University of Texas at Dallas

Ticker: BABA(NYSE) Recommendation: Buy

Price: $67.26 Price Target: $76.2

Basic Information

Market Information

Figure 1. Equity Owners

Highlights - ALIBABA (BABA)

1. We issued a buy recommendation with a target price of $76.2. It implies a

13.29% of holding period return. Singles day shopping festival, rural Taobao,

cloud computing, and international operations contribute a significant revenue

to Alibaba. On the other hand, Alibaba has improved its logistic by a strong

partnership with Cainiao and its partners. Same day delivery services can be

offered from 41 cities to 88 cities, significantly increasing customer

satisfication and purchasing incentive.

2. Main price drivers: (1) Growing E-commerce demand in China boosts

Alibaba’s revenue despite the slowdown in China’s economy (2) Alibaba

continues to diversify its business

3. The e-commerce demand in China continues to grow as internet service

penertrating to rural area. Additionally, mobile commerce revenue increased

by 192% last year and is expected to continued the growing trend

4. Main risks issues are: Concerns that the counterfeit may destroy its

reputation. Also, higher interest rate might lead to higher exchange rate and

cause a lost in exchange from Yuan or other currency to US dollar.

Ticker BABA

Exchange NYSE

Industry Specialty Retail,

Other

Sector Services

52 week price

range

$57.2-95.06

Market Cap 168,257.3

Share Out. 2,512.4

Avg. Daily Volume 17.57

Float % 41.9%

Institutional

Ownership

26.98%

Diluted EPS 4.11

Beta 1.34

TEV/LTM

Revenue

11.6x

TEV/LTM

EBITDA

35.7x

P/E 16.29

Forword P/E 3.01

ROE 34.7%

Analysts:

Wang-Chang, Tsai

Yi-Chun, Cheng

Wei-Hung, Lin

Heng, Lin

Chuan-Wen, Tsai

HuiShan, Huang

2016.02.23

2

Figure 2. Alibaba Entity

Table 1. Key Statistic

*Exchange rate of 0.153 USD/CNY

Figure 3. Revenue Growth

Business Description Company Overview : Alibaba Group Holding Ltd., founded by Chung Tsai and Yun Ma in 1999, is

headquartered in Hangzhou, China and operates as an online and mobile commerce

company. It provides online and mobile marketplaces in retail and wholesale trade,

as well as cloud computing and other services.

It operates Taobao Marketplace, an online shopping destination; Tmall, a third-party

platform for brands and retailers; Juhuasuan, a group buying marketplace;

Alibaba.com, an online wholesale marketplace; Alitrip, an online travel booking

platform; 1688.com, an online wholesale marketplace; and AliExpress, a consumer

marketplace. The company also provides pay-for-performance and display marketing

services through its Alimama marketing technology platform; Taobao Ad Network

and Exchange (TANX), a real-time online advertising exchange in China; and data

management platform that allows participants on TANX to evaluate and select online

advertising inventory using behavioral data, as well as data from browsing behavior

and shopping history. In addition, it offers cloud computing services, including

elastic computing, database services, and storage and large scale computing services

through its Alibaba Cloud Computing platform; Web hosting and domain name

registration services; payment and escrow services for buyers and sellers; and

develops and operates mobile Web browsers. The company provides its solutions

primarily for businesses. (Figure 2)

Management Team : 1. Yun Ma, also known as Jack, Founded Alibaba Group Holding Limited

in 1999 and has been its Executive Chairman since May 2013. Mr. Ma

co-founded Alibaba.com Limited in March 1999 and has also been its

Chairman since 1999. He served as the Chief Executive Officer of

Alibaba at Taobao.com. He served as Chief Executive Officer of

Alibaba.com Limited since 1999. He was selected by China Central

Television (CCTV) and its viewers as one of the “Top 10 Business

Leaders of the Year“ in 2004, and selected as one of the “25 Most

Powerful Business people in Asia“ by Fortune Magazine in 2005.

2. Yong Zhang, also known as Daniel, has been the Chief Executive

Officer of Alibaba Group Holding Limited since May 10, 2015. Mr.

Zhang served as the Chief Operating Officer of Alibaba Group Holding

Limited from September 2013 to May 10, 2015. Prior to joining Alibaba

Group, he served as the Chief Financial Officer and Vice President of

Shanda Interactive Entertainment Ltd. from August 2005 to August 27,

2007. He served as the Chief Financial Officer of Taobao from joining in

August 2007 to June 2011. He served as President of Tmall.com since

June 2011 and served as its General Manager for three years.

3. Chung Hsin Tsai, also known as Joseph, has been an Executive Vice

Chairman of Alibaba Group Holding Limited since May 10, 2013. Mr.

Tsai served as the Chief Financial Officer at Alibaba Group Holding

Limited until May 10, 2013. He served as Chief Financial Officer of

Alibaba.com Limited until July 2007 and served as its Chief Operating

Officer from 1999 to 2000. He joined Alibaba.com Limited in October

1999 and spearheaded the establishment of the Hong Kong headquarters.

Key Stats 2013 2014 2015 LTM 2016E

Total

Revenue

(M)

$5,293 $8,051 $11,685 $14,473 $ 20,028

EBITDA

(M)

$2347.2 $4269.4 $4244.6 $4930.9 $ 9762.5

ROC 22.6% 26.1% 10% 6.5% 18.6

ROE 38.1% 90.2% 24.6% 34.7% 26.3%

EPS 0.55 1.53 1.48 4.09 3.33

D/E Ratio 302% 100.9% 33.4% 22.8% 23%

0.0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

2012 2013 2014 2015 2016 2017 2018

Revenue

2016.02.23

3

Business Strategy : As the website are serving different customers with different Domains, they have different Business Models for each of

them:

Alibaba - like Amazon, it acts as the mediator of the deals and keeps a margin of each transaction that is being done

through the website. Moreover, the sellers need to offer annual subscriptions to maintain their online Shops.

Tmall - a China's third-party platform for brands and retailers to sell their products and is an open business-to-

consumer(B2C) platform enabling businesses world-wide to reach China’s vast and growing consumer market. The

brand owners/retailers need to pay fees to run their businesses.

But, its most exclusive business, which is following an entirely different Business model:

Taobao - no money is being charged for the maintenance of accounts and no commission on any of the sale that is

being done. All transactions are done for free and the sellers get the complete money of their sales. The company

earns most profit by advertisement. Being the biggest market place in China, they get a large number of

advertisements and earn huge profits from there.

As the accounts are for free, so they have some exclusive features missing, which are being offered in their premium

services like - Alibaba & Tmall.

Other than that:

Company has its own website for payment gateways, which is named Alipay

Aliexpress - for sale/purchase through their own gateways

They are establishing few banks in collaboration with government

They have a major stake in "Sina Weibo"

They have stakes in other companies as well and rules the entire China online market place.

Marketing Strategy: The company uses various sales and marketing strategies like exploiting the fastest growing channels (mobile) and utilizing

the latest trends in mass-marketing such as flash sales promotions (11/11 Singles Day which was invented by Alibaba in

2009)

SWOT Analysis :

STRENGTHS

Largest online trading website in China (Alibaba accounts for about 80 percent of all online retail sales in China)

The integration of the business combination (Alibaba entity)

Industry leader in both B2B and C2C markets

Vast amounts of information flow

Sufficient sources of funding

Aggressive and smart marketing

WEAKNESSES

Illegal, counterfeit products

Low brand recognition (An Ipsos poll conducted for Thomson Reuters shows that 88% of Americans had not heard

of Alibaba. A week after the company went public, the number had fallen, but remains at a high 76%)

OPPORTUNITIES

Market share possibility in U.S.

E-commerce market development space is enormous

Online business is flourishing

Growing internet peneration

Increasingly perfect legal system of electronic commerce

Large untapped market segment (The local rural market and foreign market)

2016.02.23

4

THREATS

Growing e-Commerce industry in China and increasing competitors

New law restrictions for third-party payment

Lack of a solid network security

Potential global economic crises

Competition among domestic or foreign rival websites, such as Amazon, EBay, Baidu

Industry Overview and Competitive Positioning

Figure 4. E-commerce Market in 2015 Figure 5. M-commerce sales in 2015

Macroeconomic Analysis In recent years, China is moving away from a manufacturing-based economy to a service-based economy, and has

ended a period of intensive fixed asset investment.

After the havoc in its market, China has announced that it will focus on supply-side reform in 2016. Costs for firms are

going to be cut by reducing taxes and fees, improving administrative procedures, and reducing social security

contributions. These steps will encourage growth of domestic firms. New industries will continue to be promoted; the

high-tech industry is growing rapidly, and foreign investment in this industry is expanding along with it.

Telecommunications, e-commerce, and new energy sectors are growing as well.

Boosting consumer demand is a somewhat newer task, and with consumer demand rising slowly, it may take some time

for demand to make up for other types of spending. However, China’s upper middle class is growing, set to almost

double as a percentage of urban households by 2020, which will ensure ongoing expansion of consumer spending.

Good market prospect China’s e-commerce retail sales are expected to increase by 42.1% to US$672.01 billion, accounting for over 40% of

the global e-commerce retail sales in 2015 estimated by eMarketer. The e-commerce market in 2018 is expected to

reach US$1.57 trillion according to eMarketer. China has become the world’s largest e-commerce market.

Mobile commerce in 2015 is predicted to reach US$333.99 billion, making up about half of China’s total retail e-commerce sales. Retail e-commerce in 2015 accounts for only 15.9% of the total retail sales; and mobile 7.9%. Rural netizens are major future consumers for e-commerce companies. To achieve long and continuous growth, companies have to seize opportunities to attract rural shoppers. Alibaba, the largest internet company in the world, is to invest 1 billion yuan (US$0.16 billion) in the logistics and delivery services to better serve rural shoppers in the Double 11 shopping festival. In addition, Chinese cross-border e-commerce is also growing fast.

2016.02.23

5

China’s rural Internet users are even more active on e-commerce sites than their counterparts in urban areas, given the lack of alternative retailing. Hence, the rapid growth of online shopping in rural areas has further augmented demand in the Chinese e-commerce sector.

Figure 6. Internet Peneration Rate Figure 7. Growth in Internet users

Porter Five Forces Analysis 1. Threats of entrance of the new enterprises -- High

The industry is very attractive. There are no significant barriers to enter for industry, the firms of the industry have

adopted a diversification strategy of sell. Their products to customers are not very differentiated.

2. Rivalry among Existing Firms -- High

The Intensity of Competitive Rivalry Internet creates more tools and means for competing, so rivalry among

competitors is likely to be more intense. The Internet tends to increase rivalry by making it difficult for firms to

differentiate themselves and by shifting customer attention to issues of price.

3. Bargaining power of Buyers -- High

It is strong, because it is easy to find other supplier in the industry. Consumers have low loyalty to the brand, they look

for cheap & better products. Buyers are also provided with lots of options in this industry.

4. Bargaining Power of Suppliers -- Low

In general level, it is low, because the products existing in this industry are sold by many firms. In case of products like

Books, DVD’s and CD’s, the bargaining power of suppliers is low, this is caused by the existence of many suppliers in

the Industry.

5. Threats of substitute products or services -- High

In general, it is easy to sell in the internet, so, there are threats of substitute products or service in the e-commerce

industry. There are threat of substitute products, by fact of products sold in the industry could be sold by other firms

that are inside or outside of industry. For example, if the buyer is not satisfied with price of a DVD or Book supplied by

Amazon.com, they can choose to buy other products from other firm that do not belongs to this industry, at a lower price.

2016.02.23

6

Valuation

Valuation overview We used three different valuation techniques to evaluate the target stock price of Alibaba. The techniques include Discounted Cash

Flow Model, Comparable Company multiple pricing method, and Forward P/E valuation model. In addition, we assigned different

weight to each method.

Discounted Cash Flow Model For the Discounted Free Cash Flow model we used a three-year forecast and estimated the terminal value based on Perpetuity

Method. We based our analysis on 1.34 levered equity beta, 8.7% weighted average cost of capital(WACC). We expected sales

growth rates are 49% in 2016 and 24.3% in 2017 based on Capital IQ and Yahoo Finance.The Discounted Cash Flow Model

implied the results of $62.05 per share. However, we made many assumptions when applying DCF model, possibly making the

stock price less precise. So, we assigned only 20% weighted to the final target price.

Weighted Average Cost of Capital

We estimated weighted average cost of capital to be 8.7% for the following reasons:

1. Cost of equity The risk premium is 5.6%, which is the trailing 12 month cash yield. We used yield of 30 year US Treasury Bond as our risk

free rate, which is 2.6%. Therefore, the CAPM model gives us the cost of equity of 10.12%

2. Cost of debt

The cost of debt of Alibaba is 5.23%

3. Capital Structure

Equity: 76%

Debt: 24%

Figure 8. Capital Structure

Forward P/E valuation method We calculated P/E ratios of BABA in 2014, 2015 and estimated forward P/E ratio of 2016. Multiplying this estimated number by

the forcasted earnings per share of 2016, we got the forward price of BABA in 2016. The forward price is $83.9 and we assigned

40% weighted to this method.

Comparable Company multiple pricing Model In order to evaluate Alibaba’s performance relative to other companies within the specialty retail industry, we conducted a

Comparable Company multiple pricing Model. We chose Baidu, Amazon, Netease, and Ebay as Alibaba’s major competitors. The

intrinsic value we produced by using the Comparable Company multiple pricing Model is higher than Alibaba’s current stock price.

We assigned 40% weighted to this method.

Alibaba Baidu Netease Amazon eBay

Beta 1.34 2.26 0.85 1.63 1.21

Multiples Selection

Company Name Ticker P/E EV/EBIT

Alibaba BABA 20.1x 25.3x

Baidu BIDU 22.7x 25.7x

Netease NTES 14.9x 14.6x

Amazon AMZN 115.4x 64.5x

eBay EBAY 12.6x 11.8x

2016.02.23

7

Performance Measure

Multiple Low Median High Selected

Multiple

P/E 12.6x 18.8x 115.4x 18.8x

EV/EBIT 11.8x 20.2x 64.5x 20.2x

Price

Price / Earnings E.V. / EBIT

Estimate Price of Alibaba $70.01 $81.07

Target Price Price Weight Target price

DCF $62.05 0.2

$76.2 Forward P/E $83.9 0.4

Multiples $70.01/$81.07 0.4

Technical Analysis

From the chart, we observe the price has already recovered from the support, and believe the price will bounce up to the

previous risistence. Alibaba has experienced a long correction period. It’s stock price has gone all the way from the

historical top to the bottom. However from the recent trend, we can see the price has recovered from the support. We

believe the price will bounce up more, hopefully it will form a nice V shape in the future.

2016.02.23

8

The MACD is going to move up to cross above signal line, which is the signal to buy.

Financial Analysis

1. ROE- DuPont Analysis

The ROE of Alibaba is 34.7% (BIDU:19.5%, ERAY: 14.7%, NTES: 24%, AMZN: 4.9%). We broke down the ROE

through DuPont analysis and found the profit margin is 73.1% (19.7%, 20.1%, 31.8%, 0.6%), assets turnover is 0.3(0.6,

0.3, 0.6,1.8), and equity multiple is1.58 (1.65, 2.44, 1.26, 4.54). Among all the comparable companies, BABA has

highest ROE, which mainly attributes to its high profit margin. Although having a great profit margin, BABA has lower

than average assets turnover, which means BABA did not utilize its assets efficiently.

2016.02.23

9

2. D/E ratio Alibaba has the second low D/E ratio among its competitors. The low D/E ratio puts Alibaba in a relatively

advantegous position for following reasons. First, compared to competitors, Alibaba does not have to pay less interest

and make its net income higher. Second, if Alibaba wants to borrow money to expand its business, Alibaba will have

more bargaining power to banks or financial institutions.

3. Cahs flow Alibaba presented positive CFO in past few years. The possitive operating cash flow aindicates that Alibaba can always

generate sufficient cash flow to maintain its operations. Additionally, Alibaba has the lowest days sales outstanding

among all its opponents. This situation illustrates that Alibaba can reinvest its earnings faster than the others.

Investment Risk

Foreign currency translation The functional currency of the Company is the United States Dollar ("US$") and reporting currency of the

Company is Renminbi ("RMB"). The Company's subsidiaries and VIEs with operations in the PRC, Hong Kong,

United States and other jurisdictions use their respective currencies as their functional currencies. The financial

statements of the Company's subsidiaries and VIEs, other than the subsidiaries and VIEs with the functional currency

of RMB, are translated into RMB using the exchange rate as of the balance sheet date for assets and liabilities and

average exchange rate for the year for income and expense items. Translation gains and losses are recorded in

accumulated other comprehensive income or loss as a component of shareholders' equity.

In the financial statements of the Company's subsidiaries and VIEs, transactions in currencies other than the

functional currency are measured and recorded in the functional currency using the exchange rate in effect at the date

of the transaction. At the balance sheet date, monetary assets and liabilities that are denominated in currencies other

than the functional currency are translated into the functional currency using the exchange rate at the balance sheet date.

All gains and losses arising from foreign currency transactions are recorded in the determination of net income or loss

during the year in which they occur.

Operating risk Counterfeit is common on Taobao, shopping website of Alibaba. Alibaba’s reputation might be damaged for these

inferior merchandise. Moreover, Alibaba might face lawsuits because of these counterfeit. Many internation boutiques,

such as Gucci, have noticed that and planned to sue Alibaba. If losing the lawsuit, Alibaba will have to pay a lot of

litigation cost for that. Additionally, Alibaba began to start a assurance program last year. Assurance program protects

whole sell buyers or sellers from not receiving products or money. However, this program is free to Alibaba’s clients.

In other words, Alibaba is going to bear the default risk for its clients and possibly lose a lot of money. Fortunately, this

program did not cost serious problem for Alibaba last year.

Sources Capital IQ

Yahoo Finance

StockCharts.com

FreeStockChart

CIW

WSJ