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Alibaba Earnings and Valuation Summary (November 2017)

Core Content

Alibaba Group reported strong financial results, showcasing robust revenue growth and strategic initiatives across its core commerce, cloud computing, and new retail segments. Despite a lackluster stock reaction, the report suggests that the company's fundamentals remain solid, and the investment in growth areas may be undervalued in the market. The analysis concludes with a "Buy" recommendation, citing the company's strong performance and future growth potential.

Main Points

• Revenue Growth: Alibaba achieved a 64% YoY revenue growth in China retail, driven by user growth and enhanced personalization.
• User Growth: Active consumers reached 488 million, with a 22 million sequential increase and 11% YoY growth.
• Tmall Performance: Tmall GMV growth reached 49% YoY, with significant gains in electronics and FMCG segments.
• Content and Engagement: The company is investing in content and community features such as 88 Loyalty Membership, which are positively received by users.
• New Retail Strategy: Collaborations with Intime, Suning, and initiatives like LST (Ling Shou Tong) are expanding the company's reach and improving supply chain efficiency.
• Cloud Business (AliCloud): AliCloud saw 99% YoY revenue growth, with new products and increased capital expenditures (Capex) indicating a strong focus on market expansion.
• Investment Strategy: Alibaba plans to invest US$15 billion in Cainiao over five years and US$15 billion in DAMO Academy over three years.
• Earnings Beat: The company exceeded revenue expectations by RMB55.1 billion, with non-GAAP EBIT surpassing forecasts by RMB23 billion.
• Valuation Adjustments: The report updated the SOTP valuation, lifting the target price to US$209 from US$199, based on improved forecasts for revenue and EBIT.
• Key Risks: Potential regulatory intervention, macroeconomic slowdown, competition, and margin pressures due to increased investment are noted as key risks.

Financial Highlights

Revenue and EBIT

• Revenue (2QFY18): RMB55.1 billion, a 6% beat against consensus.
• EBIT (non-GAAP): RMB23.0 billion, a 10% beat against forecasts.
• Net Profit (non-GAAP): RMB22.0 billion, a 30% beat against forecasts.

Growth Forecasts

• FY2019 Revenue Growth: Estimated at 55% YoY, up from 49%–53%.
• FY2019 Non-GAAP EBIT Growth: 8% YoY.
• FY2020 Revenue Growth: Estimated at 48% YoY.
• FY2020 Non-GAAP EBIT Growth: 11% YoY.

Valuation Metrics

• Price Target: US$209, up from US$199.
• P/E (DB): 36.6x for FY2018.
• P/BV: 8.99x for FY2018.
• EV/Sales: 11.0x for FY2018.
• EBITDA Margin: 45.4% for FY2018.
• Net Margin (non-GAAP): 40.1% for FY2018.

Key Risks

• Regulatory Intervention: Possible restrictions in China could affect operations.
• Macro Slowdown: Economic slowdown in China and consumer spending may impact growth.
• Intensifying Competition: Increased competition from both global and local e-commerce platforms.
• Margin Pressure: Accelerated investment may lead to pressure on margins without corresponding top-line returns.

Strategic Initiatives

• Singles Day Preparation: Highlighted as a key growth event, with global participation and enhanced logistics capabilities.
• Cainiao Integration: Consolidated into the earnings forecast, removing it from the SOTP valuation.
• DAMO Academy: Focused on smart logistics and data technology, with a US$15 billion investment over three years.
• Expansion Plans: Continued expansion into new categories and international markets through platforms like Lazada and AliExpress.

Financial Summary

Valuation and Target Price

• Target Price: US$209 (up from US$199).
• SOTP Valuation: Adjusted to reflect the new investment and growth strategies.
• Core Commerce Valuation: Maintained at 33x P/E for FY2018.
• AliCloud Valuation: Maintained at 8x EV/Sales for FY2018.
• Ant Financial Valuation: Adjusted to 1x CY18-20 PEG.
• Total Value: Increased by 5% due to improved growth and margin expectations.

Conclusion

Alibaba's strong earnings and strategic investments suggest continued growth potential, despite market fatigue. The report recommends a "Buy" due to the company's robust fundamentals and long-term growth initiatives, even though there are risks related to regulation, competition, and macroeconomic conditions.