20180530-招商证券_香港_-Invest_in_ZTO_to_deepen_partnership_with_industry_leader_5页_1mb

Alibaba (BABA US; BUY) Summary

Core Content

Alibaba Group (BABA US) has been highlighted as a top investment pick in the China e-commerce (eC) sector. The report discusses the strategic investment by Alibaba and Cainiao Network in ZTO (ZTO US), which is expected to strengthen Alibaba's logistics ecosystem and support its New Retail strategy.

Key Investment and Strategic Move

• Alibaba and Cainiao lead $1.38bn investment in ZTO: Alibaba and Cainiao Network will lead a group of investors to acquire a 10% equity stake in ZTO for $1.38 billion. This investment is aimed at enhancing first and last-mile delivery, warehouse management, cross-border logistics, and technology-driven smart solutions.
• Strengthen logistics capabilities: The collaboration with ZTO is expected to improve delivery service quality and consistency, helping Alibaba narrow the customer experience gap with JD's in-house logistics model.
• ZTO's market position: In 1Q18, ZTO held 16.5% market share in China's express delivery sector, making it the largest player. Alibaba's affiliated logistics companies collectively held around 35-40% market share.

New Retail and Logistics Innovation

• New Retail demand: The investment aligns with Alibaba's aggressive New Retail strategy, which requires early investments in smart supply chains, retail technologies, and advanced logistics.
• Cainiao's expansion plans: Cainiao plans to invest an additional RMB100 billion (US$15.2 billion) over the next five years to expand its logistics network.
• Historical investments: In 2016, Cainiao raised RMB10 billion (US$1.5 billion) from top sovereign funds, including GIC, Temasek, and Primavera Capital Group.

Financial Highlights

Investment Recommendation

• Reiterated BUY: The report reiterates a BUY rating with a 12-month target price of US$262, representing a potential upside of +32% from the closing price of May 29, 2018 (US$198).
• Sector performance: Alibaba's US share price has shown strong performance, with a 10.9% gain in the last month, 11.8% in the last six months, and 59.8% in the last 12 months.

Shareholding Structure

• Altaba Inc.: 15.0%
• Blackrock: 2.4%
• T Rowe Price Group: 2.1%
• No. of shares outstanding (mn): 2561

Financial Ratios and Performance

• Gross margin: Declined from 66.0% in FY16 to 55.5% in FY20E.
• Non-GAAP EBITDA margin: Dropped from 51.7% in FY16 to 34.1% in FY20E.
• ROE: Varied from 39.4% in FY16 to 19.7% in FY20E.
• Non-GAAP NP margin: Reduced from 42.5% in FY16 to 26.7% in FY20E.

Conclusion

• Alibaba remains top pick: Despite the competitive eC landscape, Alibaba is still viewed as the top investment choice in the China e-commerce sector.
• Strategic partnership: The investment in ZTO is seen as a strategic move to deepen collaboration with industry leaders and enhance logistics capabilities.
• Growth expectations: The report highlights continued growth in revenue and profitability, with a focus on long-term value creation through innovation and digital transformation.

Investment Ratings

Disclaimer

This document is prepared by China Merchants Securities (HK) Co., Limited. It is for information purposes only and does not constitute investment advice. The information and opinions expressed are subject to change and should not be relied upon. Investors are advised to make their own independent decisions and consult financial and tax advisors. The document is not available to all investors and is restricted in certain jurisdictions.