsolidation and disposal of subsidiaries, net of cash proceeds

(749)

(191)

Cash paid for business combination, net of cash acquired

(462)

(125)
475
(54)

545
(1,406)
(76)

89

(6,777)
0

(32,997) (12,148) (10,564) (11,965)


9,364
(97)

9,571

13,539

2,649

59,701

91,504

48,823

61,343

7,286

16,857

30,396

33,045

124,549

173,372

16,857

30,396

33,045

124,549

173,372

234,715

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%

Source: Company data, Jefferies estimates


Note: FY15 refers to fiscal year ended March 31, 2015
page 113 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 140: Cash flow statement (Fiscal year ends on March 31, in USD mn)
FY2012A FY2013A FY2014A
Net income (loss)

741

1,393

199
0
114

FY2015E FY2016E FY2017E

3,765

5,022

5,767

7,524

203

457

952

1,196

1,499

204

130

215

283

398

546

Adjustments for cash generated from operating activities:


Share-based compensation
Equity-settled donation expense
Depreciation and amortization of PP&E and land use rights
(Gain) Loss on disposal of equity investees

(4)

(11)

(2,820)

Realized and unrealized loss (gain) related to investment securities

22

(13)

(14)

Change in fair value of other assets and liabilities

42

39

Loss (Gain) on disposal of other subsidiaries

(1)

(62)

Amortization of intangible assets

25

21

51

92

300

413

Impairment of goodwill and intangible assets

21

28

Loss on disposal of PP&E

Share of results of equity investees

33

160

193

193

24

17

236

19

71

Restricted cash

(18)

(157)

(214)

Loan receivables

(36)

(455)

(1,476)

Prepayments, receivables and other assets

(38)

(57)

(574)

Deferred income tax


Allowance for doubtful accounts relating to micro loans
Changes in operating assets and liabilities net of effects of acquisition

(193)
2,121
(764)

0
(681)

0
(654)

Income tax payable

37

(19)

162

95

110

105

Escrow money payable

15

157

216

198

230

221

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

1,474

2,331

4,243

7,085

9,573

11,817

Decrease (Increase) in short term investments

592

417

744

Increase (decrease) in restricted cash

(335)

54

32

Decrease (Increase) in trading investment securities

27

(2)

(24)

Acquisition of available-for-sale and held-to-maturity investment securities

(81)

(10)

(478)

(74)

Accrued expenses, accounts payable and other liabilities

Net cash generated from operating activities


Cash flows from investing activities:

Disposal of available-for-sale investment securities

312

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)

(118)

Disposal of property and equipment


Cash paid for business combination, net of cash acquired
Deconsolidation and disposal of subsidiaries, net of cash proceeds
Loans to employees, net ot repayment
Acquisition of equity investees
Disposals of equity investees
Net cash used in investing activities
Net cash generated from (used in) financing activities
Exchange rate effect on cash and cash equivalents

(1,336)

60

48

(30)

(8)

(3)

89

(7)

(48)

(55)

(34)

(121)

(73)

(2,649)

12

27

(20)

88

75
(9)

(226)
(12)

14

(1,092)
0

(1,958)

1,506

9,624

14,750

7,870

9,888

(16)

(1,703)

(5,308)

(1,929)

Net increase in cash and cash equivalents

1,521

2,180

426

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

9,973

1,391

3,180

5,191

3,478

7,938

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%

Source: Company data, Jefferies estimates


Note: FY15 refers to fiscal year ended March 31, 2015
page 114 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

This page is intentionally kept blank

page 115 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

Appendix

page 116 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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.

page 117 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 141: FY2Q15 (CY3Q14) results preview (in RMB mn)
FY1Q14A FY2Q14A FY3Q14A FY4Q14A
Total Revenue (in RMB mn)

10,778

FY1Q15A

FY2Q15E

10,950

18,745

12,031

15,771

16,021

FY3Q15E FY4Q15E
27,720

17,300
-37.6%

QoQ % Change

24.3%

1.6%

71.2%

-35.8%

31.1%

1.6%

73.0%

YoY % Change

58.7%

46.8%

61.7%

38.7%

46.3%

46.3%

47.9%

43.8%

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%

74.7%

72.6%

77.7%

71.2%

70.9%

61.6%

63.0%

59.7%

2,576.0

2,650.4

3,903.6

3,085.0

3,992.0

5,447.3

9,424.7

5,968.4

8,202

8,300

14,841

8,946

11,779

10,574

18,295

11,331

Gross profit

Gross margin
Non-GAAP cost of revenue
Non-GAAP Gross profit
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%

76.1%

75.8%

79.2%

74.4%

74.7%

66.0%

66.0%

65.5%

Non-GAAP Gross margin


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%

50.3%

47.9%

47.0%

45.3%

43.4%

33.9%

37.1%

32.9%

Operating margin
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%

54.3%

56.6%

57.9%

54.0%

51.7%

43.7%

42.6%

43.5%

4,384

4,883

8,266

5,543

12,344

4,739

9,003

4,977

4.5%

11.4%

69.3%

-32.9%

122.7%

-61.6%

90.0%

-44.7%

154.6%

-413.0%

104.4%

32.1%

181.6%

-2.9%

8.9%

-10.2%

40.7%

44.6%

44.1%

46.1%

78.3%

29.6%

32.5%

28.8%

4,583

5,943

10,386

6,699

7,317

6,441

10,705

7,027

-0.2%

29.7%

74.8%

-35.5%

9.2%

-12.0%

66.2%

-34.4%

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

3.4%

28.2%

74.8%

-35.5%

6.8%

-15.8%

66.2%

-34.4%

117.5%

136.6%

135.5%

49.4%

54.4%

1.5%

-3.5%

-1.8%

0.32

0.41

0.72

0.46

0.49

0.42

0.69

0.45

3.3%

28.2%

74.8%

-35.5%

7.1%

-15.8%

66.2%

-34.4%

117.2%

136.3%

135.3%

49.2%

54.7%

1.7%

-3.3%

-1.6%

Non-GAAP Operating margin


Net Income
QoQ % Change
YoY % Change
Net margin
Non GAAP Net Income
QoQ % Change
YoY % Change

QoQ % Change
YoY % Change
Non-GAAP EPADS, diluted (in USD)
QoQ % Change
YoY % Change

Source: Company data, Jefferies estimate


Note: Non-GAAP quarterly financials of FY14 is based on our estimates.

page 118 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Chart 142: FY2Q15 (CY3Q14) results preview (in USD mn)
FY1Q14A FY2Q14A FY3Q14A FY4Q14A
Total Revenue (in USD mn)

1,734

FY1Q15A

1,761

3,015

1,935

2,542

FY2Q15E

FY3Q15E FY4Q15E

2,583

4,468

2,789
-37.6%

QoQ % Change

24.1%

1.6%

71.2%

-35.8%

31.4%

1.6%

73.0%

YoY % Change

58.5%

46.7%

61.5%

38.6%

46.6%

46.6%

48.2%

44.1%

438.7

482.8

671.0

558.2

739.1

991.8

1,654.6

1,123.2

1,295

1,279

2,344

1,377

1,803

1,591

2,814

1,665

Cost of revenue
Gross profit
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%

76.1%

75.8%

79.2%

74.4%

74.7%

66.0%

66.0%

65.5%

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 Gross margin


Operating Profit - GAAP

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%

54.3%

56.6%

57.9%

54.0%

51.7%

43.7%

42.6%

43.5%

705

786

1,330

892

1,990

764

1,451

802

4.3%

11.4%

69.3%

-32.9%

123.2%

-61.6%

90.0%

-44.7%

154.3%

-412.7%

104.1%

31.9%

182.2%

-2.7%

9.1%

-10.0%

40.7%

44.6%

44.1%

46.1%

78.3%

29.6%

32.5%

28.8%

737

956

1,671

1,078

1,179

1,038

1,726

1,133
-34.4%

Non-GAAP Operating margin


Net Income
QoQ % Change
YoY % Change
Net margin
Non GAAP Net Income
QoQ % Change

-0.3%

29.7%

74.8%

-35.5%

9.5%

-12.0%

66.2%

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

3.4%

28.2%

74.8%

-35.5%

6.8%

-15.8%

66.2%

-34.4%

117.5%

136.6%

135.5%

49.4%

54.4%

1.5%

-3.5%

-1.8%

0.32

0.41

0.72

0.46

0.49

0.42

0.69

0.45

3.3%

28.2%

74.8%

-35.5%

7.1%

-15.8%

66.2%

-34.4%

117.2%

136.3%

135.3%

49.2%

54.7%

1.7%

-3.3%

-1.6%

YoY % Change

QoQ % Change
YoY % Change
Non-GAAP EPADS, diluted (in USD)
QoQ % Change
YoY % Change

Source: Company data, Jefferies estimates


Note: Non-GAAP quarterly financials of FY14 is based on our estimates.

page 119 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

Alibabas M&A Investment Summary


Table 4: Alibabas M&A activities disclosed by company
Business area
Mobile

O2O

Digital Media
and
Entertainment

Date
June,
2014

Target
UCWeb
(Private)

Apr,
2014/
Apr,
2013

Weibo
(NASDAQ: WB)

Apr,
2014/
Mar,
2014

TangoMe
(Private)

Jul,
2014/
May,
2013

Autonavi
(Private;
delisted from
NASDAQ in July
2014)

Deal Details
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.
USD1,035mn in
aggregate for approx.
30% stake on a fullydiluted 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)
USD217mn in
aggregate for 20%
stake on a fully-diluted
basis

USD1,326mn in
aggregate for 100%
stake (Initial
investment:
USD294mn for 28%
stake; Follow-on
investment:
USD1,032mn for the
remaining stake)
Jul, 2014 Intime Retail
HKD5,368mn
Group (" (USD692.5mn) for
9.9% equity stake and
", HKSE:
convertible bonds
1833 HK)
which would increase
Alibaba's stake to 26%
upon conversion.

Jul, 2014 Evergrande FC


("
", private)

Target Company Description


- 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,
according to the company.

Implied Strategies
- Enhance mobile offerings beyond eCommerce, such as general mobile
search
-Access UCWeb's large base of mobile
users and offer existing user base with
additional mobile solutions

- 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

- 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.
- 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.

-Improve mobile messaging technology


and solution;
-Expand customer reach to overseas
market

- One of Chinas 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" multichannel 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.
-Provide a marketing platform with
access to millions of soccer fans across
China

RMB1.2bn
- One of the most popular soccer teams
(USD192.9mn) for 50% in China and China's first ever winner of
stake
the Asian Football Confederation
Champions League Cup.

page 120 of 130

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

- 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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Table 4: Alibabas M&A activities disclosed by company
Business area

Logistics

Date
May,
2014

Target
Youku Tudou
(NYSE: YOKU)

June,
2014

Alibaba
Pictures
(formerly
known as
ChinaVision,
HKSE: 1060
HK)

Apr,
2014

Wasu*
("", SZSE:
000156 CH)

Jul, 2014 Singapore Post


Limited
(SGX: S08 SG)

Mar,
2014

Haier
Electronics
Group
(HKSE: 1169
HK)

Deal Details
USD1.09bn for 16.5%
stake on a fully-diluted
basis (Yunfeng Capital
invested USD132mn to
purchase an additional
2% stake)

Target Company Description


- 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.
HKD6,244mn
-A company primarily engaged in media
(USD805.7mn) in cash related business, mainly including
for 60% stake
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.
RMB6.54bn
-An operator of digital media
(USD1.05bn)
broadcasting and distribution in China.
investment through
Wasu is one of seven operators approved
Hangzhou Yunxi for
by the state to deliver multimedia
approx. 20% stake
content to households.
interest.
-Total revenue grew 29.9% YoY to
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.
SGD313mn
-The national postal service provider in
(USD249mn) for 10.3% Singapore and a leading provider of estake
Commerce logistics solutions in the AsiaPacific 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.
HKD2.8bn
-Haier Electronics Group is a company
(USD364mn) for 2%
engaged in R&D, manufacturing and
stake in Haier, 9.9%
sale of electrical appliances, especially
stake in Goodaymart, a large electrical appliance.
wholly-owned
-Goodaymart Logistics (""), a
subsidiary of Haier
wholly-owned subsidiary of Haier,
engaged in logistics,
mainly focused on large format goods
and additional 24%
delivery and installation of home
stake in Goodaymart
appliance, furniture and sanitary ware for
upon conversion of all Haier and third-party branded products
convertible bonds

page 121 of 130

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

Implied Strategies
-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

-Gain access to movie and television


program content
-Potentially expand Alibaba's products
and offerings in the digital media
entertainment sector

-Enhance Alibaba's digital


entertainment strategy in original
content development, video
communication, games, music, etc.
-Cooperate on online content and
Internet TV development

-Improve its international logistics


solution
-Facilitate purchase of overseas products
by domestic consumers

-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.

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Table 4: Alibabas M&A activities disclosed by company
Business area

Date
May,
2013

Target
Zhejiang
Cainiao Supply
Chain
Management
Co, Ltd ("")
or China Smart
Logistics
(Private)

e-Commerce
infrastructure
and service

May,
2014/
Nov,
2010

Shenzhen
OneTouch
Business
Services ("
",
private)

Overseas

Mar,
2014

ShopRunner
(Private)

Healthcare

Apr,
2014

CITIC 21
(HKSE: 0241
HK)

Deal Details
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)
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.)
USD202mn for 39%
stake interest

Target Company Description


-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.

Implied Strategies
-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.

-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.
-A company that operates a membersonly 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.
HKD932mn
-A leading developer of product
(USD120.3mn) for 38% identification, authentication and
stake interest. (Yunfeng tracking systems for pharmaceuticals and
Capital acquired
medical products in China.
another 16% stake in
-Total revenue grew 279% YoY to
CITIC 21 in the amount HKD60.2mn for the year ended Mar 31,
of HKD395mn)
2014. Total profit grew by 389.4% YoY
to HKD9.6mn for the year ended Mar 31,
2014.

-Provide comprehensive export-related


service to SMEs, including customs
clearance, logistics, cargo insurance,
currency exchange, tax refund,
financing and certification, etc.

-Enable Chinese consumers to shop for


authentic American products directly.
-Develop cross-border commerce
opportunities.

-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.

page 122 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Table 5: Alibabas M&A activities reported by public news sources
Business area
Mobile

O2O

Date
Oct, 2014

Target
Peel
Technologies
(Private)

Deal Details
Strategic investment of
USD50mn

Dec, 2013

LBE Security
Master ("LBE
", private)

Undisclosed

Oct, 2013

Quixey
(Private)

Apr, 2013

Umeng ("",
private)

Oct, 2012

MoMo
("", private)

Apr, 2014

Lyft (Private)

Alibaba led a USD50mn A mobile app search engine, which allows


funding
users to find apps based on functionality
search
Acquisition for
-A service provider of applications data
USD80mn
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.
Strategic investment of -A location-based social network app with
USD40mn
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.
Alibaba led a
A ride-sharing app developer
USD250mn funding.

Nov, 2013/ KuaiDi DaChe ("


Jun, 2013
",
private)

Strategic investment,
Alibaba led a
USD100mn funding

Nov, 2012

DDmap (" Strategic investment,


no details disclosed
", private)

Jul, 2011

Meituan
("", private)

Strategic investment
(approx. 10-15% stake,
according to founder)

page 123 of 130

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

Target Company Description


-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 120mn125mn by 2014, and total revenue is
expected to reach USD8mn in FY14E, and
USD20mn-25mn in FY15E.
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.

-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.
-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.
-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.

Implied Strategies
-Help Alibaba to extend to Media
and Entertainment areas.
-Gain access to Smart Home area

-Strengthen its presence on


mobile
-Potentially cooperate on
expanding service offerings on
app distribution platform and
Alipay Wallet
-Strengthen its mobile search
technology
-Help to better understand
mobile users data and in-app
behavior
-Strengthen its advertising
technology on mobile eCommerce

-Enhance its positioning on LBS


mobile social network as a
supplement to Taobao's overall
local lifestyle service offering

-Enhance mobile service offering


-Help to increase mobile user
stickiness
-Expand footprint in O2O market
-Enhance mobile user stickiness

- Expand footprint in O2O market


by investing in one of China's top
local O2O startups

- Complement offerings of
Alibaba's "Juhuasuan" groupbuying site, which mostly offers
tangible products, with
Meituan's focus on service
instead
- Acquire additional users outside
of Alibaba's internal e-commerce
ecosystem

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Table 5: Alibabas M&A activities reported by public news sources
Business area

Date
Oct, 2006

Target
Koubei
("", private)

Deal Details
Strategic investment,
no details disclosed

Target Company Description


Leading Chinese classified listing and
community website on accommodation,
catering, etc.

Digital Media
and
Entertainment

Jun, 2014

Huxiu.com (1)
(, private)

Strategic investment

Jul, 2014

Kabam
(Private)

Shanghai Yunxi, a
company fully owned
by Small and Micro
Financial Services
Company (formerly
known as Zhejiang
Alibaba e-Commerce)
Strategic investment of
USD120mn

Jun, 2014

21st Century
Media ("21
", private)

Strategic investment of
RMB500mn
(USD80.4mn)

Dec,
2013/Oct,
2012

Ttpod ("
", private)

Strategic investment,
no details disclosed

Jan, 2013

Xiami
("", private)

Acquisition, no details
disclosed

Sept, 2013

Kanbox
("", private)

Acquisition, no details
disclosed

e-Commerce
infrastructure
and service

Jun, 2013/ Taotaosou ("


Nov, 2011/ ", private)
Apr, 2010

May, 2011
Jan, 2010

Sept, 2009

Strategic investment
with initial investment
of RMB3mn
(USD0.48mn), and
further investment
undisclosed
CNZZ
Acquisition of
(Private)
USD15mn
Baozun
(" Strategic investment,
no details disclosed
", private)
net.cn
("", private)

Acquisition of
RMB540mn
(USD86.8mn)

page 124 of 130

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

Implied Strategies
- Complement Alibaba's ecommerce portfolio with the rich
community contents of Koubei
- Merged Koubei into Taobao in
pursuance of the "Big Taobao"
strategy in August 2009
-Gain access to media content

-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.
-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.
-One of the top mobile music players in
China.
-Its total MAUs and DAUs reached 30.5mn
and 6mn in Jul 2014, respectively,
according to iResearch.
A major free music streaming website

-Reach a partnership to publish


and distribute mobile games.
-Plan to launch 10 games over
the next three years

A network service provider engaged in


Internet data monitoring and analysis
An e-commerce service provider for
merchants including IT, marketing, client
service, logistics, etc.
-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.

-Enhance its service capabilities to


merchants
- Enhance Taobao's service
capabilities to consumers and
enterprises
- 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

-Gain access to media content

-Gain access to music content


-Expand its mobile offering to
customers

-Improve Taobao user experience


given the integration of Xiami's
music-streaming services onto
Taobao platform
-Gain access to content from
music
A leading personal cloud storage service
-Expand Aliaba's products offered
provider in China
to customers
-Enable customers to access their
content and media across
different platforms
-An image search-based shopping
-Improve buyers' user experience
platform in China.
by facilitating their product
-According to company data, accumulated search process
users and online merchants has exceeded
100mn and 1mn, respectively

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
Table 5: Alibabas M&A activities reported by public news sources
Business area
Overseas

Date
Jan, 2014

Target
1 stdibs
(Private)

Online Travel

Sept, 2014

Beijing Shiji
Information
Technology ("
",
SZSE: 002153
CH)

Mar, 2014

Bai Cheng Travel


Network ("
", private)
Qyer
("",
private)

Jointly invested with


CBC Capital of
USD20mn

A Chinese outbound travel service


provider, including hotel reservation,
travel document processing, etc.

Strategic investment,
no details disclosed

An outbound travel site. Total users


reached 40mn with 10mn on mobile as of
Jun 2014, according to company.

Mar, 2013

117go.com
("",
private)

Strategic investment,
no details disclosed

Online
Education

Feb, 2014

TutorGroup
(Private)

Financial
Services

Oct, 2013

Tian Hong Asset


Management (2)
("",
private)

Jointly invested
USD100mn with
Temasek and Qiming
Venture Partners
RMB1.18bn
(USD189.7mn)
invested through
Zhejiang Alibaba eCommerce for 51%
stake interest

-A mobile travel journal and experiencesharing app with total users of 20mn as of
May, 2014, according to mgmt.
-It launched a mobile commerce product
Taozailushang () recently, with
mobile daily transaction volume
exceeding RMB2mn.
An online education platform for
language learning.

Apr, 2014

Hundsun (3)
("",
SHSE: 600570
CH)

Jul, 2013

Deal Details
Strategic investment of
USD15mn

Target Company Description


-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.
Strategic investment of -Founded in 1995, Shiji is the leading IT
RMB2.81bn
service provider and system integrator for
(USD451.8mn) for 15% hotels. It has serviced over 400 hotels and
stake interest
has been selected as the preferred vendor
for many international hotel group such as
Grand Hyatt, Sheraton, Hilton, Shangri-la
and Marriott.

-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.
RMB3.3bn
-China's leading supplier of financial
(USD530.5mn)
software and network services including
invested by Zhejiang
securities, futures, funds, banks, trust
Rongxin Network
fund, insurances and financial
Technology for 20.62% management.
stake interest
-Hundsun's total revenue grew by 9.8%
YoY to RMB462.7mn in 1H14, net profit
reached RMB113.9mn in FY13, +43% YoY.

Implied Strategies
-Enable Chinese consumers to
shop for authentic American
products directly from U.S.
-Enhance Alibaba's presence in
overseas e-Commerce market
-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.
-Provide users with high quality
travel-related services and
content
-Complement own travelbooking 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
-Capture potential synergy
among travel, local lifestyle
service and payment to amass
big data and explore
opportunities in O2O

-Potentially expand service


offerings into online education

-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
-Expand into financial services
-Leverage on Hundsuns software
technology to integrate more
financial-related services in
Alibabas 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

page 125 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

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 to
industry sources. 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.

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) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or 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 subject
company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views
expressed 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) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or 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) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or 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) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or 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) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or 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 may
not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances
and 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 may
not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances
and 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 may
not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances
and 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 may
not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances
and 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 receives
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of reports are published at irregular intervals as appropriate in the analyst's judgement.

Company Specific Disclosures


For 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 Ratings


Buy - 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-month
period.
The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more within
a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock price
consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform
rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12month period.
page 126 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
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 securities
regulations 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 on
the investment merits of the company are provided.

Valuation Methodology
Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total
return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market
risk, 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 Picks
Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selection
is based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward
ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number
can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason for
inclusion 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 Pick
falls within an investment style such as growth or value.

Risk which may impede the achievement of our Price Target


This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the
financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based
upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of
the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and
income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial
and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may
adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such
as 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)

page 127 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

Distribution of Ratings
IB Serv./Past 12 Mos.
Rating
BUY
HOLD
UNDERPERFORM

Count

Percent

Count

Percent

1008
781
140

52.26%
40.49%
7.26%

263
139
6

26.09%
17.80%
4.29%

page 128 of 130

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

Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014

Other Important Disclosures


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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com

BABA
Initiating Coverage
27 October 2014
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Cynthia Meng, Equity Analyst, +852 3743 8033, cmeng@jefferies.com