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Company Update
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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China Renaissance Securities (US) Inc.
January 17, 2017
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.
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.
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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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
Exhibit 1. Alibaba Adjusted Operating Income per User (excl. AliCloud)
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.
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.
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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China Renaissance Securities (US) Inc.
January 17, 2017
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.
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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
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
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:
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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
Exhibit 4. Livestreaming Adoption among Tmall Beauty Brands
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
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.
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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
Ma Ji Bao
CPA Customer engagement/interactive marketing services including
communications, quizzes, and exclusive promotions
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.
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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China Renaissance Securities (US) Inc.
January 17, 2017
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.
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.
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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
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.
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.
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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China Renaissance Securities (US) Inc.
January 17, 2017
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.
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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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
Exhibit 8. Chinese Retailers Are Eager to Invest in the Omni-Channel
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.
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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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
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.
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.
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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
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.
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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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
Exhibit 11. Larger Enterprises Prefer Private Cloud
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
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China Renaissance Securities (US) Inc.
January 17, 2017
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.
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.
Source: IDC
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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
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.
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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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
Exhibit 15. Youku Tudous and Competitors MAUs
Source: Questmobile
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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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
Exhibit 17. Subscription Package Purchases of Video Subscribers
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
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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China Renaissance Securities (US) Inc.
January 17, 2017
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*
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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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
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
Risks that Alibaba may face that would impede achieving its price target are:
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.
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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
Alibaba Income Statement
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%
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%
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%
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Company Update
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.
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;
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China Renaissance Securities (US) Inc.
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Company Update
Distribution in Hong Kong
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The Analyst(s) or his/her Associate serve as an officer of the Issuer that the Analyst(s) review in this report: Nil
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China Renaissance Securities (US) Inc.
January 17, 2017
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
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analysts or members of their households from serving as an officer, director, advisory board member or employee
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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
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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China Renaissance Securities (US) Inc.
January 17, 2017
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.
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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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China Renaissance Securities (US) Inc.
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Company Update
The analysts named in this report may have from time to time discussed with our clients, including China
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China Renaissance Securities (US) Inc.
January 17, 2017
Company Update
China Renaissance have any responsibility to update any opinions or other information contained herein. Unless
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China Renaissance Securities (US) Inc.