Alibaba: Leading China s E-Commerce Shubin Niu Washington University in St. Louis 08/31/2014

Transcription

1 (Billions RMB) Alibaba: Leading China s E-Commerce Shubin Niu Washington University in St. Louis 08/31/2014 Taobao will continue dominating Chinese C2C market. According to iresearch, Taobao.com has 96.5% of the total GMV of the C2C market. I see no possible challenger in the next 5 years. However, B2C market will gradually grasp more online retail market share from C2C. Tmall is facing severe competitions from several self-running B2C websites. As people s spending increases, they will gradually shift to self-running websites because they are directly responsible for products they sale and therefore offer better shopping experience. Tmall, on the other side, is a platform website and has no intention to transform into a selfrunning one. Major competitors include JD.com (JD), the largest self-running B2C website in China and named as China s Amazon, Vipshop (VIPS), and Jumei.com (JMEI). The latter two are flash discount self-running B2C websites focusing on clothing and cosmetics. International retail business will keep growing fast. As Chinese economy continues expanding, there will be more demand for Chinese goods from global costumers. I expect China wholesale and international wholesale market will expand at an annual rate of 5%, while international retail can continue booming. Conservative valuation yields a market cap of $132 billion. Anywhere below $170 billion is a good buy. China Online Retail Market Source: iresearch % 74.70% 25.30% 65.40% 34.60% 59.60% 52.00% 40.40% 48.00% 54.10% 58.10% 60.50% 45.90% 41.90% 39.50% 13.70% e 2015e 2016e 2017e Online Retail Total GMV B2C GMV Share C2C GMV Share % 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

2 1 INTRODUCTION Alibaba Group operates Taobao Marketplace, China s dominating costumer-to-costumer (C2C) website, Tmall, China s largest business-to-customer (B2C) website in terms of gross merchandise volume (GMV), Juhuasuan, a group discount buying marketplace, Alibaba.com, China s largest global online wholesale website, 1688.com, a China wholesale marketplace, and AliExpress, a global consumer marketplace. Alibaba Group also provides cloud computing services and invests in several other companies. Revenue Breakdown Year Ended March,31 (in millions) RMB %of total rev RMB %of total rev China Commerce 29, % 45, % Retail 26, % 42, % Wholesale 2, % 2, % Int'l Commerce 4, % 4, % Retail % % Wholesale 3, % 3, % Others 1, % 2, % Total Revenue 34,517 52,504 China retail makes up around 80% of the total revenue and is growing fast. It is the most important part of the company. International retail is also a fast-growing business.

3 2 GENERAL BACKGROUND Chinese individual spending will grow 8.6% annually till 2014 according to McKinsey. At present only 48.9% internet users in China shop online, compared to 74.2% in U.S. The immature offline retail system in China compared to U.S. should further push up the percentage in the future. 3 B2C MARKET BREAKDOWN I divide B2C websites into 4 sub-fields 3C (computer, communication, and consumer electronic), clothing, babysitting, and others. 1. 3C Market Products in the 3C market are standardized, and customers biggest concern is warranty problem. While customers shopping at Tmall have to contact sellers for warranty problems, JD is directly responsible for products it sales on JD.com. In Q2 2014, the 3C market makes up 32% of the total B2C market and is growing at 66.1% compared to the same period last year. I expect Tmall will lose most of its share in 3C market in 3 years. 2. Clothing Except few discount websites such as VIPS and JMEI, other websites are all platforms. The market makes up 27.3% of the total market in Q2 2014, but its growing is slumping. I expect Tmall can keep its large market share in this field. 3. Babysitting The babysitting market makes up only 6.8% of the total B2C market in Q but is booming at more than 100% compared to same period last year. Customers biggest concern is safety, and self-running website will have apparent advantage. I expect JD taking most market share. 4. Others This category includes books, car accessories, and household items etc. Like clothing, these products are in varied forms. Consumers do not have strong after-sale concern. I assume Tmall to continue holding its current 70% market share in this field. 4 VALUATION I assume Alibaba s ability to turn GMV into revenue remains constant in the next few years. I assume Alibaba s net profit margin remains at 43.95% in the next few years. Alibaba s fiscal year ends at March 31th. When predicting GMV annual growth rate I use the fiscal year ends at December 31th. The annual growth rate is modified to accommodate Alibaba s accounting principal. A more detailed table analyzing China retail market is in Appendix I.

4 BABA Valuation (in millions RMB) e 2016e 2017e 2018e China Retail China Wholesale International Retail International Wholesale Cloud Computing Total Revenue Net Profit Net Profit Margin 24.35% 43.95% 43.95% 43.95% 43.95% 43.95% Net Profit Growth % 22.27% 21.69% 15.01% 10.08% Assuming a currency rate of 1 USD=6.15 RMB, my valuation of Alibaba Group except its investment part is $108 billion, corresponding to a 32X 2014 PE ratio and a 15X 2018 PE ratio. Other investments and equity interests worth around $24 billion. (See Appendix II for details) Therefore I estimate a conservative value of $132 billion. 5 BEYOND VALUATION: POSSIBLE RISKS AND MARKET REACTIONS $132 billion is a conservative number under the assumption that Alibaba Group is not going to improve/change its business or expand business into other fields, which are not likely to happen. Also, 32X 2014 PE is not a high valuation. Alibaba has strong government background. Chinese Prime Minister Li had complimented Taobao on helping small companies. The only threatening risk comes from Chinese economy slow-down. Chinese real estate market continues deteriorating. Government hesitates to stimulate the residential market because last time it did so the house price tripled in a year. A real crisis, if happened, will definitely affect BABA s business. Otherwise little can change BABA s solid and promising business. Many mutual fund only hold one company in one sector. Alibaba is apparently the best choice in China online retail sector because its business is more stable than VIPS and JMEI, and its profitability outperforms the self-running website JD.com. Should fund managers want to share Chinese economy growth, they are most likely to choose Alibaba to avoid possible scandals. In conclusion, anywhere under $170 billion is a good buy.

5 Appendix I: Estimating GMV of China retail market. (ir) means the number is from iresearch. (EF) means the number is from Enfodesk. All numbers in billions RMB except percentage. C2C Market e 2015e 2016e 2017e China Online Retail GMV (ir) C2C share of total GMV (ir) 59.6% 52.0% 45.9% 41.9% 39.5% Taobao share of C2C GMV 96.5% (EF) 96.5% 96.5% 96.5% 96.5% Taobao annual GMV YOY growth rate 27.24% 20.89% 15.24% 11.30% B2C Market e 2015e 2016e 2017e B2C share of total online retail GMV (ir) 40.40% 48.00% 54.10% 58.10% 60.50% B2C total GMV (ir) B2C clothing share of total B2C GMV 33.77% 27.05% 21.73% 17.63% 15.49% B2C clothing GMV 258 (EF) B2C clothing GMV yoy growth 38.81% 24% 10% 8% Tmall share of B2C clothing GMV 75% (EF) 72.50% 70% 67.50% 65% B2C 3C share of total B2C GMV 34.78% (EF) 32.11% 31.21% 32.22% 34.07% B2C 3C GMV 266 (EF) B2C 3C GMV yoy growth 60% 50% 40% 30% Tmall share of B2C 3C GMV 37.60% (EF) 30% 25% 20% 15% B2C babysitting share of total B2C GMV 5.73% 8.93% 10.99% 13.37% 16.86% B2C babysitting GMV 44 (EF) B2C babysitting GMV yoy growth 170% 90% 65% 55% Tmall share of B2C babysitting GMV 65% (EF) 54% 47% 41% 35% B2C others share of total B2C GMV 25.72% 31.91% 36.07% 36.77% 33.58% B2C others GMV 197 (EF) B2C others GMV yoy growth % 74.52% 38.20% 12.26% Tmall share of B2C others GMV 66.76% (EF) 70% 70% 70% 70% Tmall total GMV Tmall total GMV yoy growth 64.80% 46.23% 25.78% 10.58% China retail market total GMV China retail market total revenue Yoy growth 38.29% 29.77% 19.40% 11.00%

6 Appendix II: Investments and agreement with Small and Micro Financial Services Company UCWeb, Chinese largest mobile browser in terms of monthly mobile active users. Alibaba acquired 66% of the economic interests of UCWeb in the form of convertible preferred shares in April In June 2014, Alibaba bought all the rest shares with $458 million. Weibo, a leading social media platform in China. Alibaba totally invested $1.09 billion for 30% equity interest. TangoMe, Inc., or Tango, a leader in mobile messaging services based in the United States offering free voice, video and text messaging to consumers globally. Alibaba invested $217 million for 20% equity interest. AutoNavi, a leading provider of digital map content and navigation and location-based solutions in China that was previously listed on the Nasdaq Global Select Market.Alibaba spent $1.33 billion on the merger. Intime,a company managing and operating luxury department stores in China. Alibaba invested $697 million for 26% equity interest. Youku Tudou, one of China s leading Internet television companies that is listed on the New York Stock Exchange,Alibaba invested $1.09 billion for 16.5% equity interest. Alibaba Pictures (formerly known as ChinaVision), a company listed on the Hong Kong Stock Exchange that is primarily engaged in production and distribution of films and television programs,alibaba invested $811 million for 60% equity interest. Wasu, a company listed on the Shenzhen Stock Exchange and engaged in the business of digital media broadcasting and distribution in China,Alibaba offered a loan of approximately $1.06 billion to Wasu. Evergrande FC, Alibaba paid $200 million for 50% ownership interest. CITIC 21, a company that is listed on the Hong Kong Stock Exchange and is primarily engaged in the business of developing product identification, authentication and tracking system for pharmaceutical and medical products in China, Alibaba invested $121 million for 38% equity interest. Zhejiang Cainiao Supply Chain Management Co., an operator of a nationwide logistics infrastructure and information system. Alibaba had invested $273 million, and will invest another $117 million. Haier, a company that is listed on the Hong Kong Stock Exchange and is principally engaged in the research, development, manufacture and sale of electrical appliances. Alibaba invested $460 million for 2% equity interest and convertible bond which can be transferred into 2.6% equity interest. Singapore Post Limited. Alibaba invested $250 million for 10.32% equity interest. Agreement with Small and Micro Financial Services Company (SMFS) The agreement is complicated, but basically Alibaba can receive 37.5% SMFS s pre-tax income. If SMFS is going to IPO, Alibaba can receive at least a one-time payment equals to 37.5% of the equity interest.