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Alibaba (BABA US) Summary

Core Content

Alibaba Group (BABA US) delivered a strong FY2Q18 performance with sales up 61% YoY, reaching a new high since its IPO and beating analyst consensus by 9%. Non-GAAP earnings were also higher than expected, contributing to the reiteration of a "BUY" rating with an updated target price of US$224, representing a 21% potential upside from the previous target.

Key Highlights

• Revenue Growth:

  • FY2Q18 sales reached RMB55.2bn, up 61% YoY and 10% QoQ.
  • The company revised its FY18 revenue guidance up to 49–53% YoY, up from 45–49%, due to the consolidation of Cainiao Network.

• Earnings Performance:

  • Non-GAAP net profit was RMB22.3bn, up 66% YoY and 23% from the previous forecast.
  • Non-GAAP diluted EPS was RMB8.57, up 63% YoY.

• Segment Analysis:

  • Core e-commerce: Revenue rose 63% YoY to RMB46bn, driven by China commerce retail growth (64% YoY) and commission revenue (47% YoY). Core commerce non-GAAP EBITDA margin was 57%, down from 62.7% last quarter.
  • Cloud computing: Revenue surged 99% YoY to RMB2.975bn, with an adjusted EBITDA margin of -5%, down slightly from -4% in the previous quarter.
  • Digital media and entertainment: Revenue increased 33% YoY to RMB4.8bn, primarily due to mobile value-added services from UCWeb. Adjusted EBITDA margin improved to -36% from -43%.
  • Innovation initiatives and others: Revenue grew 27% YoY to RMB887mn, with increased investment in technology and new retail strategies.

• Operating Metrics:

  • Mobile MAU increased to 549mn, up 22% YoY.
  • Annual active buyers grew to 488mn, up 11% YoY.
  • Gross margin declined to 60.1% from 62.7%, reflecting increased investments.
  • Operating margin was 30.1%, down from 34.9% due to higher costs.
  • Non-GAAP net margin was 40.5%, down from 41.2% in the previous quarter.

• Investment Strategy:

  • The company is aggressively investing in e-commerce, logistics, and cloud computing, with a $15bn investment in logistics over five years and more than $15bn in R&D over three years for the DAMO Academy.
  • These investments are expected to support long-term growth, particularly in the "New Retail" strategy and AI development.

• Growth Catalysts:

  • Accelerated GMV growth and share gains.
  • New retail initiatives driving increased online spending.
  • Long-term capabilities in leveraging big data and AI to unlock value.

Financial Forecasts

Earnings Revisions

• Non-GAAP Net Profit:
  • Revised down by 4% / 5% / 1% for FY18/19/20E due to margin pressure from increased spending.
• Revenue Forecasts:
  • Revised up by 3% / 7% / 9% for FY18/19/20E, reflecting accelerated GMV growth and consolidation of Intime and Cainiao Network.

Valuation

• Target Price: US$224 (up from US$220), implying a 37x FY19E non-GAAP earnings multiple.
• Current P/E: 31x FY19E P/E.
• PEG Ratio: 1.0x, indicating a discount compared to peers like Tencent (1.6x), Amazon (1.8x), and Baidu (1.8x).

Outlook

• The company is expected to continue investing in key areas, including product innovation, technology, and logistics, to support future growth.
• Management is optimistic about the 2017 Singles' Day Shopping Festival, with expectations of record GMV and continued growth in online retail sales.
• The "New Retail" strategy is seen as a major driver for expansion into non-tier-1 cities through franchise models and online-offline integration.

Shareholding Structure

• SoftBank Group Corp.: 29.5%
• Altaba Inc.: 15.2%
• Ma, Yun: 4.6%
• Shares Outstanding (mn): 2,530

Related Research

• Alibaba (BABA US) - New retail, innovation and tech continue to unfold (BUY) - 2017/08/18
• Alibaba (BABA US) - Sky is the limit for China's almighty data commerce giant (Initiation-BUY) - 2017/07/11
• China Internet Alibaba's AliCloud - A clear share leader in China, but any threats from US peers (OVERWEIGHT) - 2017/07/03
• China Internet: Alibaba Day - Part 2 - AliCloud, UCWeb and Youku to lead robust non-eC growth (OVERWEIGHT) - 2017/06/13

Figures

• Figure 1: Revenue growth and projections.
• Figure 2: Revenue breakdown by segments.
• Figure 3: Margin trends across different business lines.
• Figure 4: Non-GAAP net profit growth.
• Figure 5: SOTP valuation model.
• Figure 6: P/E band and valuation multiples.
• Figure 7: FY2Q18 results table.
• Figure 8: CMS forecasts vs. consensus.
• Figure 9: Forecast summary - Income statement.
• Figure 10: Key operating data and financial ratios.

Summary

Alibaba's FY2Q18 results were robust, with strong revenue growth and earnings performance. The company is investing heavily in core e-commerce, cloud computing, and digital media to drive long-term growth and innovation. While near-term margin pressure is expected due to increased spending, the firm's strategic initiatives and strong market position suggest continued growth potential. The updated target price of US$224 reflects confidence in the company's ability to deliver value through its SOTP model and growth strategies.