20181003-高盛-Investing_for_future_growth__Evolving_ecommerce_and_digitizing_retail_industry__reiterate_Buy__on_CL__41页_1mb

Summary of Alibaba Group (BABA) Investment Analysis

Core Content

Alibaba Group (BABA) is positioned as a leader in the digital economy, with a clear strategy to evolve e-commerce and digitize the retail industry. The report highlights the company's strong leverage over China's consumption growth and its ability to build new businesses and execute effectively. The investment recommendation remains a Buy on the Conviction List, with a 12-month price target of $247.00, reflecting a 54.2% upside from the current price of $160.23.

Main Divisions and Outlook

• Core Commerce (Taobao & Tmall):

  • Taobao is enhancing user experience through a personalization 4.0 initiative, introducing recommendation feeds to replace traditional modules. This change is expected to improve purchase conversion rates and offer new monetization opportunities such as live streaming and video content.
  • Tmall is transforming all aspects of commerce, with a focus on personalization and ad inventory growth.

• Ele.me:

  • Expanding into local services, with a TAM of ~RMB29 trillion by 2020E. It is rapidly integrated into the broader Alibaba ecosystem and enhancing last-mile logistics solutions.

• Hema:

  • Revolutionizing the RMB5 trillion fresh grocery market through a new retail model that drives low-cost traffic, upgrades consumer experience, and enhances efficiency.

• Cainiao Logistics Network:

  • Digitalizing the logistics industry and enhancing user experience. It provides supply chain solutions and is expanding globally with six global logistics hubs.

• Cloud Computing:

  • Alibaba Cloud is empowering digital transformation with a market share of 46% in 2017, aiming to solidify its position in a TAM of RMB165 billion by 2020E. It is expanding into various industry verticals and offering cloud-based solutions.

• Ant Financial:

  • The world's largest techfin asset, building infrastructure for financial institutions using blockchain, AI, and IoT. It serves 640 million customers with at least 2 categories of services and 190 million with at least 5 categories.

Key Financials and Valuation

• Revenue Projections (RMB mn):

  • 3/18: 250,266.0
  • 3/19E: 398,389.8
  • 3/20E: 578,365.2
  • 3/21E: 796,295.2

• EBITDA Projections (RMB mn):

  • 3/18: 105,792.0
  • 3/19E: 126,007.3
  • 3/20E: 170,127.9
  • 3/21E: 240,808.0

• EPS Projections (RMB):

  • 3/18: 33.00
  • 3/19E: 38.20
  • 3/20E: 52.47
  • 3/21E: 74.36

• Valuation Metrics:

  • P/E (X): 32.6 (3/18), 28.9 (3/19E), 21.0 (3/20E), 14.8 (3/21E)
  • P/B (X): 7.7 (3/18), 6.3 (3/19E), 4.9 (3/20E), 3.8 (3/21E)
  • CROCI (%): 21.1 (3/18), 25.8 (3/19E), 29.7 (3/20E), 36.9 (3/21E)
  • FCF yield (%): 3.2 (3/18), 4.0 (3/19E), 4.9 (3/20E), 6.6 (3/21E)
  • EV/EBITDA (X): 27.2 (3/18), 22.5 (3/19E), 16.2 (3/20E), 10.6 (3/21E)

• Price Target: Raised by 2% to $247.00 due to a higher valuation of Ant Financial.

Key Risks

• Slower growth: Due to macroeconomic slowdown in major business lines like China Commerce and Cloud Computing.
• Lower monetization: From changes in personalization and higher competition in areas such as e-commerce, cloud, and entertainment.
• Sustained losses: From high subsidies and low monetization in new initiatives like local services, globalization, new retail, and logistics.
• User targeting: If improved at a slower rate, it could result in lower CPC growth and revenue growth.

Strategic Initiatives

• Digitalizing retail: Alibaba is transforming the entire retail experience and building infrastructure for "Business as a Service (BAAS)".
• Globalization: Transitioning from "China to the World" to "Local to Local", with global export players such as AliExpress, Lazada, Daraz, and Trendyol.
• Cross-border logistics: Working to build a more efficient global logistics network.
• Digital financial platform: Expanding global payment solutions through partners like Paytm, Ascend, Dana, Kakaopay, GCash, and Touch N' Go.

Growth Drivers

• Customer growth: TTM annual active customers (AAC) in China increased from 454 million (2017) to 552 million (2018), a 22% yoy increase.
• Category expansion: From physical goods to broader local lifestyle services, creating more value for consumers.
• Global expansion: Strengthening its international footprint with over 100 million AAC on Lazada and AliExpress for the twelve months ended June 2018.

Conclusion

Alibaba Group continues to invest in future growth, with a strong foundation in digital infrastructure and a diverse ecosystem. The company's innovative strategies in e-commerce, logistics, cloud computing, and financial technology are expected to drive long-term value creation. Despite challenges, the report reiterates a Buy rating based on its strong fundamentals, strategic positioning, and growth potential.