January 17, 2017

Company Update

Alibaba Group Holding (BABA US, BUY, TP: $115.00)

BUY HOLD SELL Monetization Upside Supported by Upgraded Full
Service; Reiterate Buy
Target Price: $115.00 Current Price: $96.27
52-Week High (MM) $109.87 We are reiterating our Buy rating for BABA and $115 price target. We think BABA is
52-Week Low (MM) $59.25 best positioned in the market to provide full services including advertising, financing,
EV (MM) $250,558
Market Cap (MM) $233,953 logistics and inventory management, cloud, and other business services to merchants
Shares Outstanding (MM) 2,430 on its platform. The company continues to mine its trove of consumer data to
Average Daily Trading Volume (M) 10.5 deliver new ad products and improve its merchants' ROI. We see potential for
Source: Factset growth in merchant ad spending and in the percentage of merchants that advertise.
We expect BABA can also grow GMV by providing omni-channel services to offline
merchants. AliCloud is the dominant player in the cloud market, and continues to
Price Performance enjoy advantages from its present scale, first-mover status, and strict cyber-security
120 regulatory environment. Our $115 PT includes $110 for e-comm (0.9x PEG of FY18E
102 non-Cloud EPS of $4.45), and $5 for AliCloud (7.5x P/S upon FY18E rev of $1.8bn).
85
68
BABA's improving analytics attract advertisers- Alibaba continues to help
merchants improve their ROI with new ad products such as JuXingTai, which allows
50 merchants to fully customize their online presence. We hear positive feedback
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 from ad agencies and expect growth potential in ARPA and in the percentage of
BABA merchants that advertise. Tmall Global recently raised service charges which likely
S&P 500 (rebased)
brings upside to commission rev as well.
Increasing GMV via omni-channel- Another growth driver is Alibabas opportunity
to help merchants manage offline and online sales across a single omni-channel
platform. Offline retailers pay as much as 20% of sales for their offline channels,
compared to a mid-teens rate to list and advertise on Alibaba, per our estimate.
Its intended privatization of Intime should help it develop such capabilities, as well
as provide opportunities for other businesses within its ecosystem, such as digital
media and entertainment.
AliCloud leading the industry- We anticipate AliCloud's scale and experience
adapting to cybersecurity requirements will likely keep it ahead of smaller, state-
owned, and foreign rivals. We estimate 70% rev CAGR in next 2 yrs, with additional
future growth possible if China's large enterprises follow their global peers in
shifting from private to public cloud.
Risks- include competition, stricter e-comm and online ad regulation, potential tax
impact upon Taobao GMV growth, and macro risks such as economic slowdown and
RMB depreciation.
Summary financial data
Highlights 2017E 2018E 2019E
Revenue (MM) ($) 22,575 29,079 36,752
Research Team
Operating Income (MM) ($) 6,307 8,822 11,934
Ella Ji, CFA
EPS ($) 3.38 4.43 5.61
Head of TMT Research
+1 212-554-2966 P/E 28.5x 21.7x 17.2x
ellaji@chinarenaissance.com Source: China Renaissance Securities (US) Inc. ("CRSUS"), Company reports.

China Renaissance Securities (US) Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports.
As a result, investors should be aware that the firm 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 CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON APPENDIX A
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Company Update

Investment Thesis

We reiterate our Buy rating on Alibaba.com and $115 price target. The companys
ambition is to become a full-service provider of advertising, financing, logistics and
inventory management, cloud, and other business services to merchants on its platform,
and we think it is well positioned to provide such comprehensive services. We
recommend Alibaba as a core holding for long-term investors, considering its current
attractive valuation and the high potential of its ecosystem over the long run.

We anticipate secular growth driven by 1) the companys continuous improvement of

monetization via new and industry-leading advertising products and services, which
have been well received especially by large brands with deep pockets; 2) development
of the omni-channel which brings more offline business into its platform; 3) its Cloud
business, which is well positioned to benefit from the next wave of corporate services,
as Chinese companies demand rises rapidly along with big data in the mobile era, and 4)
realization of its other businesses values including its Ant Financial and Media &
Entertainment businesses.

Alibaba is currently trading at 21.7x our FY18E adjusted EPS estimate of $4.43. Current
valuation is attractive, given its industry-leading GMV and op income per active user.
See our valuation analysis including a BABA-JD comparison in the Valuation section.

Recent Quarter GMV Driver: Apparel, FMCG

Alibaba will report its F3Q17 (ends December) on January 24. We anticipate a solid
quarter with rebounding growth for the womans apparel category, likely attributable
to impulse purchases from recently introduced live streaming videos. FMCG (fast-
moving consumer goods) products, such as baby, cosmetics/skincare, personal care, as
well as fresh food/cooking oils likely sell well too, helped by BABAs aggressive subsidies.
We forecast 24% GMV and 46.9% revenue growth for BABA for the quarter, assuming a
3.37% blended take rate. Our non-GAAP EBITDA margin forecast is 49.4% and our non-
GAAP EPS estimate for the December quarter is $1.14.

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Exhibit 1. Alibaba Adjusted Operating Income per User (excl. AliCloud)

Source: Company reports, CRSUS estimates

InTime Retail Privatization Offer

Alibaba announced on January 10th that it will lead the privatization of department
store Intime Retail (1833.HK, not covered) for $2.6 billion, and increase its current 28%
stake to 74%. Alibaba and Intime founder Shen Guojun have offered HK$10 per share, a
42.25% premium over Intimes HK$7.03 closing price on Dec 28 before suspension of
trading. Intime operates 29 department stores and 17 shopping malls, primarily in
Zhejiang province. The firms profit declined 21.3% and sales declined 2.3% in 1H16
according to its financial statements, with management citing intense e-commerce
competition.

According to Bloomberg consensus, Intimes 2017E revenue estimate is about 3% of

Alibabas revenue forecast, and its net income is just 1.2%. The near-term financial
impact is not significant, in our view.

We think the privatization is another step towards Alibabas ambition of new retail in
the omni-channel fashion, i.e. to break the boundary of online and offline and connect
all things between offline and online. InTime malls may also be remodeled to bring in
other Alibaba businesses within its ecosystem, such as movie theaters.

New Consumer Protection E-commerce Regulation

On December 19 2016, the Standing Committee of the National People's Congress (NPC)
reviewed a draft law for e-commerce regulation that would require all vendors on e-
commerce platforms to have business licenses, pay taxes, and protect consumer data.
The law also requires platforms to facilitate complaints against vendors and protect
consumer financial and personal data, at penalty of fines up to RMB 500,000. The NPC
has not disclosed an expected timeline for this law to take effect.

If fully implemented, this likely will have some material impact on Taobao, Alibabas C2C
platform (merchants selling on the B2C Tmall platform should already be registered and

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Company Update
paying tax). In interviews with East Money, Taobao merchants said they may have to
raise prices by as much as 10% to compensate for the higher tax burden. Price hikes are
likely to affect Taobaos GMV growth since low prices are one of the biggest attractions
for Taobao shoppers. However, we believe the impact on Alibabas revenue is likely
much smaller, since it only collects advertising dollars from Taobao merchants that pay
no sales commissions based on GMV. Meanwhile, we also think the implementation
might be challenging and take time, considering that there are more than 10 million
merchants on Alibabas platform. For example, one potential problem merchants raised
is that they lack tax documentation from suppliers, which may unfairly compel them to
pay VAT (value-added tax) on the full sale price of their goods, instead of on the value-
added part only.

Monetization Upward Trend Continues, Supported by Better Services

Our channel checks indicate a continuous upward monetization trend. We anticipate a

higher blended take rate driven by Alibabas improving ad services to its platform
merchants. As shopping shifts to mobile, its mobile take rate increased to 2.8% in the
most recent quarter, up 64 bps from 2.15% one year ago, and exceeded the PC take rate
for the first time. We forecast it will break 3% in FY17 and drive the blended take rate to
exceed 3% as well in FY18.

In addition, on January 3, Tmall Global released a list of service charge increases to go

into effect on January 10, 2017. The increase affects certain subcategories within
jewelry, toys, education, home care, personal care, and electronics, whose charges will
increase from 2% or less to 5%. After the changes, service charges now stand at 4-5% for
most of the above categories and 1-2% for food and pet food. The change will likely
have a positive effect on BABAs take rate and revenues.

Exhibit 2. Core China Commerce Revenue & GMV Projections

Source for both graphs: Company reports, CRSUS estimates

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Exhibit 3. BABA Monetization Rate Projection

3.8%
3.62%
3.6%
3.55%
3.34%
3.4%
3.28%
3.2%
3.00%
3.0% 2.97% 3.09%
2.99%
2.8% 2.51% 2.89%

2.6%
2.73%
2.4% 2.59%

2.2%

2.0%

FY 17 E

FY 19 E
FY 18 E
FY 16

Take Rate (blended) Mobile take rate PC take rate

Source: Company Reports, CRSUS estimates

For example, during the recent 11.11 Singles Day Shopping Festival (Alibabas Black
Friday equivalent), Tmall added more big data services for merchants and also
continued to improve personalized recommendations for customers. Brands are
commenting on improving click through rates (CTR) and conversion rates as a result,
and appear to be satisfied with the improved offerings. Currently, only 1 million out of
BABAs 6 million active merchants are using its ad services. We thus anticipate a higher
blended take rate driven by Alibabas platforms improving ROI (higher conversions
and CTRs) as well as a growing paying merchant base.

Looking forward, we anticipate the following drivers for its ecommerce revenue:

Innovation in advertising. Larger merchants will allocate a greater share of budget to

Alibaba, as expanded product offerings and improved performance metrics give them
better sales returns on their advertising investment. In the future, we anticipate tools
permitting more transparent real-time tracking of ad performance, such as Google
(GOOG, not covered) and Facebook (FB, not covered) currently offer, may encourage
retailers to further increase ad spending.

In addition, live streaming is gaining traction in specific verticals, such as beauty. We

believe live streaming has the most potential in sectors like beauty, personal care,
accessories, and apparel, whose customers like to see a product demonstrated and feel
that its purchase brings them closer to attaining their favorite broadcasters look. We
anticipate live streaming will help the performance of these categories in the December
quarter of 2016.

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Exhibit 4. Livestreaming Adoption among Tmall Beauty Brands

Source: L2 Insight Report China: The Rise of Livestreaming and Alizila

Omni-channel increasing online penetration. Offline merchants are shifting a greater

share of their sales inventory online, and will be able to direct their former offline
marketing, rent, and personnel expense budgets into Alibaba advertising.

Long-term ad load increase. Alibaba increased its ad load twice in May and September
of 2015. Currently, we see for most categories it has 4 ads in the top 25 listings, or 16%
ad load. This compares to JDs 1 ad in top 11 listings. Both are still below the 30% ad
load criteria for online search companies, indicating room for growth.

Innovation in Advertising

Product Expansion and Refinement

Supported by its big data and long-term user behavior data collection, Alibaba continues
to improve its product offerings for its merchants, especially large-sized merchants, for
whom its customer data collected across its ecosystem provide valuable targeting
opportunities.

Alibaba Major Ad Formats

Taobao Express Train (Zhi Tong Che)

P4P search keyword ads, ranked based on size of ad payment and
merchant popularity/ratings

Diamond Stall (Zuan Shi Zhan Wei)

P4P targeted display ads on Taobao, TMall, Sina Weibo, NetEase, and
Youku desktop sites and mobile

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Company Update
Ma Ji Bao
CPA Customer engagement/interactive marketing services including
communications, quizzes, and exclusive promotions

Taobao Guest (Taobao Ke)

Content creators on outside websites such as blogs are paid a commission
for directing shoppers to an advertisers Taobao store

Effective Branding (Pin Pai Shi Xiao)

Brand advertising for sectors like auto to generate leads and build brand
awareness

Online Sales (Wang Xiao Bao)

Targeted ad products on Alibabas wholesale site 1688, including search
ads, premium online storefronts, and PPC display ads

Source: Alimama

Core products include search and display ads, branded as Express Train and Diamond
Stall, respectively. Newer products include the Ma Ji Bao service, which engages
customers by offering them special deals for guessing the brand or price of a certain
product. Alibaba is also fostering a social ecosystem on Taobao. Last year it introduced
engagement incentives both for internet celebrities, who can earn commissions from
brands, and everyday users who share photos and reviews. Quanzi circles allow users to
share and discuss products by interest, and questions from potential buyers are
forwarded to recent purchasers. Content creators on external sites may also earn
commissions for hosting ads for Taobao platform merchants.

Ad Targeting & Data Analysis Tools

Daoist Sword (Da Mo Jian)

Unified ID tracks products and users across sites, apps, and real location,
claiming to cover 98% of internet users or 500 million people
Used in ad targeting and identifying counterfeiters
Daoist Shield (Da MoPan)
Integrates Ali ecosystem data with merchants own customer data to track
consumer behavior, location, and interests and target accordingly on
Alibabas and 3P platforms

Wireless Intelligence (Zhi Wu Xian)

Open platform for design and customization of mobile advertising content,
rd
including links to advertisers own 3 party apps
Multi-Star Platform (Ju Xing Tai)
Newly introduced big-data based product for large brands. Customizes
product recommendations, promotions/pricing, online storefront, and
product descriptions based on user data
Source: Alimama

Alibaba assigns each user a Unified ID to track their activity across all products within
the Alibaba ecosystem, including Youku, Taobao, and UCWeb browser, which it allows

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Company Update
merchants to combine with their own customer tracking data. We have heard favorable
feedback on the new product Ju Xing Tai, which allows advertisers to customize the
product recommendations, online storefronts, and product descriptions users see as
well as promotions they are offered. Continuing innovation in data-based targeting will
increase consumer engagement and conversion and improve merchant ROI.

A glimpse at US ecommerce giant Amazon's expansion of advertising beyond its own

platform illustrates potential opportunities for Alibaba. In December 2016 Amazon
rolled out 2 products to help outside content producers find advertisers: Amazon
Header Bidding, which lets publishers receive real time bids for ad space which are
hosted on AWS, and Amazon Shopping Insights, which tells websites what their readers
buy on Amazon to better sell space to advertisers. While Alibaba has not stated an
intention to launch such products, we believe Alibaba's user data and top cloud
platform would make it a strong partner for other media if it does choose to offer them.

Alibaba May Dominate the Online FMCG Market, which Is Projected to

Reach RMB 226Bn by 2025

FMCG encompasses fresh and packaged food, home care, personal care, and OTC drugs.
Chinese consumers tend to turn to online FMCG platforms for premium and imported
cosmetics, personal care, and baby products, due to safety concerns and limited offline
selection. We believe that China's online FMCG market can grow to RMB 226 billion
($32 billion) by 2025 from RMB $55 billion at present. This would represent 15% CAGR
over the next nine years. We expect the overall FMCG category growth to remain
relatively flat, while online penetration increases from 4% in 2015 to about 16%.

For more detailed analysis of the FMCG sector, please see our JD initiation report dated
January 13, 2017.

Exhibit 5. FMCG Online Penetration Expected to Reach 16% by 2025

Source: Bain, CRSUS Research

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FMCG orders tend to be low value, e.g. RMB100-200, coupled with moderate gross
margin e.g. ~15%, making it difficult to break even at the operating income level. We
therefore expect big platforms to increase their share without a significant challenge
from small players. BABAs share of the online FMCG market was 52% in 2015,
according to OC&C Consulting, up from about 40% in 2014 according to Bain.

Exhibit 6. B2C FMCG E-Commerce Market Share by Category

Source: Kantar 2016 China Digital Power Study

If we assume total online FMCG market size expands to RMB 100 billion in 2016 from
RMB 60 billion in 2015, that would indicate ~RMB 55 billion online FMCG GMV for
Alibaba.

Despite the low margins, we think FMCG should expand and strengthen the Alibaba
ecosystem. Alibabas strong female user base gives it an advantage in selling products
such as cosmetics. The high frequency of FMCG purchases should increase user
engagement, allowing it to cross-sell more expensive items. In addition, the personal
nature of FMCG purchases makes it a valuable source of consumer data, improving the
platform's advertising offerings.

Omni Channel Adds GMV from Offline Retailers

Currently e-commerce penetration is in about the mid-teens in China and this share is
continuing to grow. With a pricey real estate market raising rents, traditional brick and
mortar retailers are pressured to move an even greater share of their sales online. Rent
for retail stores has increased 20% annually in the past 5 years, consisting of a 28.5%

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Company Update
increase in first tier cities and a 16.5% increase in second tier cities according to CBRE.
According to business magazine Caijing, a Ministry of Commerce official stated in spring
2016 that rent made up 30% of operating costs for some retailers. Chinese firms also
face rising fulfillment costs as well as intensifying competition from e-commerce and
foreign retailers.

Exhibit 7. Chinese Retailers Face Greater Competitive and Cost Pressures

Source: PwC, JDA Software

Note: Global category includes China as well as US, UK, Germany, and Mexico

Alibaba is working to make the most of margin pressure on physical stores by

encouraging them to combine online and offline into a single omni channel. Brands can
manage inventory across all online and offline locations. In this way, even offline
retailers can have a presence on Alibabas platforms, increasing its GMV and blended
take rate.

Brands pay consistently more for their offline channels than on Alibabas platform. For
example, skincare brand LOccitane (0973.HK, not covered) and apparel brand Esprit
(0330.HK, not covered) each paid 21% of revenues toward rent and marketing in the last
fiscal year, according to their filings. By contrast, brands currently pay a mid-teens
percentage of revenues to list and advertise on Alibabas platforms, per our estimate. In
addition, online is not merely a sales channel. It is also a key channel for branding and
an important customer services platform. Alibaba therefore has considerable room to
increase advertising revenue from brands looking to increase their investment in the
omni-channel.

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Exhibit 8. Chinese Retailers Are Eager to Invest in the Omni-Channel

Source: PwC, JDA Software

Note: Global category includes China as well as US, UK, Germany, and Mexico

Alibabas synthesis of online and offline extends to its O2O platform Koubei, a joint
venture between Alibaba and Ant Financial which together invested $1 billion to launch
the platform in June 2015. Koubei has worked to onboard merchants with promotions
such as 2016s Double 12 event, which offered consumers discounts at offline service
providers. It gained participation from 1 million merchants, boosted traffic flow by 13%,
and increased spending per customer by 29%, according to NetEase media.

Koubei is close to closing a $1.2 billion financing round, which values the O2O platform
at $8 billion, according to a December 21 article in Bloomberg. Investors include China
Investment Corp, Silver Lake Management, Yunfeng Capital (backed by Jack Ma),
Primavera Group, and CDH Investments. We anticipate Koubeis net loss will continue to
narrow in 2017, and the platform will add increasing value to the Alibaba ecosystem.

AliCloud at the Front of Chinas Rising Cloud Market

Bain predicted that Chinas cloud market could reach $20 billion by 2020, still a fraction
of IDCs $195 billion estimate for the global cloud market in 2020. Chinas cloud market
is worth RMB 34.6 billion ($4.97 billion) in 2016, consisting of an RMB 14.76 billion
public cloud market (43%) and RMB 19.82 billion private cloud market (57%), according
to the China Academy of Information and Communications Technology (CAICT).

The public cloud market can be further broken down into three types of services, from
foundational to highly focused. Infrastructure-as-a-Service (IaaS) provides the servers,
storage, and operating systems that allow businesses to forgo on-site servers and other
hardware. Platform-as-a-Service (PaaS) is a web environment in which developers can
build applications for functions including customer relationship management (CRM),

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database hosting, and data analysis. Software-as-a-Service (SaaS) offers software
programs that are run over the web instead of as a local download, such as Office 365.
In 2016, the RMB 14.76 billion China public cloud market consisted of RMB 6.5 billion
IaaS, RMB 7.41 billion SaaS, and RMB 850 million PaaS according to CAICT.

Exhibit 9. Public Cloud Market Composition, 2016

Source: China Academy of Information and Communications Technology

Robust Revenue Growth Expected

We estimate AliCloud represents over a 40% share in Chinas public cloud market. In the
most recent quarter F2Q16 (Sept 30), AliCloud contributed RMB 1.5 billion or 4% of
revenue with 130% y/y growth and 651,000 paying customers. Its adjusted EBITA loss
narrowed to RMB 57 million in F2Q16 from RMB 158 million the previous quarter. We
expect AliCloud will contribute more than RMB 7 billion and 14 billion total revenue in
FY17 and FY18, respectively. Main drivers include consolidation in the public cloud space,
large enterprises security concerns, an expected eventual shift from private to public
cloud, and tight cybersecurity regulation that favors large domestic cloud providers.

Exhibit 10. AliCloud Revenue Projection

Source: Company reports, CRSUS estimates

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Early Mover AliCloud Retains Strong Competitive Positioning

Alibaba launched cloud services in 2011 ahead of peers and is now seeking to leverage
its current market share leadership into a similar level of profitability and dominance
that Amazons (AMZN, not covered) AWS has been enjoying in the US. AliCloud currently
leads the cloud industry with over 40% market share in Chinas public Infrastructure as a
Service (IaaS) market, with Tencent (0700.HK, Buy, PT HKD 250), Ucloud (private
company), AWS, Microsoft Azure (subsidiary of Microsoft, MSFT, not covered), China
Telecom (CHA, not covered), etc. as its primary competitors according to IDC and our
estimates.

We are optimistic about AliClouds market share leadership in China in the long term.
Although current market competition is intense, we believe AliCloud should be able to
succeed over time. Foreign companies have strong reputations for quality, and AWS for
example is highly competitive in pricing. However, AWS had only a 4.3% share while IBM
(IBM, not covered) had less than a 1% share of Chinas public cloud market in 2015
according to IDC. Laws requiring data of Chinese companies to be retained in China
forces foreign firms to sell through local partners. Foreign firms will be particularly
constrained by a cybersecurity law scheduled to take effect this June, which requires
network operators to censor, cooperate with official inquiries, and submit to rigorous
oversight if serving key industries including energy, finance, and internet. Last August,
46 foreign trade groups signed a petition opposing the law on grounds it would erect
trade barriers. Separately, the central government has also instructed local
governments to reduce their reliance on foreign IT, indicating their desire to grow
domestic champions in the cloud.

Other major domestic companies include Tencent, which entered the cloud market in
2012 and specializes in the social, video and gaming verticals, as well as state-owned
telecom providers and smaller cloud firms. For example, China Telecom (CHA, not
covered) and China Unicom (CHU, not covered) had 13.1% and 7.6% of China's public
cloud market in 2015 respectively, according to IDC. The telecom companies' structure
as state-owned enterprises (SOEs) and need to partner with IT firms such as Huawei for
equipment disadvantage them compared to private rivals. While select, smaller players
have been able to raise funding (e.g. UCloud raising RMB 1 billion and Qi Niu Cloud
(private company) raising RMB 1.4 billion since 2014), we believe price competition will
likely consolidate the industry in the long run.

Long-Term Opportunities in the Private Cloud Market

Private Cloud is more than 57% of the total cloud market and mainly suits large
companies. Such large-sized Chinese enterprises prefer to operate private cloud systems
out of an in-house data center, citing security concerns and a desire to retain control of
their data. Large firms, especially SOEs, are less price-sensitive and more likely to be
held accountable by the government if they do suffer a security breach.

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Exhibit 11. Larger Enterprises Prefer Private Cloud

Source: Bain China Private Cloud Report 2015

While the public cloud requires massive scale to compete on capacity and cost, and is
therefore dominated by a few giants, private cloud customers value compatibility with
their existing systems, user friendliness, and security. It is therefore easier for smaller
companies to compete in private rather than in public clouds, especially hardware
companies or those whose operating systems are compatible with companies legacy IT
systems. IBM is, therefore, the market leader in the global private cloud, although AWS
dominates the public cloud market, according to Synergy Research Group (Exhibit 13,
below).

Exhibit 12. Global Private Cloud Is Less Consolidated than Public Cloud

Source: Synergy Research Group

While cybersecurity regulations favoring domestic companies may hinder IBMs

expansion in China, AliCloud will still face private cloud competition from increasingly
competitive domestic IT hardware companies such as Lenovo (0922.HK, ADR: LNVGY),
not covered), Huawei (002502.SZ, not covered), and Inspur (0596.HK). A 2015 Bain

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Company Update
survey found that Huaweis private cloud services have been popular among telecom
operators, which have been among the first large enterprises to shift away from foreign
hardware.

Private to Public Cloud

Despite the current preference for private cloud, we think more large enterprises may
gradually shift toward public cloud in the next several years. Alibaba released a hybrid
public-private cloud platform this year in response to new security rules, and has
already signed the Zhejiang government, Guizhou police, and national Customs
Administration as customers. For government bodies and SOEs, the central
government's directives to boost domestic cloud providers may counterbalance their
security concerns.

An interesting trend in the global market is large enterprises' increasing willingness to

adopt public cloud services. A 2016 Global Cloud survey by McKinsey found that while
only 10% of large enterprises surveyed used public Infrastructure-as-a-Service (IaaS) in
2015, 51% planned to use IaaS as a primary environment for at least one workload type
by 2018. Security concerns are easing over time as companies become more
comfortable with AWS and peers' security, acknowledging the cloud giants' security
budgets dwarf their own. Even the US CIA now uses AWS, according to Forbes,
recognizing that Amazons experience securing its public cloud has prepared it to
provide security for a private cloud. Chinese large enterprises may similarly become
more comfortable with public cloud security features as the cloud market develops.

Exhibit 13. Global Public Cloud Spending to Exceed Private Cloud

Source: IDC

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Continued Investment in Media and Entertainment

Alibaba keeps building its media and entertainment business coverage. In 2016 it
acquired Youku in April, consolidated its media and entertainment business in the Sept
quarter, and announced a $1.48 billion investment fund for new media projects. It also
participated in the recent RMB 2.5 billion fund raising of Chinas Bona Film. Alibaba
eventually should cover the entire movie industry from upstream movie production to
downstream movie publication and distribution.

Exhibit 14. Digital Media & Entertainment Revenue Projection

Source: Company reports, CRSUS estimates

Youku is currently one of the top online video platforms in China. We estimate it will
contribute to the majority of our expected RMB 14.5 billion Digital Media &
Entertainment segment revenue for FY17E, as shown in Exhibit 15 above. EBITA loss will
likely remain steep, as we anticipate Alibaba will support Youku to become more
aggressive in bidding for high-quality content.

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Exhibit 15. Youku Tudous and Competitors MAUs

Source: Questmobile

Exhibit 16. Youku Tudous and Competitors Time Spent

Source: Questmobile

A June 2016 survey by Penguin Intelligence suggests that video services must continue
to sustain a high-content investment, since subscribers pay to view megahits and have
little loyalty to any given platform. Fully 49% of subscribers signed up for a platforms
exclusive content, compared to only 27% for the content library and 16% for a better
viewing experience. When they did subscribe, 55.8% of respondents said they preferred
to purchase one-month memberships.

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Exhibit 17. Subscription Package Purchases of Video Subscribers

Source: Penguin Intelligence

This survey finds that the biggest reason for buying 1-3 month subscriptions is an
unwillingness to spend money. Viewers are only willing to pay for the current run of an
exclusive show, which will keep competition and spending high.

Although competition among BAT will remain intense, competition from new entrants in
the video space is unlikely. For example, a 30% cap on foreign content has constrained
Western giants like Netflix. Regulators required live streamers to register in November
and prohibited sharing of unofficial videos on social media in December 2016. This
tightening of internet video regulation in the past 2 months almost ensures that Youku
Tencents Video and iQiyis video should primarily compete with each other in this space,
in our view.

Valuation

BABA-JD, Sameness and Difference

As a major Chinese internet company Alibaba is often referred to collectively with Baidu
(BIDU, Buy, $204) and Tencent as BAT, reflecting the three firms' dominance of the
industry with a combined 70% share of user time spent on mobile devices in China in
2016, according to our research. Alibaba's diverse business segments also compete with
other companies in the e-commerce, O2O, media & entertainment, payments, logistics,
and cloud services industries. However, unlike Baidu and Tencent, Alibaba's core
business involves the sale of physical products; China e-commerce (retail and wholesale)
will contribute 77.4% of revenues in FY17 per our estimates. Therefore, we have chosen
to analyze Alibaba here with JD.com, China's second largest e-commerce platform by
GMV according to iResearch.

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Company Update
The table below highlights our findings of the differences between the two e-commerce
companies, providing a better appreciation for each companys scale and business
model. For JD, the full sale price of goods sold under its direct sales model is booked as
revenue, giving it higher revenue than BABA. Alibaba's marketplace business model
generates income via advertising and sales commissions, yielding lower revenue but
higher adjusted op income per active user, at 13x that of JDs. Excluding its cloud
business, Alibabas current market cap is 6x the size of JD. We forecast BABAs revenue
CAGR at 29% while JDs revenue CAGR should be at 31% from 2016-2018, yet JDs
margin expansion, in our opinion, should be more robust than BABAs and its user
growth has exceeded that of BABA, according to both companies reports. We think
Alibabas scale and business model make it an attractive pick. Our $115 target includes
$110 for e-commerce business (0.9x PEG of FY18E non-Cloud EPS of $4.45), and $5 for
AliCloud (7.5x P/S multiple upon FY18E rev of $1.8bn).

Exhibit 18. BABA (excl. AliCloud) and JD Valuation and Operation Comparison 2017E*

Market Target Adj Op

Market Cap Cap/ User Market Cap GMV (RMB Revenue Active Income/
(USD bn) (USD) (USD bn) bn) (RMB bn) Users (mn) User (RMB)
BABA 236.31** 437.31 290.97** 4,497.02 200.64 540 164.68
JD 39.01 131.39 46.69 881.76 343.08 297 12.59
BABA:JD 6.1x 3.3x 6.2x 5.1x 0.6x 1.8x 13.1x
*JD FY2017 = calendar year 2017, BABA FY2018 ends March 2018
**excl Cloud. Source: Company reports, CRSUS estimates

Price Target Calculation

We are reiterating our Buy rating and maintaining our $115 US target price, which
includes $110 for e-commerce and $5 for AliCloud at an exchange rate of 6.9 RMB to
USD based on our FY 2018 estimate. The $110 US ecommerce target price is based on
0.9x PEG, 27.4% EBITA CAGR for the next 2 years, and FY18E non-GAAP EPS of $4.46
(excl. Cloud). Separately, for its Cloud business, we estimate Alibaba will achieve roughly
RMB 12 billion in revenue in FY18 (ending March 2018). We apply a 7.5x target multiple
up AliClouds FY18E revenue, which comes to ~$13 billion total valuation, or ~$5 per
share.

There is also potential value upside from other businesses in Alibabas ecosystem, such
as Ant Financial Services, Digital Media and Entertainment business, and logistics
services, which are not included in our price target. For example, Ant Financial is valued
at ~$60 billion based on the latest round of financing. We estimate it will realize nearly
$2 billion net income in FY18E. Alibaba has the right to convert its interest in Ant
Financial into 33% equity, subject to Chinese regulatory approval. The 33% of $60 billion
should be worth $19.8 billion, or ~$7.6 per share.

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Exhibit 19. Price Target Calculation

Revenue
In USD (in Bns) EPS Multiple Target Price
eCommerce 4.45 24.80 P/E multiple $110
AliCloud $1.77 -$0.02 7.50 P.S multiple $5
Total 4.43 $115
RMB/USD 6.9
Source: Company reports and CRSUS estimates

Key Risks to Our Price Target

Risks that Alibaba may face that would impede achieving its price target are:

E-Commerce Competition Alibaba faces competition from established e-commerce

rivals as well as emerging platforms offering specialty products such as baby products,
imports, and cosmetics. As a social platform, Taobao also competes with other forms of
social media and entertainment for user time and ad revenue. Challengers may slow its
GMV and/or revenue growth, impeding achievement of its price target.

Third-party merchants increase product quality risk Potential brushing and

counterfeiting of third party merchants on Alibabas platforms increase its risks of
consumer dissatisfaction, damaged partnerships with the counterfeited brands and
regulatory penalties causing revenues to suffer.

Business services competition As Alibaba enters the business services space, it will
face competition from rivals in this area including other tech companies, SOEs such as
telecom firms, as well as foreign rivals. In addition, like other cloud providers, Alibaba is
at risk of a security breach and the regulatory penalty in this area as well as the
reputational damage and loss of business that it could entail, which would affect
revenues, reputation, and ultimately, the price target.

Regulatory The draft e-commerce regulation proposed in December 2016 may

increase tax, security, and compliance costs to Alibaba and its vendors. The final form
and timeline of the regulation remains uncertain at present, but it may impact Alibabas
bottom line within our time horizon and thus affect earnings per share and the target
price.

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Company Update
Alibaba Income Statement

(in RMB millions, except per share or stated otherwise) FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 E FY 18 E FY 19 E

Total Revenues (=1+2+3+4+5) 20,025 34,517 52,504 76,204 101,143 152,347 200,642 253,590
Y/Y Change (%) 72.4% 52.1% 45.1% 32.7% 50.6% 31.7% 26.4%
Q/Q Change (%)

Cost of Revenue 6,554 9,719 13,369 23,834 34,355 57,736 75,843 95,857
As % of Total Sales 32.7% 28.2% 25.5% 31.3% 34.0% 37.9% 37.8% 37.8%
y/y change 48.3% 37.6% 78.3% 44.1% 68.1% 31.4% 26.4%

Gross Profits 13,471 24,798 39,135 52,370 66,788 94,611 124,799 157,733
Gross Margin 67.3% 71.8% 74.5% 68.7% 66.0% 62.1% 62.2% 62.2%
GP y/y change 84.1% 57.8% 33.8% 27.5% 41.7% 31.9% 26.4%
Non-GAAP Gross Margin 72.9% 76.7% 74.2% 70.0% 65.1% 64.7% 64.4%

Operating Income 5,150 14,413 24,964 23,135 29,102 42,563 60,869 82,347
Operating Margin 25.7% 41.8% 47.5% 30.4% 28.8% 27.9% 30.3% 32.5%
Operating Profit y/y change 179.9% 73.2% -7.3% 25.8% 46.3% 43.0% 35.3%

Non-GAAP Operating Income 6,404 15,672 27,808 36,163 45,184 60,769 80,896 104,377
Non-GAAP Operating Margin 32.0% 45.4% 53.0% 47.5% 44.7% 44.1% 44.3% 45.0%
Operating Profit y/y change 144.7% 77.4% 30.0% 24.9% 34.5% 33.1% 29.0%

GAAP Net Income 4,665 8,649 23,403 24,320 71,289 33,767 52,229 71,569
Non-GAAP Net Income 1,787 13,752 27,522 34,922 42,861 58,497 78,924 100,431
Non-GAAP Net Margin 8.9% 39.8% 52.4% 45.8% 42.4% 38.4% 39.3% 39.6%
Y/Y Change (%) 669.6% 100.1% 26.9% 22.7% 36.5% 34.9% 27.3%

GAAP Diluted EPS - - 0.58 - - 13.33 20.37 27.71

Non-GAAP Diluted EPS 0.71 5.76 11.80 13.98 16.73 22.46 30.15 38.21
Non-GAAP Diluted EPS attributable to ordinary shareholders
0.54 for computing
5.71 non-GAAP
11.76 diluted
13.95
EPS 16.80 22.82 30.57 38.69

Weighted Basic Shares Outstanding 2,479 2,294 2,175 2,337 2,458 2,477 2,489 2,499
Weighted Diluted shares outstanding 2,522 2,389 2,332 2,499 2,562 2,605 2,618 2,628

Non-GAAP EBITDA-BABA 7,274 16,607 30,731 40,753 52,340 71,236 92,587 116,680
Adjusted EBITDA margin 36.3% 48.1% 58.5% 53.5% 51.7% 46.8% 46.1% 46.0%
Y/Y change (%) 32.6% 28.4% 36.1% 30.0% 26.0%

BABA Income Statement in USD ($Ms) FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 E FY 18 E FY 19 E

Total Revenues 3,214 5,702 8,463 12,293 15,686 22,575 29,079 36,752
Y/Y Change (%) 77.4% 48.4% 45.2% 27.6% 43.9% 28.8% 26.4%

Non-GAAP Operating Income 1,028 2,589 4,483 5,834 7,007 6,307 8,822 11,934
Operating Margin 32.0% 45.4% 53.0% 47.5% 44.7% 27.9% 30.3% 32.5%
Y/Y Change (%) 151.9% 73.1% 30.1% 20.1% -10.0% 39.9% 35.3%

Non-GAAP Net Income 287 2,272 4,436 5,633 6,647 8,668 11,438 14,555
Non-GAAP Net Margin 8.9% 39.8% 52.4% 45.8% 42.4% 38.4% 39.3% 39.6%
Y/Y Change (%) 692.0% 95.3% 27.0% 18.0% 30.4% 32.0% 27.3%

Non-GAAP EBITDA 1,168 2,743 4,954 6,574 8,117 10,556 13,418 16,910
Non-GAAP EBITDA margin 36.3% 48.1% 58.5% 53.5% 51.7% 46.8% 46.1% 46.0%
Y/Y change (%) 135.0% 80.6% 32.7% 23.5% 30.0% 27.1% 26.0%

Non-GAAP Diluted EPS 0.09 0.94 1.90 2.25 2.60 3.38 4.43 5.61
Y/Y Change (%) 997.3% 101.1% 18.7% 15.7% 29.8% 31.0% 26.6%

USD/RMB 6.23 6.05 6.20 6.20 6.45 6.75 6.90 6.90

Source: Company reports, CRSUS estimates

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Appendix A

Analyst Certification
I, Ella Ji, CFA, certify that the views expressed in this research report accurately reflect my personal views about
any and all of the subject securities or issuers featured in this report. Furthermore, no part of my compensation
was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Important Disclosures
The following disclosures relate to relationships between China Renaissance Securities (US) Inc., China
Renaissance Securities (Hong Kong) Limited, each of their affiliates, (collectively "China Renaissance") and
companies covered by research analysts of China Renaissance and referred to in research products. All references
in this report to CRSUS refer to China Renaissance Securities (US) Inc. CRSUS is registered with the Securities
and Exchange Commission (the SEC) as a U.S. broker-dealer under Section 15 of the Securities Exchange Act
of 1934 and is a member of FINRA and SIPC (http://www.sipc.org). CRSUS is located at 45 Rockefeller Center,
Suite 1900, New York, NY 10111. All references in this report to "CRSHK" refer to China Renaissance Securities
(Hong Kong) Limited. CRSHK is licensed by the Securities and Futures Commission for the conduct of dealing in
securities, advising on securities, and advising on Corporate Finance. CRSHK is located at Units 8107-08, Level
81 International Commerce Centre, 1 Austin Road West, Kowloon, Hong Kong.

Disclosures required by United States laws and regulations

See company-specific regulatory disclosures below for any of the following disclosures required as to companies
referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership;
compensation for certain services; types of client relationships; managed/co-managed public offerings in prior
periods; directorships; for equity securities, market making and/or specialist role. China Renaissance trades or
may trade as a principal in debt securities (or in related derivatives) of issuers discussed in this report. In addition
to 1% ownership positions in covered companies that are required to be specifically disclosed in this report,
China Renaissance, its affiliates, and their respective officers, directors or employees, other than the analyst(s)
who prepared this report, may have a long position of less than 1% or a short position or make purchases or
sales as principal or agent in the securities discussed herein, related securities or in options, futures or other
derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing
arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts
of interest. Unless prohibited by the provisions of Regulation S of the U.S. Securities Act of 1933, this publication
is distributed in the U.S. in accordance with the provisions of Rule 15a-6, under the U.S. Securities Exchange
Act of 1934 for Major Institutional Investors, as such term is defined in Rule 15a-6. To the extent that this
publication is distributed to U.S. Institutional Investors other than Major Institutional Investors, this publication is
distributed by CRSUS but not CRSHK (whether directly or indirectly). Any transactions by U.S. persons with China
Renaissance Securities (Hong Kong) Limited in securities discussed in this publication will be effected through
China Renaissance Securities (US) Inc., in compliance with the requirements of paragraph (a)(3) of Rule 15a-6
of the U.S. Securities Exchange Act of 1934.
Additional disclosures required under the laws and regulations of jurisdictions other than the United States

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Distribution in Hong Kong

The report is for your information only and is not an invitation or offer to sell, or a solicitation of an offer to buy,
the securities described in this report. It has been prepared solely for professional investors (as defined in the
Securities and Futures Ordinance of Hong Kong) whose business involves the acquisition, disposal or holding of
securities, whether as principal or agent, and is not intended for disclosure to, and should not be relied upon by,
any person other than a professional investor. If you are an unintended recipient of this report, you are requested
immediately to return this copy of the report directly to China Renaissance Securities (Hong Kong) Limited. For
professional investors in Hong Kong, please contact China Renaissance Securities (Hong Kong) Limited for all
matters and queries relating to this report.

The following disclosures are made by CRSHK as per paragraph 16 of the Code of Conduct for Persons Licensed
by or Registered with the Securities and Futures Commission (SFC Code of Conduct), and capitalized terms
used below bear the same meanings as defined in paragraph 16 of the SFC Code of Conduct. A copy of the SFC
Code of Conduct can be found on: www.sfc.hk:

The Analyst(s) or his/her Associate serve as an officer of the Issuer that the Analyst(s) review in this report: Nil

Issuers that the Analyst(s) review in this report where the Analyst(s) or his/her Associate have Financial Interest:
Nil

Financial Interests in relation to the Issuer of the Securities which are reviewed in this research report where
CRSHK has an aggregate of such interests amount to 1% or more of the Issuer's market capitalization: Nil

Securities of the Issuer that the Analyst(s) review in this report where CRSHK make a market: Nil

Individuals who are employed by or associated with CRSHK who are serving as an officer of the Issuer: Nil

Any investment banking relationship that CRSHK has with the Issuer (including any compensation or mandate
for investment banking services received within the preceding 12 months of this report): See further China
Renaissance disclosures below.
Global product, jurisdiction and distribution
The research group of China Renaissance produces and distributes research products for clients of China
Renaissance on a global basis. Analysts based in China Renaissance offices around the world produce equity
research on industries and companies. This research is disseminated in Hong Kong by CRSHK; and in the United
States of America by CRSUS. CRSUS has approved and agreed to take responsibility for any research prepared
by CRSHK if and to the extent CRSUS distributes it in the United States.

This report and the securities and financial instruments discussed herein may not be eligible for distribution or
sale in all jurisdictions and/or to all types of investors. This report is provided for information purposes only and
does not represent an offer or solicitation in any jurisdiction where such offer would be prohibited.

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Company Update
No part of this report may be reproduced or distributed in any manner without the written permission of CRSUS.
CRSUS specifically prohibits the re-distribution of this report, via the Internet or otherwise, and accepts no
liability whatsoever for the actions of third parties in this respect.

The following are additional required disclosures: Ownership and material conflicts of interest: China
Renaissances policy prohibits its analysts, professionals reporting to analysts and members of their households
from owning positions in securities of any company in the analyst's area of coverage. Analyst compensation:
Analysts are paid in part based on overall revenues of China Renaissance, which includes investment banking
revenues. Analyst as officer or director: China Renaissances policy prohibits its analysts, persons reporting to
analysts or members of their households from serving as an officer, director, advisory board member or employee
of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts are not registered or
qualified as research analysts with FINRA. They may not be associated persons of CRSUS and therefore may not
be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with Subject Company, public
appearances and trading securities held by the analysts

Potential Conflicts of Interest

Analyst Conflict of Interest:
The research analyst(s) responsible for the preparation of this report receives compensation based upon a
variety of factors, including the quality and accuracy of research, internal/client feedback, and overall firm
revenues, which include investment banking revenues. Research analysts do not receive compensation based
upon revenues from specific investment banking transactions.
China Renaissance Conflicts of Interest:
China Renaissance has not managed or co-managed a public offering of the securities for the companies
referenced in this report in the past twelve months.
China Renaissance received compensation for investment banking services from JD.com Inc. (JD) in the past 12
months. China Renaissance has not received compensation for investment banking services from Alibaba Group
Holding (BABA) in the past 12 months.

China Renaissance expects to receive or intends to seek compensation for investment banking services from
Alibaba Group Holding (BABA) and JD.com Inc. (JD) in the next three months.
Distribution of Ratings and Investment Banking
Below is the distribution of research recommendations as of January 17, 2017
Rating Count Percent IB Count IB%
Buy 5 55.56% 5 100.00%
Hold 3 33.33% 3 100.00%
Sell 1 11.11% 1 100.00%
China Renaissance Ratings as of May 10, 2016:
Ratings of Buy, Hold and Sell have a time horizon of twelve to eighteen months from the date of publishing the
initiation or subsequent rating/price target change report issued for the subject company. The ratings are as
follows:

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Company Update
Buy The expected return on the subject companys stock price should outperform the typical benchmark
market index for the subject company's primary listing exchange (e.g. the S&P 500 for US-listed stocks) over
the above-defined time horizon from the publishing date of the initiation of coverage or subsequent report
announcing a rating change.
Hold The stock price of the subject company is not expected to either appreciate or depreciate meaningfully
from the typical benchmark market index for the subject company's primary listing exchange (e.g. the S&P 500
for US-listed stocks) during the above-stated time horizon.
Sell The expected return on the subject companys stock price should underperform the typical benchmark
market index for the subject company's primary listing exchange (e.g. the S&P 500 for US-listed stocks) over
the above-defined time horizon from the publishing date of the initiation of coverage or subsequent report
announcing a rating change.
Not Rated China Renaissance has removed the rating and, if applicable, the price target, for the subject
company's stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, should no longer be relied upon. An NR
designation is not a recommendation or a rating.
Not Covered a company for which China Renaissance research has not been published.
Valuation Methodology
BABA US:
Our $115 price target for Alibaba (BABA, Buy) is based on $110 for e-commerce and $5 for cloud. The $110 e-
commerce target price is based on 0.9x PEG, 27.4% EBITA CAGR for next 2 years, and FY18E non-GAAP EPS of
$4.45 (excl Cloud). There is also potential value upside from its agreement with Ant Financial Services, which is
not included in our price target. Alibaba has the right to convert to 33% equity interest in Ant Financial, subject
to regulatory approval. The 33% of Ant's $60 billion valuation , based on the latest round of financing, is worth
$19.8 billion, or ~$7.6 per share.

General Disclosures
This research is for institutional investors only, and intended for our clients only. Other than disclosures relating to
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that are inconsistent with the recommendations or views expressed in this research.

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The analysts named in this report may have from time to time discussed with our clients, including China
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Company Update
China Renaissance have any responsibility to update any opinions or other information contained herein. Unless
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