alibaba group - credit suisse

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29 October 2014

Asia Pacific/China

Equity Research

Consumer Internet

Alibaba Group

(BABA.N) INITIATION

The giant marches on

■ Still ample upside potential despite the 44% post-IPO rally. We initiate

coverage on Alibaba Group with an OUTPERFORM rating and a target price

of US$114. We forecast a ~37% revenue CAGR over the next three years

driven by new products and services, monetisation improvements, and

synergies with its several investment portfolio companies/affiliates. This

revenue growth, combined with the incomparable scalability (it is the largest

e-commerce ecosystem in the world) and operating leverage should help the

company deliver sustainable earnings in the coming years.

■ Deep dive into its organic growth potential and opportunities in

ecosystem. We have performed a proprietary analysis to derive our

estimates on Alibaba's growth potential by specific product categories and

identify the areas within the ecosystem for potential take-rate improvements.

With ~US$10 bn of investment in various companies in mobile, social and

new categories, we expect Alibaba to tap into various aspects of people's

daily life. We also see the option value in new businesses and Ant Financial

(valuation of US$52.8 bn) to provide further upside.

■ Several catalysts ahead. Sustained strong gross merchandise volume

(GMV) growth, monetisation improvement, launches in new

categories/markets and synergies with its portfolio companies are some of

the positive drivers ahead. Risks: (1) high logistics and other investments;

(2) sluggish new category expansion; and (3) slow mobile growth.

■ Undervalued. Our TP is based on DCF valuation of its core business of

US$107 (~20% growth rate during 2020-25, a WACC of 11% and a 3%

terminal growth rate) and Ant Financial value of US$6.7 per share. Our TP

implies a 27.5x CY17E diluted adjusted EPS, and PEG of 1.5x CY15E, on

the back of a 30% earnings CAGR (2015-17E).

Share price performance

80

90

100

110

120

80

85

90

95

100

Sep-14

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the

MSCI CHINA F IDX which closed at 6410.87 on 27/10/14

On 27/10/14 the spot exchange rate was US$1./US$1

Performance over 1M 3M 12M Absolute (%) 8.1 — — — Relative (%) 10.9 — — —

Financial and valuation metrics

Year 3/14A 3/15E 3/16E 3/17E Revenue (Rmb mn) 52,504.0 80,066.4 110,759.3 137,010.3 EBITDA (Rmb mn) 26,259.0 33,297.5 48,358.6 61,818.8 EBIT (Rmb mn) 24,920.0 30,990.2 44,636.2 56,314.4 Net profit (Rmb mn) 27,605.3 32,117.4 46,636.8 59,710.5 EPS (CS adj.) (Rmb) 10.63 12.27 17.46 21.92 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 14.2 18.8 25.9 EPS growth (%) 99.0 15.5 42.3 25.6 P/E (x) 56.3 48.8 34.3 27.3 Dividend yield (%) 0 0 0 0 EV/EBITDA (x) 56.9 43.4 28.9 21.7 P/B (x) 53.0 11.7 8.9 6.8 ROE (%) 188.3 39.3 29.7 28.5 Net debt/equity (%) Net cash Net cash Net cash Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM Price (27 Oct 14, US$) 97.79 Target price (US$) 114.00¹ Upside/downside (%) 16.6 Mkt cap (US$ mn) 245,748 Enterprise value (Rmb mn) 1,445,328 Number of shares (mn) 2,513.02 Free float (%) 13.0 52-week price range 99.7-85.0 ADTO - 6M (US$ mn) 700.4

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

[V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Dick Wei

852 2101 7339

[email protected]

Evan Zhou

852 2101 6745

[email protected]

Jialong Shi

852 2101 7437

[email protected]

29 October 2014

Alibaba Group

(BABA.N) 2

Focus charts and table Figure 1: The Alibaba ecosystem Figure 2: Offline retail infrastructure

Sellers Buyers

Logistics

Financing

Marketing Affiliates

Social Network O2O

Mobile Browser

Digital

Entertainment

Mobile Payment

MARKETPLACES Retail

operational

partners

Online and mobile commerce platform

TECHNOLOGY DATA TEAM

Independent

Software Vendors

Professional

Service Provider

0.6

2.6

1.3 1.3

1.5

China United States UnitedKingdom

Japan Germany

(Retail space per capita in square meters, 2013)

Source: Company data Source: Euromonitor

Figure 3: Total revenue breakdown by different

monetisation models in FY14

Figure 4: Market share in China B2C

Pay-for-performance

marketing services45.3%

Display marketing

services7.7%

Commissions24.3%

Membership and value-

added services9.8%

Others12.9%

Tmall57.4%

JD21.2%

Suning3.5%

VipShop2.8%

Gome1.9%

Amazon1.5%

Dangdang1.5%

Yixun1.4%

Yihaodian1.4%

Others7.4%

Source: Company data Source: iResearch. Based on transaction volume in CY2Q14

Figure 5: Alibaba Peer Group—leading internet and e-commerce comps

Close Target Mkt cap P/E PEG (2015) P/B P/S

Company Ticker Ccy price Rating Price Upside (US$ mn) CY14E CY15E CY16E 14-16 15-16 CY14E CY14E CY15E CY16E

Tencent 700 HK HKD 118.1 O 155 31% 142,591 35.5 26.8 21.5 0.9 1.1 11.7 10.8 8.9 7.5

Baidu BIDU US USD 219.9 O 260 18% 77,106 34.9 24.9 18.2 0.7 0.7 9.1 9.7 7.5 5.6

Google GOOGL US USD 549.9 O 723 31% 186,424 21.0 17.7 15.0 1.0 1.0 3.5 2.8 2.4 1.5

Ctrip CTRP US USD 55.5 O 78 41% 7,897 52.2 32.1 21.6 0.6 0.7 5.1 6.4 5.2 4.4

Vipshop VIPS US USD 210.7 O 267 27% 11,905 76.9 43.4 26.8 0.6 0.7 30.3 3.4 2.0 1.4

Rakuten 4755 JP JPY 1,178.0 N 1400 19% 14,442 28.4 21.8 17.7 0.8 0.9 4.3 2.6 2.4 2.1

Facebook FB US USD 80.3 O 90 12% 208,732 49.5 39.4 29.5 1.3 1.2 11.4 17.0 12.6 9.1

Amazon AMZN US USD 290.0 O 395 36% 134,258 132.2 73.4 40.7 0.9 0.9 12.0 1.5 1.3 1.0

Ebay EBAY US USD 51.2 N 61 19% 63,597 17.4 15.6 14.0 1.4 1.3 2.9 3.5 3.2 2.6

Priceline PCLN US USD 1,134.3 O 1550 37% 59,489 21.7 17.6 14.7 0.8 0.9 7.0 7.0 5.7 4.4

Average 47.0 31.3 22.0 0.9 0.9 9.7 6.5 5.1 4.0

* Price as of 27 October 2014 close.

Source: Company data, Thomson-Reuters, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

29 October 2014

Alibaba Group

(BABA.N) 3

The giant marches on Leading e-commerce marketplace

We initiate coverage on Alibaba Group with an OUTPERFORM rating and a TP of US$114.

Despite the 44% post-IPO rally, we see good growth potential for Alibaba in deepening

and expansion of product and service categories, improvement in monetisation especially

from mobile, and synergies with investment portfolio companies and affiliates.

As the largest e-commerce ecosystem in the world, the incomparable scalability and

operating leverage will help the company deliver sustainable earnings stream in the

coming years backed by a ~37% revenue CAGR. We expect Alibaba Group to become

even more influential in China as the e-commerce sector maintains decent growth, and

becomes an integral part of the daily life.

Growth opportunities in core operations

We have performed a proprietary analysis to arrive at our estimates on Alibaba's growth

potential by product category, and identify the emerging and frontier categories that

investors should focus on. We have also identified areas where the take rate improvement

could come by increasing monetisation within its ecosystem. We believe blended

monetisation in China's retail marketplace has grown steadily YoY over the years, coupled

with slight increases in PC and mobile monetisation rates, and expect it to improve further

from 2.6% in FY14 to 3.0% by end-FY18. Our base case scenario yields a commission

revenue from Tmall (Alibaba's B2C marketplace) of Rmb51.3 bn in FY18. The international

business is also likely to contribute meaningfully in the next two years, starting from Tmall

Global.

Future potential in the ecosystem

We see meaningful synergistic opportunities with investment portfolio companies, AliCloud

and Ant Financial. With ~US$10 bn of investment in various companies in mobile, social

and new categories, we expect Alibaba to tap into various aspects of people's daily life.

AliCloud should help form strong entry barriers thanks to its data scale and analysing

capability.

We also see a significant value in new business ventures and Ant Financial (previously

Small and Micro Financial Services Company) with a valuation of US$52.8 bn providing

additional upside potential to the stock.

Initiate with OUTPERFORM and a TP of US$114

Our TP is based on DCF with a ~20% growth rate over 2020-25, a WACC of 11% and a

3% terminal growth rate. Our target price implies 27.5x CY17E diluted adjusted EPS. Our

TP also implies PEG of 1.5x CY15E, on the back of a 30% earnings CAGR over 2015-17.

We estimate a net cash position of ~US$6.6 bn by the end of CY3Q14.

An SOTP-based valuation shows Retail Marketplaces at Rmb1,462 bn, Wholesale at

Rmb121.5 bn, AliCloud at Rmb16.1 bn, others at Rmb18.5 bn, Investment Portfolio

Companies at Rmb67.6 bn, Ant Financials at Rmb108.5 bn leading to a total value of

Rmb1,835 bn, corresponding to US$295.8 bn and US$114 per share.

Several catalysts ahead. Sustained strong GMV growth, monetisation improvement,

launches in new categories/markets and synergies with its portfolio companies are some

of the positive drivers ahead. Main risks to our call include (1) high logistics and other

investments; (2) sluggish new category expansion; and (3) slow mobile growth.

The incomparable scalability

and operating leverage will

help the company deliver

sustainable earnings stream

in the coming years

We believe the blended

monetisation rate in China's

retail marketplace has

grown steadily YoY, coupled

with a slight increase in PC

monetisation and increasing

mobile monetisation

Meaningful synergistic

opportunities with

investment portfolio

companies, AliCloud and

Ant Financial should provide

upside potential

Our DCF-based valuation

yields a TP of US$114

29 October 2014

Alibaba Group

(BABA.N) 4

Alibaba Group Holding Limited BABA.N / BABA US Price (27 Oct 14): US$97.79, Rating:: OUTPERFORM [V], Target Price: US$114.00

Target price scenario

Scenario TP %Up/Dwn Assumptions Upside 130.00 32.94 40% CAGR for China retail GMV from 14-17E Central Case 114.00 16.58 32% CAGR for China retail GMV from 14-17E Downside 100.00 2.26 20% CAGR for China retail GMV from 14-17E

Key earnings drivers 3/14A 3/15E 3/16E 3/17E

China retail GMV (RMB Bn)

1,678 2,393 3,192 3,820 Blended monetization rate (%)

— — — — Mobile GMV (RMB Bn) 0.04 0.03 0.03 0.03 Mobile monetization rate (%)

319 902 1,561 2,152 0.01 0.02 0.02 0.03

Income statement (Rmb mn) 3/14A 3/15E 3/16E 3/17E

Sales revenue 52,504 80,066 110,759 137,010 Cost of goods sold 12,225 23,790 33,682 40,850 SG&A 7,870 10,399 13,148 15,326 Other operating exp./(inc.) 6,151 12,580 15,571 19,016 EBITDA 26,259 33,298 48,359 61,819 Depreciation & amortisation 1,339 2,307 3,722 5,504 EBIT 24,920 30,990 44,636 56,314 Net interest expense/(inc.) 547 (9,577) (792) (2,148) Non-operating inc./(exp.) 2,429 2,768 3,094 3,709 Associates/JV — — — — Recurring PBT 26,802 43,335 48,522 62,171 Exceptionals/extraordinaries — — — — Taxes 3,196 5,717 10,221 13,446 Profit after tax 23,606 37,618 38,301 48,724 Other after tax income — — — — Minority interests 291 2,127 285 (315) Preferred dividends 239.0 60.0 — — Reported net profit 23,076 35,431 38,016 49,040 Analyst adjustments 4,529 (3,314) 8,621 10,671 Net profit (Credit Suisse) 27,605 32,117 46,637 59,710

Cash flow (Rmb mn) 3/14A 3/15E 3/16E 3/17E

EBIT 24,920 30,990 44,636 56,314 Net interest 1,882 12,345 3,886 5,856 Tax paid (3,196) (5,717) (10,221) (13,446) Working capital (1,357) (1,885) 8,054 9,082 Other cash & non-cash items 7,154 7,900 11,322 15,154 Operating cash flow 29,403 43,633 57,677 72,961 Capex (4,776) (5,588) (7,200) (9,600) Free cash flow to the firm 24,627 38,045 50,477 63,361 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) (25,195) (90,040) (63,533) (1,872) Investing cash flow (29,971) (95,628) (70,733) (11,472) Equity raised 1,923 67,672 — — Dividends paid — (60.0) — — Net borrowings 12,789 21,030 — — Other financing cash flow (9) (2,391) (285) 315 Financing cash flow 14,703 86,250 (285) 315 Total cash flow 14,135 34,255 (13,341) 61,804 Adjustments (97.0) — — — Net change in cash 14,038 34,255 (13,341) 61,804

Balance sheet (Rmb mn) 3/14A 3/15E 3/16E 3/17E

Cash & cash equivalents 49,995 119,774 167,359 225,589 Current receivables — — — — Inventories — — — — Other current assets 17,838 25,254 36,920 44,709 Current assets 67,833 145,028 204,280 270,298 Property, plant & equip. 7,241 10,522 13,999 18,095 Investments 20,689 31,205 31,205 31,205 Intangibles — — — — Other non-current assets 15,786 66,931 66,931 66,931 Total assets 111,549 253,686 316,415 386,529 Accounts payable — — — — Short-term debt 10,364 13,072 13,072 13,072 Current provisions — — — — Other current liabilities 27,020 37,044 54,156 65,580 Current liabilities 37,384 50,116 67,228 78,652 Long-term debt 30,711 49,033 49,033 49,033 Non-current provisions — — — — Other non-current liab. 2,636 5,288 5,288 5,288 Total liabilities 70,731 104,437 121,549 132,973 Shareholders' equity 29,338 134,189 179,805 238,495 Minority interests — — — — Total liabilities & equity 111,549 253,686 316,415 386,529

Per share data 3/14A 3/15E 3/16E 3/17E

Shares (wtd avg.) (mn) 2,598 2,618 2,672 2,724 EPS (Credit Suisse) (Rmb)

10.6 12.3 17.5 21.9 DPS (Rmb) — — — — BVPS (Rmb) 11.3 51.3 67.3 87.6 Operating CFPS (Rmb) 11.2 16.6 21.6 26.8

Key ratios and valuation 3/14A 3/15E 3/16E 3/17E

Growth(%) Sales revenue 52.1 52.5 38.3 23.7 EBIT 132 24 44 26 Net profit 99 16 45 28 EPS 99 15 42 26 Margins (%) EBITDA 50.0 41.6 43.7 45.1 EBIT 47.5 38.7 40.3 41.1 Pre-tax profit 51.0 54.1 43.8 45.4 Net profit 52.6 40.1 42.1 43.6 Valuation metrics (x) P/E 56.3 48.8 34.3 27.3 P/B 53.0 11.7 8.9 6.8 Dividend yield (%) — — — — P/CF 53.3 35.9 27.7 22.3 EV/sales 28.5 18.1 12.6 9.8 EV/EBITDA 56.9 43.4 28.9 21.7 EV/EBIT 60.0 46.6 31.3 23.8 ROE analysis (%) ROE 188 39 30 29 ROIC 130 44 39 49 Asset turnover (x) 0.47 0.32 0.35 0.35 Interest burden (x) 1.08 1.40 1.09 1.10 Tax burden (x) 0.88 0.87 0.79 0.78 Financial leverage (x) 2.73 1.70 1.62 1.52 Credit ratios Net debt/equity (%) (21.9) (38.6) (54.0) (64.5) Net debt/EBITDA (x) (0.34) (1.73) (2.18) (2.64) Interest cover (x) 45.6 (3.2) (56.3) (26.2)

Source: Company data, Thomson Reuters, Credit Suisse estimates.

29 October 2014

Alibaba Group

(BABA.N) 5

Table of contents Focus charts and table 2 The giant marches on 3

Leading e-commerce marketplace 3 Growth opportunities in core operations 3 Future potential in the ecosystem 3 Initiate with OUTPERFORM and a TP of US$114 3

Alibaba Group Holding Limited BABA.N / BABA US 4 Leading e-commerce marketplace 6

China e-commerce to continue to grow 6 Alibaba Group's dominant position 9

Growth opportunities in core operations 13 Comprehensive monetisation models 13 Mobile and Tmall, the growth catalysts 19 Highly scalable business model with decent margins 24 Demystifying the category mix picture 27

Future potential in the ecosystem 31 Investments and co-operation: The ecosystem ambition 31 Alipay and Ant Financial 34 AliCloud: Key infrastructure platform 40 Taobao Local Service 46 Internationalisation 51 Logistics network 56

Initiate with OUTPERFORM and a TP of US$114 59 Share price drivers/risks 65

Positive share price drivers and catalysts 65 Downside risks 65

Appendix I: Company profile 67 Funding history before IPO 68 Company structure 68 Alibaba partnership 69 VIE Exposure 70 China retail marketplaces 72 International retail marketplace: AliExpress 75 China wholesale marketplace: 1688.com 76 International wholesale marketplace: Alibaba.com 77

Appendix II: Financial statement analysis 78 Income statement 78 Balance sheet 80 Cash flow statement 81

Appendix III: Looking at Alibaba through a global lens 82 How Alibaba's "take rate" compares 82 A very relevant history lesson: eBay, Google and Gmarket 83 Financial comparison with global companies 84

29 October 2014

Alibaba Group

(BABA.N) 6

Leading e-commerce marketplace Alibaba, the largest e-commerce company in the world, based on 2013 GMV, according to

the IDC GMV Report, operates its online marketplaces for third-party merchants and

individuals to conduct e-commerce business all over the world. The company has

achieved rapid growth over the past few years driven by the boom in China's e-commerce

sector. We expect Alibaba Group to become even more influential in China as the e-

commerce sector should maintain decent growth going forward, and become an integral

part of the daily life.

China e-commerce to continue to grow

China's GDP has experienced robust growth over the past few decades, as the economy

has moved on to a consumption-driven path progressively in order to achieve a balance

and rely less on government investments. According to Euromonitor, China’s real GDP

was Rmb58.7 tn in 2013, and is expected to witness a 7% CAGR in the next three years to

reach Rmb71.8 tn by 2016E. Meanwhile, China's consumption expenditure growth is

expected to outstrip the GDP growth with an 8.3% CAGR over this period. The total real

consumption expenditure is estimated to increase from Rmb21.0 tn in 2013 to Rmb26.7 tn

in 2016E, according to Euromonitor.

Figure 6: China GDP growth Figure 7: China consumption expenditure growth

58.762.9

67.371.8

2013 2014E 2015E 2016E

(Real GDP based on constant 2013 prices, RMB in trillions)

21.0 22.9

24.8 26.7

2013 2014E 2015E 2016E

(Real consumption expenditure based on constant 2013 prices, RMB in trillions)

Source: Euromonitor Source: Euromonitor

However, consumption as a percentage of GDP in China is still structurally lower

compared to that in developed countries, such as the US. According to Euromonitor,

China’s consumption as a percentage of GDP in 2013 was only 35.8%, compared with the

US at 67.1%, the UK at 63.7%, Japan at 59.5%, and Germany at 54.4%. Therefore, there

is still a significant room for China’s consumption to grow given the current low contribution

to GDP. The increasing real income of Chinese consumers and a drop in the household

savings rate could further drive the consumption level over time.

Alibaba has achieved rapid

growth over the past few

years driven by the boom in

China's e-commerce sector

China's GDP has

experienced robust growth

in the past few decades,

and moved on to a

consumption-driven path

progressively

29 October 2014

Alibaba Group

(BABA.N) 7

Figure 8: Consumption as a percentage of GDP

35.8%

67.1%63.7%

59.5%

54.4%

China United States United Kingdom Japan Germany

Source: Euromonitor

With rapid development of internet infrastructure and services, the internet population in

China grew significantly from 298 mn in 2008 to 618 mn in 2013. As the momentum

continues, especially the increasing mobile adoption, internet penetration in China should

improve further.

Supported by increasing personal income and improving customer experiences in product

presentation, payment, logistics and after-sales services, China’s internet shopper

population has expanded dramatically, and the penetration rate increased from 24.8% in

2008 to 48.9% in 2013, according to iResearch.

Increasing penetration has meant more and more consumers going online to purchase

goods as they look for bargains, better quality, and broader product selection. On the other

hand, e-commerce platforms with heavy volumes of user traffic and low operating costs

have become an important sales channel to merchants. The dynamics between merchants

and online shoppers have created a virtuous circle, boosting the e-commerce market's

growth.

Figure 9: China internet user growth Figure 10: China online shopping transaction volume

74 108 160 194 242302

298

384

457513

564618

669731

790

24.8%28.1%

35.1%37.8%

42.9%

48.9%

0%

10%

20%

30%

40%

50%

60%

0

100

200

300

400

500

600

700

800

900

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

China Internet User Population

China Internet Shopper Population

China Internet Shopper Penetration

(mn)

128 263

461 785

1,187

1,892

2,760

3,780

4,772

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

(RMB in billions)

Source: iResearch, CNNIC for internet user 2008-2013 Source: iResearch

Supported by increasing

personal income and

improving customer

experiences in product

presentation, payment,

logistics and after-sales

services, China’s internet

shopper population has

expanded dramatically

29 October 2014

Alibaba Group

(BABA.N) 8

According to iResearch, China’s online shopping transaction volume is expected to

increase from Rmb1,892 bn in 2013 to Rmb4,772 bn in 2016E at a CAGR of 36.1%. The

e-commerce penetration rate in China should surpass that of the US by the end of 2014E,

and further increase to 14.5%, compared with 10.3% penetration in the US, as estimated

by Forrester Research and iResearch.

Increasing e-commerce penetration is mainly attributable to an expansion in online

shopper population and the side-effects of a deficient offline physical retail infrastructure.

Online shopper penetration in China has increased significantly, and continues to narrow

the gap with other developed countries, while, on the other hand, the offline retail

infrastructure in terms of retail space per capita is still at a relatively low level compared to

the developed countries.

Figure 11: E-commerce penetration

1.1%

2.0%2.9%

4.3%

5.6%

8.0%

10.4%

12.6%

14.5%

5.1%5.9%

6.5%7.1%

7.8%8.5%

9.1%9.8% 10.3%

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

China United States

(as % of total retail market in 2013)

Source: iResearch, Forrester Research Online Retail Forecast for US online retail penetration

Figure 12: Online shopper penetration comparison Figure 13: Offline retail infrastructure

48.9%

63.8% 64.2%

52.1%

68.0%


Japan Germany

(Online shoppers as % of total Internet user population, 2013)

0.6

2.6

1.3 1.3

1.5


Japan Germany

(Retail space per capita in square meters, 2013)

Source: CNNIC for China, IDC for other countries Source: Euromonitor

According to Euromonitor, China's retail space per capita was 0.6 sq m, compared with 2.6

sq m in the US, 1.3 sq m in both UK and Japan, and 1.5 sq m in Germany. We believe the

huge gap in physical retail infrastructure cannot be bridged in the short term given the high

capital expenditure and market cultivation cost.

Increasing penetration of e-

commerce is mainly

attributable to online

shopper population

expansion and the side-

effect of deficient offline

physical retail infrastructure

29 October 2014

Alibaba Group

(BABA.N) 9

The lack of physical retail infrastructure, especially in lower tier cities, is one of the key

obstacles for development of the offline retail market. In addition, due to limitations on

product availability and high operating costs, the retail market in lower tier cities may not

be as efficient as the market in top tier cities. Therefore, inconvenience and inefficiency of

the local retail market deter consumers, and they resort to online shopping, which could

provide better price, better quality and broader product selection.

Alibaba Group's dominant position

Alibaba is the clear leader in the China e-commerce space. It has established its dominant

position in both C2C and B2C online shopping markets in China. Taobao and Tmall, its

two strong franchises in C2C and B2C businesses, respectively, are the largest e-

commerce platforms in China. In addition, Alibaba operates Juhuasuan, the most popular

group buying marketplace in China based on monthly active users in 2013, according to

iResearch.

Figure 14: Taobao, the C2C marketplace Figure 15: Tmall, the B2C marketplace

Source: Company data Source: Company data

In China's C2C market, Taobao, with an average of over 100 mn unique daily visitors in

June 2014, is the absolute leader given the 96.5% market share in terms of transaction

volume in CY2Q14, according to 100EC. There were approximately 8.4 mn annual active

sellers, primarily individuals and small businesses, on the Taobao marketplace, during the

12 months ended 30 June 2014. By leveraging the large seller base, Taobao offers

consumers with extensive collection of products and services and geographical coverage.

Tmall is a third-party platform with a large volume of user traffic for brands and retailers to

sell their products or services online. According to iResearch, the market share of Tmall,

Alibaba's B2C arm in the China retail marketplace, in terms of transaction volume was

57.4% in CY2Q14, much higher than its peers'. The large traffic and transaction volume on

Tmall has attracted more and more merchants to sell branded products on this platform.

As of 30 June 2014, there were 110,000 brands on Tmall that offered trusted products with

competitive pricing.

Moreover, Juhuasuan, the most popular group buying marketplace in China, offers quality

products at discounted prices by aggregating demand from numerous consumers. By

adopting the flash sales model, Juhuasuan helps merchants to promote their products on

sale within limited period of time. In the 12 months ended 30 June 2014, the total GMV

generated from traffic through Juhuasuan, which is recorded as either Taobao

marketplace GMV or Tmall GMV, was Rmb65.6 bn.

Alibaba is the clear leader in

the China e-commerce

space with a dominant

market share in retail

marketplaces

29 October 2014

Alibaba Group

(BABA.N) 10

Figure 16: Juhuasuan, the group buying marketplace

Source: Company data

Figure 17: China's online shopping market breakdown between B2C and C2C

86.3%74.7%

65.4%59.6%

52.0%45.9% 41.9% 39.5%

13.7%25.3%

34.6%40.4%

48.0%54.1% 58.1% 60.5%

2010 2011 2012 2013 2014E 2015E 2016E 2017E

B2C C2C

Source: iResearch

29 October 2014

Alibaba Group

(BABA.N) 11

Figure 18: C2C China market share Figure 19: B2C China market share

Taobao96.5%

Paipai3.4%

Others0.1%

Tmall57.4%

JD21.2%

Suning3.5%

VipShop2.8%

Gome1.9%

Amazon1.5%

Dangdang1.5%

Yixun1.4%

Yihaodian1.4%

Others7.4%

Source: 100EC.CN. Based on transaction volume in CY2013 Source: iResearch. Based on transaction volume in CY2Q14

The three marketplaces together generated a GMV of Rmb1,833 bn, and had aggregate

279 mn active buyers and 8.5 mn active sellers in the 12 months ended 30 June 2014.

Notably, the GMV settled through Alipay on the Singles Day 2013, Alibaba’s signature

annual sales event on its China retail marketplace, was US$5.8 bn, higher than the GMV

of all US online retailers from Thanksgiving sales in 2013. The impressive sales record

generated on Alibaba’s marketplaces demonstrates its influential position in China’s e-

commerce space.

Driven by the huge GMV generated on Alibaba’s platform, primarily the China retail

marketplaces, Alibaba has achieved significant revenue growth over the past three years,

from Rmb20.0 bn in FY12 to Rmb52.5 bn in FY14 with a CAGR of 62.0%.

Figure 20: Singles Day vs. US Thanksgiving sale in 2013 Figure 21: Alibaba's total revenue

5.8

5.3

Alibaba's Retail Marketplaces All US Online Retailers GMV

(US$ in billions)

20.0

34.5

52.5

FY2012 FY2013 FY2014

(RMB in billions)

Source: Company data, comScore for US online retailers GMV Source: Company data

The GMV generated on Alibaba’s China retail marketplace during the 12 months ended 30

June 2014 was US$0.3 tn, compared to a total consumption of US$3.4 tn, and total GDP

of Rmb9.3 tn in China, according to Euromonitor. Although there have been a large

number of transactions settled on Alibaba’s marketplaces, by foreseeing the huge upside

potential going forward, we expect the company to target a larger piece of the pie in total

consumption, and even a larger portion in terms of contribution to GDP.

Driven by the huge GMV

generated on Alibaba’s

platform, primarily the China

retail marketplaces, Alibaba

has achieved significant

revenue growth over the

past three years

29 October 2014

Alibaba Group

(BABA.N) 12

On the other hand, we believe that Alibaba could further expand its customer base as the

internet adoption in China grows rapidly, and Alibaba, as the largest e-commerce

company in China, should deepen its reach, and make potentially revolutionary changes in

people’s lives.

Figure 22: GMV upside* Figure 23: Annual active buyers upside*

0.30

3.40

9.30

Alibaba Consumption GDP

(US$ in trillions)

0.28

0.62

1.40

Annual Active Buyers Internet Users Population

(billions)

Source: Company data, Euromonitor

*GMV for 12 months ended 30 June 2014

Source: Company data, Euromonitor, CNNIC

*Annual active buyers for 12 months ended 30 June 2014

Long-term market share trend

In terms of GMV, we expect China retail marketplace GMV to grow slower than some of its

smaller e-commerce peers, such as JD.com and VIPShop.

However, as Alibaba has strong operating capabilities to penetrate into new categories,

such as local services, financial services, and medical, we expect it to maintain a strong

long-term growth rate. We expect Alibaba's ecosystem to maintain its dominant market

share in China in the long run.

In terms of GMV, we expect

China retail marketplace

GMV to grow slower than

some of its smaller e-

commerce peers, such as

JD.com and VIPShop

29 October 2014

Alibaba Group

(BABA.N) 13

Growth opportunities in core operations Comprehensive monetisation models



Figure 25: China retail revenue breakdown by different


Pay-for-performance


Display marketing

services7.7%

Commissions24.3%


added services9.8%

Others12.9%

Online marketing

services66.5%

Commission31.9%

Others1.7%


Figure 26: Different revenue models across business lines

Monetisation Business unit Description

Online marketing P4P (Pay for Performance) Taobao

Tmall

AliExpress

1688.com

Alibaba.com

Sellers bid for keywords at prices established by the online auction

system

Display Advertising Taobao

Tmall

Marketers bid for display marketing services at prices established by

a RTB system

Taobaoke Program Taobao

Tmall

Sellers pay commissions based on percentage of GMV for

transactions completed by buyers sourced from third-party marketing

affiliates’ website

Commission-based Transaction Fee Tmall

Juhuasuan

AliExpress

Commission based on a percentage of GMV

Membership fees Annual Subscription 1688.com

Alibaba.com

Storefront fees from 1688.com and Alibaba.com

Storefront fees Subscription Juhuasuan

Taobao

Placement fees for flash sales slots on Juhuasuan group buying

marketplace

Monthly subscription fees from using packages and tools provided by

Wangpu

Cloud computing and

infrastructure

Variable/SaaS Alibaba Cloud Rendering of services (e.g., data storage, elastic computing, web

hosting)


Alibaba operates a wide range of online marketplaces for both domestic and international

consumers and merchants, including Taobao (China retail C2C marketplace), Tmall

(China retail B2C marketplace), Juhuasuan (China group buying marketplace), AliExpress

(global retail B2C marketplace), Alibaba.com (Global wholesale B2B marketplace), and

1688.com (China wholesale B2B marketplace).

29 October 2014

Alibaba Group

(BABA.N) 14

In addition, Alibaba provides payment solutions (through contractual arrangement with

Alipay), logistics information system (China Smart Logistics), online marketing services

(Alimama), and cloud computing services (Alibaba Cloud) to facilitate the full life cycle of

the transactions on its marketplaces.

Figure 27: Major products and services offered by Alibaba

Alibaba Cloud Computing (Platform for internal and third-party use)

Data Platform

Alimama (Online marketing services)

China Smart Logistics (Logistics Information System)

Alipay (Payment services)

AliExpress(Global consumer marketplace)

Alibaba.com(Global wholesale marketplace)

1688.com(China wholesale marketplace)

Taobao Marketplace(Online shopping destination)

Tmall.com(Brands and retail platform)

Juhuasuan(Group buying marketplace)

China Retail Marketplaces


By leveraging the strong user traffic on its platforms, Alibaba has designed various

monetisation models for its different business lines, including:

1) Online marketing:

Alibaba's online market services comprise Pay for Performance (P4P) marketing

services, display advertising, and the Taobaoke programme.

In the P4P marketing services, sellers bid for keywords that match product or service

listings in the search results on a cost-per-click (CPC) basis at prices established by

its online auction system, which facilitates the price discovery through a generalised

second price (GSP) sealed bid auction.

The CPC depends on the bidding price and the quality score of the advertisement,

which is a function of several features, such as similarity between keywords and

advertisements, number of clicks, and click through rate (CTR). The higher quality

score an advertisement obtains, the lower per click cost it could achieve. The revenue

of P4P marketing services is derived from the bidding price of specific keywords

(depending on the intensity of the bidding) and the number of clicks per advertisement

(mix of the query traffic of specific keywords and click through rate of the

advertisement).

By leveraging the strong

user traffic on its platforms,

Alibaba has designed

various monetisation models

for its different business

lines, including online

marketing, commission,

membership fees, and cloud

and infrastructure services

fee

29 October 2014

Alibaba Group

(BABA.N) 15

Figure 28: P4P on Taobao

Paid ResultsOrganic Results


Display marketing model helps sellers bidding for display positions on the relevant

marketplaces or through third-party marketing affiliates at fixed price or prices

discovered by a real-time bidding mechanism on a cost-per-thousand impression

(CPM) basis.

Therefore, the revenue generated from display marketing is driven by the query traffic

of specific keywords or web traffic of third-party marketing affiliates and the price of

per thousand impression merchants are willing to pay.

Figure 29: Display marketing on Taobao

Display marketing (CPM)


Taobaoke programme, another performance-based advertising solution, connects

sellers and Alibaba's affiliate marketing partners for marketing displays on the affiliate

partners' websites. Different from P4P marketing services, the Taobaoke programme

charges sellers commissions based on a percentage of GMV for transaction settled

through Alipay from third-party affiliates on a cost-per-sale (CPS) basis. Sellers could

29 October 2014

Alibaba Group

(BABA.N) 16

promote their online stores or certain products through the Taobaoke programme by

specifying the commission (5-50%) paid for each transaction, of which a significant

portion is shared with third-party affiliate partners.

2) Commission

Under the commission model, Alibaba charges merchants on its retail B2C

marketplace and group buying marketplace a transaction fee (real-time technical

service fee) based on a percentage of GMV for the transaction settled through Alipay.

The commission rate varies among different product categories, and ranges from

0.3% to 5%.

As all the merchants who purchase promotional slots on Juhuasuan are from Taobao

and Tmall, the end transactions are completed on Taobao or Tmall only. Therefore,

the transaction from traffic originating on Juhuasuan could be charged additional

commission on Tmall if the merchants are Tmall merchants while transactions settled

on Taobao are still free from commissions.

As the marketplaces with commission model are branded as premium and trusted

platforms and have higher standards when it comes to brands and merchants

selection, quality-seeking customers are more willing to purchase products on those

platforms. As a result, brands and merchants sometimes could charge customers a

premium on products over C2C marketplace, which, to some extent, is the incentive

for those brands and merchants to pay for the commission.

Figure 30: Commission structure of China retail marketplaces

Transaction Fees

(0.3%-5% take rate)

Transaction to Taobao

Transaction to Tmall


29 October 2014

Alibaba Group

(BABA.N) 17

Figure 31: Tmall commission rates

Category Commission Notes

Apparel, Shoes, and Sports/Outdoors 5% Bicycle Accessories (2%)

Jewellery 5% Gold (0.5%), Platinum (2%)

Cosmetics 4%

Home Decoration 5% Basic Material, Wire, and Oil Paint (2%)

Books and Media Products 2%

Foods 2% Oil and Flour (1%)

Medicine and Nutrition 3%

Music Instruments 2%

Services & Tickets 0.50% Phone Bill (0.3%), 3G Card (1%), Home Design/Software/DIY (2%), Phone Number (3%)

Auto parts 2% New/Used Automobile (0%)

Home Daily Goods 5% Pets related (2.5%)

Maternity and Baby 5% Nutrition Foods and Education Tools (2%)

3C 2%

Home Appliance 2% Personal Care (5%)

Travel 2% Hotel (3%)


3) Membership fees

Merchants in the wholesale marketplace business, namely Alibaba.com and

1688.com, are charged membership fees by Alibaba on an annual basis.

Wholesalers with Gold supplier membership on Alibaba.com or with China Trust Pass

on 1688.com are eligible to host premium storefronts, enjoy priority placement in

search results, and other value-added services, such as product showcase, custom

clearance, value-added tax refund, and other import/export business solutions. The

paying members are also offered with optional value-added services, such as keyword

purchase, showroom, etc.

The revenue from Alibaba's wholesale marketplaces is primarily generated from sale

of memberships. In FY14, the membership fees accounted for 74.1% and 87.6% of its

China and International wholesale marketplace revenues, respectively.

Figure 32: Wholesale marketplaces monetisation

Alibaba.com 1688.com

Customers Chinese exporters Global SMEs Domestic Wholesalers

Membership pricing Rmb29,800-50,000 Global Gold Supplier Lite: US$299

Global Gold Supplier: US$2,999

Rmb3,688

Membership type China Gold Supplier Global Gold Supplier China Trust Pass

Basic offerings Priority placement in search results

Storefront and product listing, product showcase

Third-party authentication and verification (A&V)

Onsite inspection

Trust rating and profile

Corporate email, traffic analysis tools

Priority placement in search results

Storefront and product listing,

product showcase

Third-party A&V

Trust rating and profile

Transaction tools

Optional VAS Keyword purchase

Ali-Advance (keyword bidding)

Showroom

Supplier Assessment

Ali-Advance (keyword bidding)

Premium Placement

Non-marketing services Business management services (traffic analysis, customer inquiry management)

Translation support

Export-related services

Escrow

Logistics arrangement


29 October 2014

Alibaba Group

(BABA.N) 18

4) Storefront fees

The major storefront fees revenue comes from the monthly subscription fees for

Wangpu, the storefront management software provided by Alibaba, and the flash

sales slots on Juhuasuan. Storefront mainly targets Taobao and Jushuansuan

merchants.

Wangpu provides featured functions in customising storefronts, such as layout

management, product recommendation and classification. By paying subscription fees

of Rmb50 per month, sellers could efficiently upgrade, decorate and manage their

storefronts via a set of management tools included in Wangpu.

In addition, sellers also need to pay storefront fees for the promotional slots on

Juhuasuan marketplace for a specific period.

Figure 33: Taobao Wangpu


5) Cloud computing and infrastructure

As one of the strategic products, Alibaba Cloud offers a wide range of cloud

computing and infrastructure related services, including elastic computing services,

storage and database services, and data processing services on the time- and usage-

based provision. Customers could customise their computing or data analysis needs

by choosing different packages of cloud-related solutions.



Figure 35: China retail revenue breakdown by different


Pay-for-performance


Display marketing

services7.7%

Commissions24.3%


added services9.8%

Others12.9%

Online marketing

services66.5%

Commission31.9%

Others1.7%


29 October 2014

Alibaba Group

(BABA.N) 19

Alibaba has enhanced its monetisation capabilities by employing various monetisation

models in its different business lines. In FY2014, the revenue contributed from Pay-for-

performance marketing services, display marketing services, commissions, and

membership and VAS were 45.3%, 7.7%, 24.3%, and 9.8%, respectively.

In the China retail marketplace business, revenues generated from online marketing in

FY14 were 66.5% while commission and others revenues contributed were 31.9% and

1.7%, respectively.

Pay-for-performance marketing services, as the major revenue source, are supported by

merchants in increasing need for sales marketing and store promotion due to the intense

competition in the marketplace. Price of the performance-based monetisation model is

determined by market-based bidding system. More merchants participating in the bidding

process could help the value of the marketing service to be fully realised, as longer bidding

queues could accelerate the price discovery.

On the other hand, Merchants' budget allocation on the marketing-related services

depends on the expectations of the GMV generated from the marketing and customer

acquisition efficiency.

As we see trends that merchants are moving towards Tmall, its B2C marketplace, given

Tmall's increasing brand recognition and traffic, we expect commission revenue to ramp

up quickly in the near future, and contribute more to the revenue mix in its China retail

marketplace business.

Figure 36: Different revenue models across the business lines

Monetisation Business unit Description

Online marketing P4P (Pay for Performance) Taobao

Tmall

AliExpress

1688.com

Alibaba.com

Sellers bid for keywords at prices established by the online auction

system

Display Advertising Taobao

Tmall

Marketers bid for display marketing services at prices established by

a RTB system

Taobaoke Program Taobao

Tmall

Sellers pay commissions based on percentage of GMV for

transactions completed by buyers sourced from third-party marketing

affiliates’ website

Commission-based Transaction Fee Tmall

Juhuasuan

AliExpress

Commission based on a percentage of GMV

Membership fees Annual Subscription 1688.com

Alibaba.com

Storefront fees from 1688.com and Alibaba.com

Storefront fees Subscription Juhuasuan

Taobao

Placement fees for flash sales slots on Juhuasuan group buying

marketplace.

Monthly subscription fees from using packages and tools provided by

Wangpu.

Cloud computing and

infrastructure

Variable/SaaS Alibaba Cloud Rendering of services (e.g., data storage, elastic computing, web

hosting)


Mobile and Tmall, the growth catalysts

The China retail marketplace, as the largest revenue source of Alibaba, contributed 81.6%

of FY14 total revenue. Within the China retail marketplace business, revenues from online

marketing services and commission as a percentage of China retail marketplace revenue

were 69.4% and 28.15%, respectively. In our view, the structural shift towards mobile and

Tmall in the China retail marketplace could provide potential opportunities in monetisation.

In FY14, the revenue

contributed from pay-for-

performance marketing

services, display marketing

services, commissions, and

membership and VAS were

45.3%, 7.7%, 24.3%, and

9.8%, respectively

29 October 2014

Alibaba Group

(BABA.N) 20

Figure 37: Revenue breakdown by business in FY14 Figure 38: China retail marketplace revenue breakdown in

FY14

China retail81.6%

China wholesale

4.4%

International retail

1.8%

International wholesale

7.5%

Cloud and infrastructure

1.5%

Others3.3%

Online marketing

services69.4%

Commission28.1%

Others2.5%


Both GMV and take rate upside potential from mobile

We believe that blended monetisation in the China retail marketplace has grown steadily

YoY mixed with slight increases in PC and mobile monetisation rates.

Alibaba has made great efforts in mobile development to improve customer experience as

well as provide merchants with comprehensive mobile marketing solutions. The increasing

effort has boosted the mobile monetisation rate starting from FY3Q14, and it was 1.49% in

FY1Q15, an increase of 157% YoY. The GMV contribution from mobile also increased

significantly, from Rmb12.7 bn in FY2Q13 to Rmb164.4 bn in FY1Q15. As a result, the

mobile revenue has ramped up rapidly, and mobile revenue as a percentage of total China

retail marketplace revenue reached 19.4% in FY1Q15.

According to iResearch, Alibaba is the leader in the China mobile commerce space, with

an 84.2% market share in terms of transaction volumes in CY2Q14. In addition, the mobile

MAUs on Alibaba's mobile platform had reached 188 mn by the end of 30 June 2014,

compared with 163 mn at the end of 31 March 2014 and 136 mn at the end of 31

December 2013.

Figure 39: China mobile commerce market share—Alibaba has even higher market share

Taobao84.2%

JD5.3%

VipShop2.0%

Suning1.0%

Gome0.6%

Others6.9%

Source: iResearch. Based on transaction volume in CY2Q14

We believe that blended

monetisation in the China

retail marketplace has

grown steadily YoY mixed

with slight increases in PC

and mobile monetisation

rates

29 October 2014

Alibaba Group

(BABA.N) 21

Figure 40: Blended monetisation on Alibaba's China retail

marketplaces

Figure 41: Monetisation rate—PC and mobile

5.6

9.6

6.8

8.7 8.6

16.1

9.4

12.6 2.46%

2.77%

2.30%2.51%

2.31%

3.05%

2.18%2.52%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Total revenue Blended monetization rate

(RMB in billions)

0.47% 0.55% 0.47% 0.58% 0.61%

1.12%0.98%

1.49%

2.57%

2.95%

2.52%2.77%

2.61%

3.53%

2.63%

3.03%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

Mobile monetization rate PC monetization rate


Figure 42: GMV generated by mobile on Alibaba's China

retail marketplaces

Figure 43: Mobile revenue on Alibaba's China retail

marketplaces

12.7

25.731.5

41.3

54.8

104.4

118.0

164.4

5.6%7.4%

10.7%12.0%

14.7% 19.7%

27.4% 32.8%

0%

5%

10%

15%

20%

25%

30%

35%

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Mobile GMV Mobile GMV as % of total GMV

(RMBin billions)

0.06 0.14 0.150.24

0.33

1.17 1.16

2.45

1.1% 1.5%2.2% 2.8%

3.8%

7.3%

12.4%

19.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Mobile revenue Mobile revenue as % of total revenue

(RMB in billions)


We see consumers migrating from PC to mobile when it comes to shopping behaviour.

Given Alibaba's leadership position in the China mobile commerce market, we expect the

company to achieve meaningful growth in mobile GMV in its China retail marketplace

business.

At the same time, by providing more mobile-related products or services to facilitate

transactions through mobile, Alibaba could potentially gain higher monetisation driven by

increases in both commission rate on mobile and marketing revenues in order to further

narrow the gap in monetisation between PC and mobile.

We expect Alibaba to

achieve meaningful growth

in mobile GMV in its China

retail marketplace business

29 October 2014

Alibaba Group

(BABA.N) 22

Figure 44: China online shopping market mix in terms of transaction volume

86.3%

74.7%

65.4%59.6%

52.0%45.9%

41.9% 39.5%

13.7%

25.3%

34.6%40.4%

48.0%54.1%

58.1% 60.5%

2010 2011 2012 2013 2014E 2015E 2016E 2017E

C2C B2C

Source: iResearch

Figure 45: GMV mix in Alibaba's China retail marketplaces

179

255223

257 275

346295

34249

91

71

8899

183

135

159

21.5%

26.3%24.1%

25.5%26.5%

34.6%

31.4% 31.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0

100

200

300

400

500

600

FY2Q13 FY3Q13 FY4Q13 FY1Q14 FY2Q14 FY3Q14 FY4Q14 FY1Q15

Taobao GMV Tmall GMV Tmall as % of total GMV


Structural shift to Tmall supports future growth

In the China online shopping space, the B2C business has progressively expanded over

the past few years. According to iResearch, transaction volume from B2C alone accounted

for 40.4% of the total online shopping transactions, and is expected to further increase to

60.5% in CY17.

29 October 2014

Alibaba Group

(BABA.N) 23

Figure 46: Taobao vs Tmall

Rating systems for both buyers and sellers

Enforcement of accurate description of products

Full refund within 7 days

Shipment within 72 hours

Authenticity guarantee (5x compensation)

Invoice guarantee

Home delivery (home appliance)

Home delivery & installation (furniture)

Free SF Express services (3C)

Free additional services

Customer service hotline

Optional


Merchants in China retail marketplaces are moving towards Tmall, given Tmall's

increasing brand recognition and traffic. On the other hand, since Alibaba could charge

additional commission on transactions settled on Tmall through Alipay, Alibaba also has

the incentives to direct more traffic from Taobao to Tmall.

Moreover, from the consumers' standpoint, Tmall could provide better shopping

experience by offering more premium services in addition to Taobao, including authenticity

guarantee, invoice guarantee, and other advanced delivery services. As a result,

consumers, who are more concerned about product quality and shopping experience, are

expected to gradually shift from Taobao to Tmall.

Therefore, we expect Tmall's GMV to ramp up quickly going forward, and contribute higher

commission revenue to its China retail marketplace business.

Figure 47: Global take rate comparison*

2.1%~2.4%

8.8%

11.0%

Alibaba marketplace eBay marketplace (ex-vehicles) eBay marketplace + Paypal (ex-vehicles)

Source: Company data, Credit Suisse estimates

*Alibaba data based on FY2014, eBay data based on CY2013

Alibaba take rate = commission revenue from Tmall and Juhuasuan / total GMV in Tmall and Juhuasuan

eBay take rate = revenue from marketplace (ex-vehicles) / GMV from marketplace (ex-vehicles)

29 October 2014

Alibaba Group

(BABA.N) 24

In our estimates, the effective take rate on Tmall ranges from 2.1% to 2.4%, much lower

than eBay marketplace's 8.8% (ex-vehicles) and 11.0% of blended take rate (marketplace

+ Paypal). Thus, there is still a huge room for improvement in Alibaba's take rate given the

benchmark level of global peers.

However, as the commission rate is determined based on the estimated profitability of

each industry in a country and reflects the amount of money a seller is willing to pay to

generate sales or attract buyers through Tmall, we do not believe the commission rate can

be increased substantially in the near term, despite the huge gap between Tmall and eBay.

By assuming a take rate of 2.4%, at the high-end of the current effective take rate, we

have conducted a sensitivity analysis on the revenue contribution from commission

generated on Tmall. Our base case assumption of a 30% GMV CAGR for CY13-17 and

45% GMV contribution from Tmall yields revenue from commission on Tmall of Rmb51.3

bn in FY18 compared with less than Rmb12 bn revenue in FY14, implying a CAGR of

43.7% over the next four fiscal years.

Figure 48: Sensitivity analysis on revenue contribution from commission on Tmall

Tmall GMV as % of total GMV

(Rmb bn) 37.5% 40.0% 42.5% 45.0% 47.5% 50.0% 52.5%

Total GMV

CAGR (FY14-FY18)

20.0% 31.1 33.1 35.2 37.3 39.3 41.4 43.5

22.5% 33.7 36.0 38.2 40.5 42.7 45.0 47.2

25.0% 36.6 39.0 41.4 43.9 46.3 48.8 51.2

27.5% 39.6 42.2 44.9 47.5 50.1 52.8 55.4

30.0% 42.8 45.6 48.5 51.3 54.2 57.0 59.9

32.5% 46.2 49.2 52.3 55.4 58.5 61.6 64.6

35.0% 49.7 53.1 56.4 59.7 63.0 66.3 69.6

37.5% 53.5 57.1 60.7 64.2 67.8 71.4 75.0

40.0% 57.5 61.4 65.2 69.0 72.9 76.7 80.6


We believe that with increasing GMV contribution from Tmall, Alibaba could potentially

generate a significant portion of its revenues from the commission charged on Tmall even

under a prudent commission rate schedule.

Highly scalable business model with decent margins

Unlike other e-commerce companies in China, Alibaba adopts a pure third-party platform

approach in its different business lines. As a platform, Alibaba provides fundamental

technology infrastructure and operates marketplaces to connect buyers and sellers

globally. The interactions between buyers and sellers on the platform create network effect

to reinforce the engagement and attract more consumers and merchants.

In addition, the cross-selling between different platforms also increases Alibaba's

monetisation potential, and lowers traffic acquisition costs across different platforms. For

instance, by combining Tmall's product offerings with Taobao, the products listed on Tmall

could also appear in the search results of Taobao. Thus, Tmall could also enjoy the large

traffic on Taobao, and monetise the traffic based on the transactions settled on its platform.

Moreover, with less offline exposure, the marketplace model enables Alibaba to be highly

scalable, and maintain decent margins and strong cash flow by leveraging its huge user

traffic.

In our estimates, the

effective take rate on Tmall

ranges from 2.1% to 2.4%,

much lower than 8.8% for

eBay marketplace (ex-

vehicles) and 11.0% of

blended take rate

(marketplace + Paypal)

Unlike other e-commerce

companies in China, Alibaba

adopts a pure third-party

platform approach in its

different business lines

29 October 2014

Alibaba Group

(BABA.N) 25

Figure 49: GMV comparison with China e-commerce

companies*

Figure 50: Revenue comparison with China e-commerce

companies*

663.4

1,077.2

1,677.6

32.7 73.3 125.5

1.9 5.7 12.8

FY2012 FY2013 FY2014

Alibaba JD VIPShop

(RMB in billions)

20.0

34.5

52.5

21.1

41.4

69.3

1.9 5.7

12.8

FY2012 FY2013 FY2014

Alibaba JD VIPShop

(RMB in billions)


*JD in CY basis


*JD in CY basis

Compared to other e-commerce companies, such as JD and VIPShop, Alibaba has

benefited from its marketplace strategies, and achieved higher GMV and margins. The

huge customer and merchant bases make Alibaba outperform its peers in terms of GMV.

Without taking any inventory, Alibaba maintained its gross profit margin at 77% in FY14,

much higher than JD at 10% and VIPShop at 24%. The marketplace approach also leads

to a zero fulfilment cost, which allows Alibaba to focus on its core platform operation.

Consequently, Alibaba's operating and net profit margins are higher than its e-commerce

peers.

Figure 51: Margin comparison with China e-commerce companies *

77%

0%

8% 8% 7%

55%53%

10%6%

2% 1% 1%

0%-3%

24%

11%

4% 2% 3% 5% 4%

GPM Fulfilment S&M R&D G&A Adj. OPM Adj. NM

Alibaba JD VIPShop


*Alibaba and VIPShop FY2014 non-GAAP basis; JD CY2013 non-GAAP basis

29 October 2014

Alibaba Group

(BABA.N) 26

Marketplace vs direct sales

Marketplace and direct sales are the two major business models in the e-commerce space.

Marketplace provides third-party platform to facilitate the transactions between buyers and

sellers while, in direct sales model, platform owner takes inventory of products in different

categories, and directly sells goods to his/her customers.

Compared to direct sales, as marketplaces are not directly engaged in product

merchandising, they usually have a wide range of product and service coverage. Direct

sales, on the other hand, are normally focused on fewer categories and standardised

products to avoid potential operational risks. Customers could have more choices buying

products on marketplace than on the direct sales platform.

In terms of inventory, the marketplace model has higher operating leverage with no

inventory risks while direct sales platforms may have different models, such as buyout and

consignment, based on own inventory.

In addition, marketplaces usually do not operate their own logistics network. They often

collaborate with logistics partners to support the fulfilment needs of the merchants on their

platforms or allow merchants to fulfil the orders at their discretion. Direct sales platform

may have different strategies in logistics. Many direct sales platforms prefer to establish

their own logistics network while some direct sales platforms choose to collaborate with

third-parties to fulfil the orders.

We see an increasing trend of direct sales platforms building their own logistics team as

they look for low-cost per order and better customer experience. However, due to diverse

geographical locations, direct sales platforms with self-owned logistics teams may have

limited delivery capability, especially in lower tier cities. Some comprehensive B2C

retailers, who operate both direct sales and marketplace, may also open their own logistics

system to third-party merchants to create synergies in operation and improve the customer

experience in logistics.

By taking inventories and building their own logistics networks, direct sales platforms are

usually asset heavy. It requires significant investment and proficiency and expertise in

offline operation. On the other hand, the marketplace model with light assets could

generate positive cash flows, and maintain high financial flexibility.

Alibaba vs other internet companies

In addition, as one of the largest internet companies in China, Alibaba enjoys the best

operating leverage among the internet giants thanks to the fast-growing e-commerce

industry. In FY14, Alibaba recorded a gross profit margin of 77%, an adjusted operating

margin of 55%, and an adjusted net margin of 53%, higher than other leading internet

companies in China.

Marketplace provides third-

party platform to facilitate

the transactions between

buyers and sellers while, in

direct sales model, platform

owner takes inventory of

products in different

categories, and directly sells

goods to his/her customers

29 October 2014

Alibaba Group

(BABA.N) 27

Figure 52: Revenue comparison with China internet

companies

Figure 53: Margin comparison with China internet

companies*

20.0

34.5

52.5

31.8

47.8

65.3

16.3

24.0

35.5

FY2012 FY2013 FY2014

Alibaba Tencent Baidu

(RMB in billions)

77%

55%53%54%

30% 29%

64%

37% 35%

GPM Adj. OPM Adj. NM

Alibaba Tencent Baidu


*FY2014 non-GAAP basis

Demystifying the category mix picture

As the pioneer in China retail e-commerce, Alibaba Group cultivated consumers' online

shopping habits. According to the company and Euromonitor, among all the consumer

spending categories, Alibaba Group dominates the categories that are fairly developed in

terms of online penetration. These categories include clothing and footwear (apparel &

accessories), electronics & home appliances, and home goods.

Figure 54: Breakdown of consumption in China, 2013

Clothing and footware8.5% Electronitcs and home

appliances3.7%

Household goods and services

4.4%

Food and non-alcoholic beverages

26.1%

Housing16.8%

Transport7.4%

Health goods and medical services

6.6%

Hotels and catering3.7%

Jewelry and accessories

3.6%

Education2.1%

Recreation and culture2.1%

Others15.0%

Source: Company data, Euromonitor. Orange denoted Alibaba's major categories.

As the pioneer in China

retail e-commerce, Alibaba

Group cultivated consumers'

online shopping habits

29 October 2014

Alibaba Group

(BABA.N) 28

Figure 55: Tmall category breakdown based on # of brands Beauty care

5%

Lifestyle33%

Apparel29%

Home decoration23%

Digital household appliances

10%


The categories that Alibaba has not achieved meaningful presence in include Food &

Beverages, Property, Healthcare, Education, etc. For various reasons, consumers have

yet to become that accustomed to shopping for these categories online.

We have analysed and researched various data sources and industry study, and came up

with our estimates on Alibaba Group's current product category breakdown in its China

retail marketplaces in terms of GMV.

Figure 56: China retail marketplace category mix—growth from Emerging & Frontier

categories

Category Type 2012 2013

Apparel & Accessories Core 29.6% 25.8%

3C and Appliances Core 13.0% 13.4%

Home Goods Core 7.3% 9.1%

Maternity and Baby products Emerging 5.2% 4.4%

Cosmetics & Beauty Emerging 2.9% 2.6%

Food & Non-alcoholic beverages Frontier 1.3% 1.5%

Travel Emerging 2.3% 2.8%

Healthcare Frontier 0.1% 0.2%

Recreation and Culture Frontier 0.0% 0.3%

Virtual items, Entertainment, Local services & Others Frontier 38.3% 40.0%

Total 100.0% 100.0%


We classify all these categories into three types:

■ Core categories

From our analysis, we estimate that the top three Core categories (apparel & accessories,

electronics & appliances, and home goods), accounted for approximately 48% of total

GMV in its China retail marketplace in 2013. Online penetration and Alibaba's share in

these categories were relatively high, but we still see decent room for growth from further

online dollar migration.

On the other hand, we saw the total contribution from Core categories trending down from

50% in 2012 to 48% in 2013, showing good trend of diversification towards variety.

Virtual goods (lottery, games points, prepaid phone cards) have seen strong growth in

GMV over the past few quarters, particularly driven by lottery tickets sales. We expect

virtual items would quickly become one of the top-three GMV categories in the future.

■ Emerging categories

29 October 2014

Alibaba Group

(BABA.N) 29

For Emerging categories such as maternity & baby products, cosmetics & beauty and

travel, we have seen users' online behaviour changing rapidly in the past two years as

they become much more receptive to consuming online. At the same time, online

penetration is still relatively low for these categories. This bodes well for ample growth for

further online adoption from consumers in these categories.

■ Frontier categories

For frontier categories, online shopper adoption is still at a nascent stage because of

product nature, regulation progress, and infrastructure readiness. In categories like food &

beverages, healthcare, financial services, neither Alibaba nor other online marketplaces is

yet to make meaningful inroads to offering these products and services online. In

categories like entertainment and local services, Alibaba is a late-comer compared to

market incumbents so needs to make further investment to catch up.

We don't foresee frontier categories to constitute a meaningful contribution in the next two

years, but we do acknowledge the great potential in these categories that could further

enrich the ecosystem and increase the user stickiness on the platform.

Figure 57: China retail marketplace product category breakdown by GMV—which are the growth categories? in %

Apparel &

Accessories

25.8%

3C and

Appliances

13.4%

Home Goods

9.1%

Maternity and

Baby products

4.4%

Cosmetics &

Beauty

2.6%

Food & Non-

alcoholic

beverages

1.5%

Travel

2.8%

Healthcare

0.2%

Recreation and

Culture

0.3%

Virtual items &

Others

40.0%

2012 2013Apparel &

Accessories

29.6%

3C and

Appliances

13.0%

Home Goods

7.3%Maternity and

Baby

products

5.2%

Cosmetics &

Beauty

2.9%

Food & Non-

alcoholic

beverages

1.3%

Travel

2.3%

Healthcare

0.1%

Recreation

and Culture

0.0%

Virtual items

& Others

38.3%


To make further inroads into the emerging and frontier categories, Alibaba has made

multiple investments cultivating and acquiring necessary assets in related areas to further

strengthen its foundation and build up presence.

29 October 2014

Alibaba Group

(BABA.N) 30

Figure 58: Alibaba's investments in emerging and frontier categories

Deal date Target company Investment

(US$ mn)

Stakes Category Notes

Oct-14 Shiji Technology 459 15.0% Travel Leading IT company in the hospitality

industry

Jul-14 Kabam 120 N/A Entertainment Kabam is an interactive entertainment

company that develops and publishes

massively multiplayer social games.

Jun-14 Guangzhou

Evergrande FC

196 50.0% Digital Media and Entertainment Leading football club in China

May-14 Youku Tudou 1,090 16.5% Digital Media and Entertainment One of China’s leading internet television

companies

Apr-14 Hundsun 539 100.0% Finance Leading vendor of financial platform

Apr-14 Wasu 1,063 Minority Digital Media and Entertainment Wasu is engaged in the business of digital

media broadcasting and distribution in

China.

Apr-14 CITIC 21 120 38.0% Pharmaceuticals and Medical

Products

CITIC 21CN is engaged in the business of

developing product identification,

authentication and tracking system for

pharmaceutical and medical products in the

PRC.

Mar-14 Byecity 20 N/A Online travel Leading outbound travel service provider in

China

Mar-14 Alibaba Pictures

(ChinaVision)

805 60.0% Digital Media and Entertainment Film and television programmes producer

and distributor in China

Feb-14 TutorGroup 100 N/A Education leading online education platform and

largest English-language learning institution

in the world

Jul-13 Qyer.com ~100 N/A Online Travel

Apr-13 Kuaidi 800 N/A O2O Leading taxi booking app in China

Apr-13 Sina Weibo 1,035 30.0% Digital Media and Entertainment Leading social media platform in China

Jan-13 Xiami N/A 100.0% Digital Media and Entertainment Leading online music platform


Where does potential growth come from?

In the next two to three years, we expect Alibaba Group's future growth in terms of

category expansion and penetration to mainly come from:

■ Food and beverages

■ Life/local services

■ Entertainment/virtual goods

In about three to five years, we see the below categories to offer more meaningful upside

to the longer-growth picture of China retail marketplaces.

■ Healthcare

■ Financial services

29 October 2014

Alibaba Group

(BABA.N) 31

Future potential in the ecosystem We expect synergistic opportunities with investment portfolio companies, AliCloud and Ant

Financials. With ~US$10 bn of investment in various companies in mobile, social and

focus categories, we expect Alibaba to tap into various aspects of people's daily life.

AliCloud will help form strong entry barriers in data scale and analysing capability.

Investments and co-operation: The ecosystem

ambition

Figure 59: The Alibaba ecosystem

Sellers Buyers

Logistics

Financing

Marketing Affiliates

Social Network O2O

Mobile Browser

Digital

Entertainment

Mobile Payment

MARKETPLACES Retail

operational

partners

Online and mobile commerce platform

TECHNOLOGY DATA TEAM

Independent

Software Vendors

Professional

Service Provider


As the largest e-commerce company in the world measured by GMV in 2013 according to

the IDC GMV report, Alibaba doesn't limit itself in its core businesses. By conducting

strategic investments, acquisitions and alliances, the internet giant aims to enhance and

expand its product and service offerings in order to establish a Greater Alibaba ecosystem

which could potentially tap into various aspects of peoples' daily life.

Backed by its powerful technology and platform, we see Alibaba's investment and co-

operation strategies focusing on: (1) enhancing user acquisition and engagement; (2)

monetising advertising resources, (3) improving customer experience; (4) expanding

product and service offerings; and (5) internationalisation. In addition, data, platform, and

offline synergies are the three key elements that Alibaba value the most.

Enhancing user acquisition and engagement

By investing in high-quality online and offline platforms, such as UCWeb, Weibo, and

Evergrande FC, Alibaba would be able to further forge its brand image and reach out to its

potential users. Increasing mobile exposure through investments should also help Alibaba

to capture customers' needs and position for future monetisation. In addition, cross

platform interactions could potentially create synergies in encouraging user engagement.

Monetising advertising resources

With substantial advertising resources from its proprietary marketing technology platform,

Alibaba has equipped itself with huge monetisation potential. Through investment in

platforms, such as YouKu and Weibo, Alibaba should be able to deepen its co-operation

with partners, and match the advertisement resources with user traffic. By integrating the

user data from different platforms, Alibaba should deliver advertisements to target users,

and achieve better advertising performance.

By conducting strategic

investments, acquisitions

and alliances, the internet

giant aims to enhance and

expand its product and

service offerings in order to

establish a Greater Alibaba

ecosystem which could

potentially tap into various

aspects of peoples' daily life

29 October 2014

Alibaba Group

(BABA.N) 32

Figure 60: Taobao/Tmall ads on Youku Figure 61: Taobao ads on Weibo

Ads from Tmall

Ads from Taobao

Ads from Taobao

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Improving customer experience

With deepening online penetration, the offline exposure of the e-commerce companies is

gaining more relevance, as the exposure could facilitate online transactions, and help

improve the online shopping experience (i.e., with offline support.) By collaborating with

offline logistic companies, retailers and manufacturers, Alibaba would be able to cover the

full customer purchase cycle, and provide better services by combining their online and

offline resources.

In addition, through cross platform data integration and analysis, Alibaba should be better

able to understand its customers from different angles. The insights from user behaviour

data in different platforms help Alibaba to enhance its quality of customer service and

marketing efficiency.

Expanding product and service offerings

Alibaba is expanding its product and service offerings by investing in companies in focus

categories, such as digital media, pharmaceutical, financial technology, and online travel

among others. Benefiting from its large user base, Alibaba could build synergies in cross

product promotions. Its strategic investments will enable it to position itself in new

business areas with higher engagement on its platform, which should provide potential

upside in the future.

Internationalisation

Besides developing its business in the domestic market, Alibaba is also targeting the

global market. Investments in global companies in related categories, such as e-

commerce and mobile, should help Alibaba to gradually establish its international

exposure.

29 October 2014

Alibaba Group

(BABA.N) 33

Figure 62: Major investments

Deal date Target company Investment

(US$ mn)

Stakes Category Notes

Oct-14 Shiji Technology 459 15.0% Online Travel Leading IT company in the hospitality

industry

Jul-14 Kabam 120 N/A Mobile Kabam is an interactive entertainment

company that develops and publishes

massively multiplayer social games.

Jul-14 Intime joint venture 13 80.1% O2O Joint venture focuses on developing O2O

business in China relating to shopping malls,

department stores and supermarkets.

Jul-14 Intime 692 9.9%+CB(16.1%) O2O Leading department stores and shopping

mall operators in China

Jul-14 Singapore Post 246 10.3% Logistics National postal service provider in Singapore

and a leading provider of e-commerce and

logistics solutions in the Asia-Pacific region

Jun-14 UCWeb N/A 100.0% Mobile China’s largest mobile browser company in

terms of monthly mobile active users

Jun-14 Guangzhou

Evergrande FC

196 50.0% Digital Media and

Entertainment

Leading football club in China

May-14 Youku Tudou 1,090 16.5% Digital Media and

Entertainment

One of China’s leading internet television

companies

May-14 OneTouch 325 100.0% Logistics Provider of comprehensive export-related

services tailored to the needs of small

businesses in the PRC

Apr-14 Hundsun 539 100.0% Finance Leading vendor of financial platform

Apr-14 Wasu 1,063 Minority Digital Media and

Entertainment

Wasu is engaged in the business of digital

media broadcasting and distribution in China.

Apr-14 TangoMe 217 20.0% Mobile Leader in mobile messaging services based

in the US offering free voice, video and text

messaging to consumers globally

Apr-14 Autonavi 1,326 100.0% O2O Leading provider of digital map content and

navigation and location-based solutions in

China

Apr-14 CITIC 21 120 38.0% Pharmaceuticals and Medical

Products

CITIC 21CN is engaged in the business of

developing product identification,

authentication and tracking system for

pharmaceutical and medical products in the

PRC

Mar-14 Byecity 20 N/A Online travel Leading outbound travel service provider in

China

Mar-14 Alibaba Pictures

(ChinaVision)

805 60.0% Digital Media and

Entertainment

Film and television programmes producer

and distributor in China

Mar-14 Haier 364 2%+CB(2.6%) Logistics Haier is engaged in the research,

development, manufacture and sale of

electrical appliances

Feb-14 TutorGroup 100 N/A Education Leading online education platform and

largest English-language learning institution

in the world

Jan-14 1stdibs 15 N/A e-commerce Luxury e-commerce site in the US

Oct-13 Quixey 50 N/A Mobile US$50 mn C-round financing lead by Alibaba

Aug-13 ShopRunner 202 39.0% eCommerce Online shopping platform in US

Jun-13 Fanatics 170 N/A eCommerce Sportswear e-commerce site in the US, co-

invested with Temasek

Jul-13 Qyer.com ~100 N/A Online Travel

Apr-13 Kuaidi 800 N/A Mobile Leading taxi booking app in China

May-13 Cainiao Supply

Chain Management

275 48.0% Logistics China Smart Logistics, an operator of a

nationwide logistics infrastructure and

information system.

Apr-13 Sina Weibo 1,035 30.0% Mobile Leading social media platform in China

Apr-13 Umeng 80 100.0% Mobile Umeng is a mobile app data analytic service

provider

Jan-13 Xiami N/A 100.0% Digital Media and

Entertainment

Leading online music platform


29 October 2014

Alibaba Group

(BABA.N) 34

Alipay and Ant Financial

(For Ant Financial Services valuation, please refer to P.61)

As one of the leading online payment and escrow solutions in China, Alipay is the most

crucial element in Alibaba's ecosystem, which facilitates majority transactions on Alibaba's

marketplaces and other payment related businesses areas such as O2O and internet

finance. Through a contractual agreement with Alibaba, Alipay connects buyers and

sellers through secured, trusted, and convenient payment mechanism, and processes

large volumes of transaction data every day.

A look at transactions on Alibaba's China retail marketplaces. Soon after a consumer

places an order, he or she has to fulfil the order by transferring the requisite amount from

his or her Alipay balance account, credit card or bank account to Alipay's escrow account.

Once the consumer confirms receipt of his/her orders or fails to appeal for refund within a

specific period of time, Alipay will then release the fund from its escrow account to the

seller. Otherwise, the money is returned to the consumer's original purchase account

without any charges.

In the 12 months ended 30 June 2014, Alipay recorded a total payment volume of

Rmb4,825 bn, and 78.1% of GMV on Alibaba's China retail marketplaces was settled

through Alipay’s escrow and payment processing services. In addition, the GMV settled

through Alipay in 1688.com, its domestic wholesale marketplace, reached Rmb141 bn

while GMV of US$2.9 bn from AliExpress, the global B2C marketplace, were processed by

Alipay.

According to iResearch, the total third-party payments transaction volume recorded in

2013 came in at Rmb17.2 bn while the third-party online payments accounted for 31.2% to

reach Rmb5.4 bn.

In 2Q14, the market share of Alipay in China's third-party online payments market was

48.8% in terms of transaction volume. In the third-party mobile payments market, Alipay

obtained an even higher penetration rate of 79.9%. The leading market share in both the

online and mobile third-party payments space is largely attributable to the huge synergies

created in Alibaba's ecosystem, including the massive transactions on Alibaba's

marketplaces as well as other affiliates and partner platforms.

Figure 63: China third-party payments transaction volume Figure 64: China third-party online payments transaction

volume and penetration

5.1

8.4

12.4

17.2

23.3

31.2

41.3

52.6

2010 2011 2012 2013 2014E 2015E 2016E 2017E

(Rmb ib trillions)

1.0 2.2

3.7

5.4

7.4

10.4

14.1

18.5

19.8%

26.2%

29.5%31.2% 31.9%

33.4% 34.2% 35.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Transaction volume (RMB in trillions) Penetration (%)

Source: iResearch Source: iResearch

Through a contractual

agreement with Alibaba,

Alipay connects buyers and

sellers through secured,

trusted, and convenient

payment mechanism, and

processes a large volume of

transaction data every day

29 October 2014

Alibaba Group

(BABA.N) 35

Figure 65: China third-party online payments market

share in CY2Q14

Figure 66: China third-party mobile payments market

share in CY2Q14

Alipay48.8%

Tenpay19.8%

China UMS11.4%

99Bill6.8%

ChinaPnR5.3%

Yeepay3.2%

IPS2.7%

Others2.0%

Alipay79.9%

Tenpay8.9%

Lakala6.5%

China mobile0.6%

Umpay0.4%

China telecom0.3%

Qiandai0.3%

Baidu wallet0.1%

Others3.0%

Source: iResearch Source: iResearch

History and structure

Alipay was established by Alibaba in 2004 as a third-party payment and escrow solution to

the buyers and sellers on its marketplaces. It helps both parties to build trust among each

other in the online payment system through an escrow solution.

In 2011, Alipay was divested from Alibaba due to the regulations on payment business

licence application for non-bank payment companies, which is only applicable to the

domestic PRC-owned entities. As a result, the company's ownership was restructured in

order to obtain the payment business licence.

In connection with the restructuring, Alibaba entered into the 2011 framework agreement

and several implementation agreements, including intellectual property licence and

software technology service agreement (Alipay IPLA) and share services agreement, with

Ant Financial Service Company, the parent company of Alipay previously known as Small

and Micro Financial Services Company. The commercial agreement with an initial term of

50 years is eligible for automatic renewal after 50 years, and is subject to Alibaba's right to

terminate at any time upon one year's prior written notice.

According to the agreement, Alipay provides payment processing and escrow services to

Alibaba, which enables settlement of transactions on Alibaba's marketplaces through a

secure payment platform and escrow process. In return, Alibaba pays fees to Alipay based

on fee rates and actual payment volumes processed on its platforms. The total annual

fees paid by Alibaba was Rmb1,307 mn, Rmb1,646 mn, and Rmb2,349 mn in FY12, FY13

and FY14, respectively.

29 October 2014

Alibaba Group

(BABA.N) 36

Figure 67: Fees paid to Alipay Figure 68: Ownership structure of Ant Financial Services

Company

1,307

1,646

2,349

25.9%

42.7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-

500

1,000

1,500

2,000

2,500

FY2012 FY2013 FY2014

Fees to Alipay (RMB in millions) YoY growth (%)

Hangzhou Junhan

Enquity Investment Partnership

58%

Hangzhou Junao Enquity

Investment Partnership

42%


The 2011 framework agreement was amended under the 2014 share and asset purchase

agreement (the 2014 SAPA) to further restructure the contractual agreements with Ant

Financial, including the transfer of SME loan business and restating the Alipay IPLA. In the

2014 SAPA, Alibaba agreed to sell certain equity interests and assets related to SME loan

business to Ant Financial for an aggregate cash consideration of Rmb3,219 mn. Alibaba

also entered into an amended Alipay IPLA with Alibaba Group to receive royalty equal to

the sum of expense reimbursement and 37.5% of the pre-tax income of Ant Financial

Services Group.

The 2014 SAPA also restated the potential equity interest and liquidity event payments

between Alibaba and Ant Financial. According to the 2014 SAPA, Alibaba was entitled to

future potential equity interest issuances of up to 33% from Ant Financial, which will be

funded by payments from Ant Financial with respect to certain intellectual property and

asset transfer under the 2014 SAPA. In the event of a qualified IPO of Ant Financial or

Alipay, Alibaba will be eligible to receive one-time payment equal to 37.5% of the equity

value immediately prior to the qualified IPO with an effective floor of US$9.4 bn or

perpetual profit sharing, if Alibaba's total ownership of equity interests in Ant Financial has

not reached 33%.

After further restructuring, approximately 58% of Ant Financial's equity interest are held by

Hangzhou Junhan Equity Investment Partnership, which is held by Jack Ma and Simon

Xie in the form of limited partnership interests while the rest 42% are held by Hangzhou

Junao Equity Investment Partnership, which is held by 20 executives of Alibaba in similar

form of limited partnership as Junhan. In addition, the general partner of Junao and

Junhan is YunBo Investment Consultancy, an entity 100%-owned by Jack Ma. As a result,

Jack Ma indirectly holds the voting right in the two limited partnerships, and controls a

majority of voting interests in Ant Financial Services Company.

29 October 2014

Alibaba Group

(BABA.N) 37

Figure 69: Key economic terms comparison between 2011 Framework Agreement and 2014 SAPA

2011 Framework Agreement 2014 SAPA

Liquidity event payment Entitled to 37.5% of the equity value of Alipay in the

event of its initial public offering, a sale or certain

transfers of interests in Alipay

Upon a qualified IPO of SMF or Alipay, Alibaba are

entitled to elect to receive a payment equal to 37.5% of

the equity value of SMF until it acquires a full 33% equity

interest

This payment had a minimum floor of US$2.0 bn and

was capped at US$6.0 bn, subject to certain gradual

increases over time if no liquidity event occurred.

At Alibaba's option and subject to regulatory approvals,

in lieu of the liquidity event payment, the company may

elect to continue to receive the 37.5% profit share in

perpetuity until it receives a full 33% equity interest

The liquidity event payment is not capped; given the

US$25 bn equity value requirement of a qualified IPO,

the minimum liquidity event payment (assuming no

reduction for equity issuances) is effectively US$9.375

bn

Profit sharing Received 49.9% of the consolidated pre-tax income of

Alipay and its consolidated subsidiaries until a liquidity

event of Alipay has occurred

Receive 37.5% of the consolidated pre-tax income of

SMF and its subsidiaries (including Alipay)

Upon a qualified IPO of Ant Financial, Alibaba may elect

either to receive a liquidity event payment or, subject to

regulatory approvals, to continue to receive the profit

share payments in perpetuity

Preferential terms under

Alipay commercial

agreement

Payment and escrow services provided to our

marketplaces on preferential terms

Economic terms of the Alipay commercial agreement

continue unchanged

50-year contract term, renewable for additional 50-year

periods at Alibaba's option

Payment stream related to

the SME loan business

N/A Receive an annual fee equal to 2.5% of the average

daily balance of SME loans in each of the three calendar

years from 2015 through 2017

Fixed fee in each of the four calendar years from 2018

through 2021 equal to the annual fee to be paid in

calendar year 2017

Potential equity interest No potential to receive a direct equity interest Entitled to acquire up to a 33% equity interest in Ant

Financial, if Ant Financial applies for and receives the

applicable PRC regulatory approvals

In the event Alibaba acquires the full 33% equity interest,

rights to profit sharing and a liquidity event payment will

automatically terminate, or in the event of any equity

interest less than 33%, such rights will reduce

proportionately

Equity issuances up to the full 33% equity interest and

exercises of pre-emptive rights that do not exceed

US$1.5 bn will be funded by certain payments to be paid

to us by Ant Financial, resulting in Alibaba's receipt of

such equity interests with no cash impact to us, subject

to applicable taxes


Ant Financial Services Company

As the parent company of Alipay, Ant Financial Services Company operates a rich

portfolio of products, such as Alipay, Yu'E Bao (the internet finance product), ZhaoCai Bao

(P2P loan product), Ant Small and Micro Loan, ZhongAn Online (Insurance company), and

private commercial bank under preparation. It covers various businesses in the financial

services sector, including payment, investment management, private loan, insurance, and

commercial bank.

Ant Financial Services

Company operates rich

portfolio of products, such

as internet finance products,

Small and Micro loans,

Insurance company, and

private commercial bank

29 October 2014

Alibaba Group

(BABA.N) 38

Figure 70: Product portfolio of Ant Financial Services Company

Payments Insurance

Internet Finance Products

Small and Micro Loan

Bank


Yu’E Bao and other internet finance products

In June 2013, Ant Financial, in collaboration with Tianhong Asset Management, launched

its first innovative internet finance product Yu'E Bao linking Alipay accounts with high yield

money market fund investments. In May 2014, Ant Financial bought a majority stake in

Tianhong Fund Asset Management in order to strengthen the cooperation.

Alipay, by virtue of its business, is connected with customers' bank account, which

provides the perfect entry for investments. Money market instruments as investment

products are more suitable for mass market customers given its low risk, high liquidity and

relatively high yield. Sitting on Alibaba's huge customer base, Yu'E Bao should easily be

able to achieve economies of scale to further improve the liquidity of the products and

reduce the unit size of the investment, which could lower the entry barrier. By

incorporating the shopping scenario and escrow services, Yu'E Bao has cleared the last

barrier in investment, and is seamlessly linked with Alipay, enabling real-time transfer and

payment. As a result, Yu'E Bao stands out from the internet finance crowd, and has

become the largest money market fund in China with AUM of Rmb534 bn as of 9M14 and

149 mn users.

Although the AUM of Yu’E Bao actually declined in 3Q14, compared with Rmb574 bn as of

2Q14 mainly due to a decrease in yields and fierce competition from peers, we see an

increase of 25 mn net users in 3Q14 (up 20% QoQ) and consumption transfer of Rmb206

bn (up 51.2% QoQ). We are still positive about Yu’E Bao's growth given the expansion of

its user base and high level of user stickiness.

29 October 2014

Alibaba Group

(BABA.N) 39

Figure 71: AUM of Yu'E Bao

6.6

55.6

185.3

250.0

400.0

541.0 574.2

534.9

Jun-13 Sep-13 Dec-13 Jan-14 Feb-14 Mar-14 Jun-14 Sep-14

(RMB in billions)


In addition to Yu’E Bao, in March and April 2014, Alipay launched Yule Bao, a crowd

funding product for film production and ZhaoCai Bao, a P2P loan product, in order expand

its product offerings to cater to the different investment needs of its users.

Small and micro loan

After purchasing the securities and assets related to SME loans from Alibaba, Ant

Financial has taken over the small and micro loan business to provide short-term financial

support mainly to SMEs and individuals on Alibaba’s marketplaces. The funding of small

and micro loan business mainly comes from two subsidiaries of a small loan company,

loan financing from banks, asset securitisation, and direct bank co-operation under an

open platform strategy.

By analysing the transactional and behavioural data on Alibaba’s marketplace, Ant

Financial has developed a proprietary credit assessment model to facilitate the process of

loan application, which could potentially reduce the risk of the loans. The reputation and

customer base of the SMEs established on the marketplaces also help to lower the default

risk of the loans.

Given the flexibility in financials provided by different loan products, SMEs on Alibaba’s

platform are encouraged to expand their businesses on the platform, which is strategically

more important to Ant Financial and Alibaba other than the profit earned in their loan

business.

Other financial related businesses, such as ZhongAn Online, an online insurance

company invested by Ant Financial, PingAn Group and Tencent, and the private

commercial bank under preparation are also the important pieces of Ant's financial

ecosystem.

In our view, by leveraging the huge traffic and large volume of transactional and

behavioural data on Alibaba's platforms, Ant Financial could easily ramp up its user base,

and provide customised services to end users. Therefore, Ant Financial could benefit from

the synergies unlocked by the collaboration. In return, the rapid growth of Ant Financial

also provides optional upside for Alibaba.

29 October 2014

Alibaba Group

(BABA.N) 40

AliCloud: Key infrastructure platform

Why do enterprises need cloud?

Cloud service is a 'new and old' term for investors. According to IDC, China's cloud service

market will reach US$11 bn in 2014 and will witness a ~40% CAGR in the next few years.

Why do enterprises need cloud? We believe the key reasons as follows:

(1) Easy to set up. Instead of buying/renting the entire infrastructure itself and renting

extra computer room, enterprises can simply build all their businesses on the cloud, which

is much less time consuming, especially for start-up companies.

(2) Flexible to operate. Compared with setting up their own infrastructure, it is easier for

enterprises to expand or diminish their business size with the cloud—they can just rent

extra computing power/storage space or lessen total volume.

(3) Lower cost. Cost is usually the most essential part of the company's decision.

According to Yulin Wang, President of Kingsoft Cloud, the cost of operating business on

Kingsoft Cloud is only one-fourth to one-third of the cost of operating the business locally,

which is an efficient method for enterprises to cut their budget.

Fast growing global cloud market, while China growing faster

Figure 72: Global cloud service market size forecast* Figure 73: Regional cloud market 2012-17 five-year CAGR,

China among the fastest growth regions

95.2111.7

131.8

154.8

180.5

209.5

244.2

17%

18%

17%

17%

16%

17%

15%

16%

16%

17%

17%

18%

18%

19%

0

50

100

150

200

250

2011 2012 2013 2014E 2015E 2016E 2017E

US$Bn

Revenue YoY %

*Public Cloud; Source: Gartner Source: Gartner

Since Amazon launched its cloud service AWS (Amazon Web Services), almost all IT

companies, such as Google, IBM, Microsoft now provide cloud service. After over ten

years' development, total global cloud market size reached US$131.8 bn in 2013, and is

expected to witness a five-year CAGR (2012-17E) of 16.9%, according to Gartner. Gartner

also provides a five-year CAGR comparison of each region. China is among the fastest

growing regions with a five-year CAGR of 28.2%.

29 October 2014

Alibaba Group

(BABA.N) 41

Figure 74: China cloud service market size forecast Figure 75: China cloud service market breakdown (2013)

2.0

3.5

4.8

6.374%

36%32%

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2011 2012 2013 2014E

RMB Bn

Revenue YoY %

PaaS5%

IaaS22%

SaaS73%

Source: China Cloud Computing White Paper 2014, CATR Source: China Cloud Computing White Paper 2014, CATR

Within a typical cloud market (Iaas+PaaS+SaaS, ~US$33 bn in 2013, according to

Gartner), US and Europe combined is still the largest market that accounted for over 70%

market share in the global cloud market. China's market share grew from 3.2% in 2011 to

4.0% in 2013, according to CATR (China Academy of Telecommunication Research of

MIIT's recent China Cloud Computing White Paper 2014 report.)

China's cloud market is still at an early stage and the total market size is quite small.

According to CATR, the China cloud market reached Rmb4.8 bn in 2013 and is expected

to grow 32% to reach Rmb6.3 bn in 2014.

Within the cloud market, SaaS (Software as a Service) is the most profitable segment,

accounting for a 73% market share, according to CATR; some SaaS companies in China

achieved a revenue of Rmb100 mn in 2013. IaaS (Infrastructure as a Service) doubled

its market size in 2013 (a 22% share). Some start-up IaaS companies, such as Ucloud,

QingCloud have received venture capital of more than US$10 mn. PaaS (Platform as a

Service) market is relatively small in China, but internet giants such as Alibaba, Tencent,

Baidu, Sina have launched their own PaaS platforms in recent years to build their own

ecosystem. PaaS's market share is only 5% mainly because it is still in the stage of user

acquisition and many vendors will provide free service; we expect high potential from this

sector too.

Figure 76: Recent funding activities of China cloud service providers

Company Chinese title Fund provider Deal date Investment (US$ mn) Sector

Gotye 亲加通讯云 Intel Oct-14 10 SaaS, communication tool

Cloudsmart 云智慧 Gobi Oct-14 10 IaaS

Qiniu 七牛 CBC, Qiming, Matrix Aug-14 >20 SaaS, Cloud storage

Ucloud Ucloud DCM, Bertelsmann Jun-14 50 IaaS

QingCloud 青云 Lightspeed, Matrix, BlueRun Jan-14 20 IaaS

Chinac.com 华云数据 SIG, Intel Feb-14 50 IaaS

Keytone Cloud 刻通云 Gobi, CBC Jul-14 8 IaaS

Jingoal 今目标 Tiger May-14 10 PaaS, Online working platform

Baoku 宝库在线 TBD Sep-14 50 PaaS, Business travel management

Fxiaoke 纷享销客 Northernlight Jul-14 10 PaaS, Mobile sales management/CRM

Kingsoft 金山云 Yuri Milner Aug-13 20 IaaS

Source: Company data, Credit Suisse

Many start-up cloud service providers have received considerable amount of funding in

recent years, showing venture capitals' high anticipation in this market.

China's cloud market is still

at an early stage while the

total market size is still

small. According to CATR,

China cloud market reached

Rmb4.8 bn in 2013 and is

expected to grow 32% to

reach Rmb6.3 bn in 2014

29 October 2014

Alibaba Group

(BABA.N) 42

■ Crowded cloud service market in China

Cloud services are one of the most crowded business segments in China. We have seen

over ten players in the market including almost all large internet companies, all three

telecom operators and some leading mobile phone vendors.

Figure 77: Major cloud service providers in China

Type of companies Example of companies

Internet company Alibaba, Tencent, Baidu, Kingsoft, Sina, JD, Shanda, Amazon

Professional cloud service provider Ucloud, Qiniu, Qingcloud, 21Vianet, ChianCache

Telecom operator China Unicom, China Telecom, China Mobile

Mobile phone vendor Huawei, Lenovo


We believe the main reasons for these players to enter the cloud service market are:

(1) Build ecosystems. We view this as the main reason for companies to enter the

market. By providing cloud services to their customers, such as game developers, e-

commerce merchants and advertising union members, cloud service providers can

strengthen relationships with them, thus providing future monetisation opportunities. We

have seen the importance of building up an ecosystem in the development stage of

leading internet companies.

(2) Big data analysis. A cloud service provider can have access to a mass volume of data

of its users, which is essential for them to analyse user behaviour and provide better

services in the future. 'Targeting the right group of users' is essential in online marketing

and advertisers pay a premium price for it.

(3) Service fees. Service fees are the most direct monetisation model for a cloud service

provider. The largest cloud service provider worldwide, Amazon, obtained ~US$3.9 bn of

revenue in 2013 (5.3% of Amazon's net sales) from AWS (Amazon Web Services,

Amazon's cloud business unit).

AliCloud provides technical support for Alibaba ecosystem

Founded in 2009, Alibaba Cloud Computing, AliCloud's, role is to handle the traffic volume

generated and data management needs resulting from the substantial scale of transactions

and data on Alibaba platform. As of today, AliCloud not only serves Alibaba's platform, its

affiliated companies and Alipay, but also generates revenue from cloud service targeting

third party companies (merchants, mobile developers, financial institutes etc.).

Figure 78: Operating history of AliCloud

Date Event

Sep-09 Founded of AliCloud, set up R&D/operation center in Beijing, Hangzhou, Silicon Valley in the US etc

Jul-11 AliCloud started to provide service to external customers with its 'Apsara' cloud computing platform

Nov-12 AliCloud successfully supported 20% of merchant orders on Nov 11 single day promotion

Jan-13 AliCloud merged with HiChina, a domain registration, hosting, email system service provider to found a new AliCloud

company

Aug-13 AliCloud becomes the first company to provide 5k cloud computing service globally

Sep-13 Whole core system of 'Yu'E Bao' (Tianhong Money Market Fund) starts to operate on AliCloud

Nov-13 Launched financial cloud service (PaaS) Ju Bao Pen（聚宝盆) targeting financial institution clients

Nov-13 AliCloud successfully support 75% of merchant orders on Nov 11 Single day promotion

May-14 AliCloud starts its operation in Hong Kong

May-14 Co-operate with Autonavi to launch a mobile cloud service Ju Wu Xian （聚无线)

Jul-14 Launched big data analysis tool ODPS that enables analysis of 100PB data in 6 hours

Aug-14 Launched 'Cloud co-operation project' （云合计划), targeting to find eco system with over 10k cloud service providers


Alibaba's cloud services are mainly at the IaaS and PaaS level, such as Elastic Computing

Service, Cloud Storage, Database Service and Data Processing service, which enables

itself and third party customers to operate at an efficient and cost-saving way.

Various players have

entered the cloud market in

China with the purpose of

offering ecosystems and big

data analysis

29 October 2014

Alibaba Group

(BABA.N) 43

Figure 79: Alibaba cloud computing service portfolio


As the largest transaction platform in China (14.5 bn annual orders, which is on average

40 mn orders per day), a technical platform that can enable large-scale and stable

operations is essential. AliCloud serves as a reliable platform for Alibaba's daily operations,

in our view.

Figure 80: AliCloud as infrastructure platform in Alibaba ecosystem

Alibaba Cloud Computing (Platform for internal and third-party use)

Data Platform

Alimama (Online marketing services)

China Smart Logistics (Logistics Information System)

Alipay (Payment services)

AliExpress

(Global consumer marketplace)

Alibaba.com

(Global wholesale marketplace)

1688.com

(China wholesale marketplace)

Taobao Marketplace

(Online shopping destination)

Tmall.com

(Brands and retail platform)

Juhuasuan

(Group buying marketplace)


We have seen the strong performance of AliCloud in special events related Alibaba, such

as 11 Nov 2013 Singles Day Promotion. In 2013 Singles Day Promotion, AliCloud helped

support 254 mn orders on Tmall/Taobao, which is 10x the order volume in ordinary days.

AliCloud is currently providing a full scale tech support to various core businesses of

Alibaba, such as Yu'E Bao (Tianhong Money Market Fund), TANX (Taobao Ad Network

and Exchange). According to Alibaba's management, Taobao, Tmall, and Alipay will soon

transfer their core infrastructure to AliCloud.

29 October 2014

Alibaba Group

(BABA.N) 44

AliCloud as one of the largest cloud service providers in China

Besides serving as an internal infrastructure service provider, AliCloud started to provide

cloud service to external customers since 2011. Currently, AliCloud has already become

one of the largest cloud service providers in China with 1,400,000+ direct and indirect

(through ISVs-Independent software vendors) cloud computing customers.

Figure 81: AliCloud's selected client list

Client type Client example

Online gaming DENA, Playcrab (大掌门), Red Infinity(龙之召唤)

Mobile Camera 360, Myotee(脸萌)

Finance Tianhong Fund, Zheshang security, Pearl River Life Insurance

e- commerce Xtep Sportswear, Christine Bakery

SaaS cloud service vendor Schneider Electronic, SAP, Worklife

Smart hardware TCL, Midea, Hisense


AliCloud has a wide array of customer base, such as start-up companies in mobile apps,

online gaming, consumer electronics and financial services.

Tailor-made cloud service for various industries

AliCloud has also launched tailor-made cloud services for different industries (行业云). For

example, its Mobile Cloud service (聚无线) provides one-stop service for mobile app

developers by providing them infrastructure cloud service such as computing, storage, etc,

and also co-operates with other subsidiary companies such as Autonavi/Umeng to provide

other value added services, such as LBS function and data analysis. We expect such

comprehensive services to help AliCloud to broaden its user base.

Figure 82: Tailor-made cloud services for various industries

Genre Characteristic

Game Cloud Tailor-made cloud services for client-based games, webgames, mobile games

Value added services for mobile game developers, such as data analysis system (Umeng), game

distribution channel (UCWeb)

Finance Cloud Provide one stop service for financial institutions to upgrade from traditional IT solution to cloud solution

Enable industrial innovation by connecting with Alipay/Taobao

e-commerce Cloud(聚石塔) Smooth access to Alibaba resources, such as Tmall, Taobao, Alipay

Successfully supported 75% of merchant orders on 11 Nov 2013 Single day promotion

Mobile Cloud(聚无线) One-stop service provider for mobile app developers

Venture capital support by Yinxinggu Capital

Autonavi/Umeng to provide LBS/data analysis support

Monetisation supported by Taobaoke


Expect limited revenue contribution near term

AliCloud generates revenue from cloud computing services, such as elastic computing,

database services, storage service and large scale computing services, also from web-

hosting and domain name registration.

AliCloud's revenue contribution to Alibaba is still minimal. AliCloud's revenue is Rmb0.7 bn

in 2013, 1.5% of Alibaba's total revenue.

29 October 2014

Alibaba Group

(BABA.N) 45

Figure 83: AliCloud revenue forecast

0.6 0.7

1.4

2.6

4.0

5.4

16%

92%85%

55%

33%

2.0% 1.5% 1.9% 2.5% 3.1% 3.3% 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-

1.0

2.0

3.0

4.0

5.0

6.0

2012 2013 2014E 2015E 2016E 2017E

RMB Bn

Revenue YoY % As % of total revenue


Comparing with Amazon AWS (Amazon Web Services)

Amazon AWS is the largest cloud service provider worldwide. After eight years' operation,

AWS's revenue reached US$3.9 bn in 2013, 4% of Amazon's total revenue. (Amazon

doesn’t disclose AWS revenue but put it in 'others' category. We estimate almost all

'others' revenue from AWS). According to Gartner, AWS's market share is bigger than the

sum of its competitors, such as Microsoft, IBM, Google, etc.

One of the key success factors for AWS is its early entry into the cloud business. It started

to operate in 2006 while its competitors started in 2012-13, which gives it an early-mover

advantage. AWS covers various countries/regions besides the US, including Europe,

China, Tokyo, Sydney, Brazil. It is also an innovation leader that launched 280 services in

2013. Amazon's main focus is on IaaS, similar to AliCloud.

Due to AliCloud's short operating history and China's immature cloud market, AliCloud's

revenue is only at 3% of AWS level. Supported by the rapid growth in China's cloud

market, we expect AliCloud to grow at a faster speed than AWS and reach 7% of AWS

revenue level in 2017E.

Figure 84: Amazon AWS revenue forecast Figure 85: AliCloud/Amazon AWS revenue comparison

0.3 0.4 0.5 0.7 1.0 1.6

2.5

3.9 5.3

7.4

10.1

13.2

3% 3% 3% 3% 3% 3% 4% 5% 6% 7% 8% 8%

35%

41%

21%

46%

67%

59%56%

35%40%

35%32%

0%

10%

20%

30%

40%

50%

60%

70%

0

2

4

6

8

10

12

14

US$ Bn

AWS revenue As % of total revenue YoY %

2.5

3.9

5.3

7.4

10.1

13.2

0.1 0.1 0.2 0.4 0.7 0.9

4%

3%

4%

6%

7% 7%

0%

1%

2%

3%

4%

5%

6%

7%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2012 2013 2014E 2015E 2016E 2017E

US$ Bn

Amazon AWS AliCloud Aliyun/AWS


29 October 2014

Alibaba Group

(BABA.N) 46

Expect domestication of IT infrastructure in China to support AliCloud growth

We expect domestication of IT infrastructure in China to be one of the main catalysts to

support AliCloud growth in future years. We are seeing government's trend to reduce

usage of foreign IT software (e.g., Microsoft Windows 8) and hardware (IBM, Oracle, EMC

products). AliCloud is the pioneer in this trend. From 2Q14, over 100 financial institutions

in China have started to cooperate with AliCloud for cloud services. Meanwhile, China

Meteorological Administration has also signed a contract with AliCloud for cloud service.

We expect further penetration of government agencies, financial institutes and other state-

owned businesses to serve as a catalyst to AliCloud.

Aggressive pricing strategy: Negative for short-term profitability, but good for long-

term user growth

As a market with great potential, the current focus of cloud service providers, especially in

IaaS, is still user base expansion/penetration, rather than monetisation. AliCloud applied a

drastic price cut in 1H14, with some products seeing price cuts of more than 50%.

AliCloud also provides entry level services of its core products, such as cloud server ECS,

cloud database RDS, etc, for free for six months to attract new users. According to Wenbin

Wang, president of AliCloud, in the next few years there will be at least 30% annual price

cut for cloud service, and the price level in 2017E will be 25% of the current level.

We are positive on AliCloud's price strategy for two reasons: (1) China is still in a very

early stage of cloud service, and so market share expansion should be the priority for

AliCloud. (2) We are seeing similar strategy for leading global cloud players, such as

Amazon and Google; primary result on user growth is positive. For example, in 2Q14,

Amazon applied a dramatic price cut to its AWS services (28-51% price cut, depending on

the type of service), and this led to an AWS user base increase of 90% YoY in 3Q14.

Taobao Local Service

Huge potential in China local service (O2O) market

Figure 86: China O2O market size forecast

66.5 201.7 45.2

124.1 225.9

484.0

0

100

200

300

400

500

600

700

800

900

2013 2017E

RMB Bn

Dining O2O Ticketing O2O Online travel

337.6

809.8

Source: iResearch

Besides e-commerce, we expect local services to be the next market to experience

digitalisation. Based on iResearch data, the total O2O market (market size of O2O market

includes three core businesses: online travel, dining and ticketing) in China has reached

Rmb337.6 bn and is expected to witness a CAGR of 24% in the next four years to reach

Rmb809.8 bn in 2007.

Besides e-commerce, we

expect local service to be

the next market to

experience digitalisation

29 October 2014

Alibaba Group

(BABA.N) 47

Taobao Local Service: A full-scale local service provider

As the pioneer of e-commerce in China, Alibaba also witnessed potential in local services.

In 2010, Alibaba started offering Taobao Local Service, a platform that allows consumers

to discover services offered by local merchants, and offered a channel for traditional offline

service providers to execute O2O strategies. Key product portfolios of Taobao Local

Service are as follows:

29 October 2014

Alibaba Group

(BABA.N) 48

Tao Diandian

Figure 87: Screenshot of Tao Diandian (PC version) Figure 88: Tao Diandian Mobile App provides pre-order

function


Taobao Diandian (dd.taobao.com) is a local service website that provides information

about dining, leisure activities, etc. It also provides two value added services on its mobile

app: restaurant pre-order and takeaway dining service. The service enables users to finish

transactions online and pay via Alipay. The difference between Taobao Diandian and

Dianping is that Taobao will show the customer a snapshot of the reviews for the fulfilled

transaction (Just like in Taobao/Tmall mode) instead of a plain vanilla comment on

Dianping.

■ Taobao Movie

Taobao Movie (dianying.taobao.com) is Alibaba's movie vertical website that enables

users to get real-time movie information online and assists users with seat selections and

online movie ticket purchases via its PC website and mobile app.

29 October 2014

Alibaba Group

(BABA.N) 49

Figure 89: Screenshot of Taobao Movie (PC version) Figure 90: Taobao Movie App's seat selection function


■ Taobao Travel

Figure 91: Screenshot of Taobao Travel (PC version) Figure 92: Taobao Travel App provides special discount

for mobile


Taobao Travel (trip.taobao.com) is Alibaba's online travel platform for airlines and travel

agents to list travel related offerings. Users can book flight, hotel etc and get visa services

online. Visibility on Taobao Travel's recent transaction volume is low. However, it has

announced previously that its total transaction volume had surpassed over Rmb10 bn in

2011. Currently, there are over 800 air ticket merchants and over 100,000 hotels on

Taobao's travel platform.

According to Netease Tech Channel, Alibaba will potentially operate Taobao Travel

channel separately in the future under a new brand name 'Fly Pig' (飞猪); Alibaba's recent

action related to travel is the acquisition of the minority interest (15%) of Beijing Shiji

(002153.SZ) for Rmb2.8 bn. Beijing Shiji is a high-end hotel management system provider

in China with a 90% market share in five-star hotels in China.

29 October 2014

Alibaba Group

(BABA.N) 50

Comparing BAT's local service strategy

Figure 93: BAT's local service initiatives scorecard

Baidu Alibaba Tencent

Online classified Baidu Shenbian Taobao Local Service, Koubei 58.com

Score card 2 3 5

Dining O2O Baidu Map Taobao Diandian Dianping

Score card 3 3 5

Movie O2O Nuomi Taobao Movie/Mobile Taobao QQ Movie/WeChat

Score card 3 3 3

Online travel Qunar/Baidu Travel Taobao Travel 17U/QQ Travel

Score card 5 4 4

Map Baidu Map Autonavi Map QQ Map

Score card 5 4 3

Mobile entry point Baidu Map Mobile Taobao, Alipay Wallet WeChat/Mobile QQ

Score card 4 4 5

Mobile payment Baidu Pay Alipay Tenpay/WeChat Payment

Score card 3 5 4

Total score card 25 26 29

Source: Company data, Credit Suisse research

We make a simple score card on BAT's (Baidu, Alibaba, Tencent, the three largest internet

companies in China in terms of market cap) local service initiatives. The result shows that

Alibaba is the leading player among the three companies supported by WeChat's strong

potential as a mobile O2O channel and also Tencent's investment in various leading O2O

players.

Online classified: Via its investment in 58.com (WUBA.US, Tencent now owns a 25%

share in 58.com), Tencent is the leader in this category. Alibaba ranks No.2 due to its

subsidiary Koubei, which is also a leading online classified website with limited market

share compared to 58.com.

Dining O2O: Via its investment in Dianping.com. China's leading Dining information

website (Tencent owns a 20% share), Tencent is the leader in this category. Both Baidu

and Alibaba are relatively weak in this segment.

Movie O2O: BAT's market power in this area is relatively weak compared to Meituan,

which owns 'Cat Eye Movie' (猫眼电影), a mobile movie booking app that has 70% market

share in online channel and 20% market share in total box office of China.

Online travel: Via its investment in Qunar.com, China's leading travel booking platform,

Baidu is the market leader in this sub segment. Although Alibaba's Taobao Travel and

Tencent's 17U/QQ Travel both have considerable transaction volume, they are still

relatively weak compared to Qunar.

Map: We view Baidu Map as the leader in BAT. According to Analysys's 2Q14 data, in

terms of active user, Baidu Map has a market share of 55.6%, while the No.2 player is

Autonavi with a market share of 23.6%.

Mobile entry point: We believe Tencent is the leader in this segment with its

WeChat/Mobile QQ, which has MAU of 438/829 mn in 2Q14. Although both Baidu Map

and Mobile Taobao/Alipay Wallet have MAU of ~200 mn, they are still relatively weak

compared with Tencent. However, we view BAT has the potential to monetise its mobile

traffic.

Mobile payment: Alipay is the absolute leader in this area with active users of 190 mn

and over 45 mn mobile transactions per day. According to iResearch, within 2Q14 mobile

payment market, Alipay is the No.1 player with a market share of 79.9%, while Tenpay is

the No.2 player with a market share of 8.9%.

29 October 2014

Alibaba Group

(BABA.N) 51

Internationalisation

With the tide of the economic globalisation and improving infrastructure, cross-border e-

commerce has become an important part in the e-commerce ecosystem. More and more

companies and individual consumers are starting to buy and sell merchandise in the global

marketplace online.

According to Enfodesk, the cross-border e-commerce market in China witnessed a CAGR

of 33.9%—from Rmb0.84 tn in 2009 to Rmb2.70 tn in 2013. We expect cross-border e-

commerce to continue to see high growth given huge cross-border demand, which may

present both opportunities and challenges to China’s e-commerce players and relevant

regulatory institutions.

Figure 94: China's cross-border e-commerce transaction volume 2009-13

0.84

1.19

1.74

2.09

2.70

16.7%

41.7%

46.2%

20.1%

29.2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011 2012 2013

Transaction volume (RMB in trillion) Growth rate (%) Source: Enfodesk

Given the fast growth of the cross-border e-commerce market, governmental agencies in

China are paying greater attention to strengthening the regulation of cross-border e-

commerce activities by offering preferential policies to participants. The policy tailwinds,

such as launch of a cross-border e-commerce pilot programme, deduction of taxes, and

regulation of cross-border e-commerce activities, could potentially further boost cross-

border e-commerce.

With the tide of the

economic globalisation and

improving infrastructure,

cross-border e-commerce

has become an important

part in the e-commerce

ecosystem

29 October 2014

Alibaba Group

(BABA.N) 52

Figure 95: China's cross-border e-commerce market breakdown

94.2% 93.8%87.4% 91.4% 88.9%

5.8% 6.2%12.6% 8.6% 11.1%

2009 2010 2011 2012 2013

Outbound Inbound Source: Enfodesk

The cross-border e-commerce in general consists of inbound and outbound businesses.

Although outbound is still the major component in the cross-border e-commerce business

given the large volume of "made-in-China" goods shipped to the world every year, e-

commerce inbound volume has steadily grown year over year, and the imbalance between

inbound and outbound has gradually improved. According to Enfodesk, the portion of

inbound business in cross-border e-commerce in China reached 11.1% in 2013, compared

with only 5.8% in 2009.

Figure 96: Cross-border e-commerce landscape

C B B C

ChinaOversea

Oversea Online Shopping

Inbound Outbound

Source: Credit Suisse research

29 October 2014

Alibaba Group

(BABA.N) 53

Oversea online shopping, as a 2C inbound arm of cross-border e-commerce, has

experienced tremendous growth in the past few years, since more and more consumers in

China have begun to explore the global marketplace as they seek cheaper, more

trustworthy or novel products offered by merchants around the world, despite longer

delivery time and inconvenience in customer support. According to Nelson, the overseas

online shopping population was 18 mn with total spending of Rmb216 bn in 2013.

Alibaba, as the largest player in China e-commerce space, has established its presence in

overseas online shopping business, ranging from delegated C2C overseas online

shopping on Taobao to delegated B2C marketplace on Tmall Global.

Taobao: Delegated C2C model

Given the difference in price, product quality and market availability between overseas and

domestic markets, small merchants and individuals in China gradually realised the

business opportunities in overseas online shopping, and rushed into the business. The

small merchants and individuals mainly adopt the delegated C2C model by establishing

online stores on the domestic marketplace. Taobao, the largest C2C online marketplace in

China, then naturally becomes the major platform for the merchants and individuals to sell

overseas products to domestic consumers.

In the delegated C2C model, third-party shopping agents (small merchants or individuals)

on Taobao, act as both merchants and intermediaries to pre-purchase goods from

overseas e-commerce platform or official websites of brands as well as offline store, and

resell the goods to Chinese consumers on different e-commerce platforms. After a

consumer purchases a product, the third-party shopping agent then ships the product from

its overseas or even domestic warehouses to consumers. Some third-party shopping

agents also provide customised shopping solutions to help Chinese customers purchase

specific goods without taking any inventory.

Oversea online shopping, as

a 2C inbound arm of cross-

border e-commerce, has

experienced tremendous

growth in the past few years

29 October 2014

Alibaba Group

(BABA.N) 54

Figure 97: Delegated C2C overseas online shopping value chain

International Brand

International 3rd-party eCommerce Platform

Official Website

Oversea 3rd-partyShopping Agent

Custom Clearance Port

1 week – 2 months

Spot Check of

Tax

CustomYes

1-3 days

No

Take Inventory

Consumer

No 1-4 days

Domestic 3rd-partyPurchase Agent

1-4 days

Yes

AsynchronizedPurchase

Purchase

Offline Store

Pre-purchase / Customized purchase

Source: Credit Suisse

The delegated C2C model simplifies the overseas online shopping process by taking care

of the overseas payment, language translation, and complicated transhipment flows, and

provides consumers a certain degree of freedom in product selection.

According to 100ec.com, China's delegated C2C overseas online shopping market

witnessed a CAGR of 97.9% from Rmb5.0 bn in 2009 to Rmb76.7 bn in 2013, and is

expected to further reach Rmb154.9 bn in 2014. In our view, huge demand for overseas

products and a lack of overseas shopping experience and qualifications are the major

reasons for the expansion of the delegated C2C overseas online shopping market.

29 October 2014

Alibaba Group

(BABA.N) 55

Figure 98: China delegated C2C overseas online shopping transaction volume

5.012.0

26.5

48.3

76.7

154.9

2009 2010 2011 2012 2013 2014E

(RMB Bn)

Source: 100ec.com

Figure 99: Delegated C2C overseas shopping on Taobao Figure 100: Delegated B2C marketplace on Tmall Global

US/HK/JP versionof iphone 6/+sold on Taobao


Tmall: Delegated B2C marketplace model

On the other hand, by leveraging experiences in operating B2C online marketplace, Alibaba

also targets to establish a professional overseas online shopping platform, and collaborate with

renowned international merchants to ensure the quality of overseas products, standardise the

shopping workflows, and further improve the overseas online shopping experience.

Tmall Global was launched in February 2014 to provide direct imported overseas products

by international merchants on its marketplace. It requires the merchants listed on its

marketplace to be an overseas entity with retail qualifications. All products sold on the

platform must be officially import certified by China Customs. As of now, Tmall Global has

had more than 1,000 brands listed, covering five categories, including baby and maternity,

cosmetics, food and healthcare, apparel, and electronics.

In August 2014, Tmall Global signed a framework agreement with France Invest Agency to

sell products made in France directly on its marketplace. In October, Costco, the second

largest retailer in the US, signed a strategic collaboration agreement with Tmall Global,

and will launch an official online store on Tmall. The newly established official online store

on Tmall initially will focus on food and healthcare products, and ship products directly

from the overseas warehouses (mainly in Taiwan) to mainland consumers.

29 October 2014

Alibaba Group

(BABA.N) 56

Overseas merchants on Tmall Global can directly ship their products to consumers in

China. In addition, all the orders placed through Tmall Global are required to be shipped

out within 72 hours, and delivered within 14 working days. The import tax is paid by the

overseas merchants, therefore, the total amount paid by consumers only includes the

price of the product and overseas shipping fees. The whole process is monitored by the

online system, and can be tracked by consumers.

Since the product information is in Chinese and the payments are settled in the RMB,

Chinese consumers find it less burdensome to purchase overseas products. In addition,

given the import tax incurred is normally covered by overseas merchants, there are fewer

uncertainties in the import process, which could potentially accelerate the custom

clearance procedure. The synergy in global logistics operation could also further lower the

shipping cost of a single order.

In order to further facilitate the overseas shopping business, Tmall Global signed a

cooperation contract with several bonded areas, such as Zhengzhou, Hangzhou, and

Ningbo, to provide temporary warehouse storage services for its merchants with no import

tax incurred.

Logistics network

As online shoppers do not need to visit physical stores to make purchases, merchants and

B2C retailers have very limited touch points with customers to make impressions and

encourage repeat purchase.

One major scenario in reaching out to customers is through the fulfilment process, when

couriers hand the parcels to customers in person. The speed of delivery and quality of

services account for an important part of the customer experience.

As the company believes that logistics play a vital role in the greater Taobao ecosystem, it

has expanded its logistics exposure through direct investments and collaborations with

third-party logistics companies in the past few years, and is well-positioned in developing a

compressive logistics infrastructure.

In 2007, Jack Ma, the founder of Alibaba Group, invested US$7.5 mn in Best Logistics, an

innovative integrated logistics supply chain service provider.

By foreseeing the upbeat sales trend in e-commerce and potential logistics bottlenecks, in

2009, Alibaba launched its innovative logistics platform called Ali Logistics (物流宝). Ali

Logistics, as a centralised logistics information system, collects all the data from

customers, merchants as well as third-party logistics companies, and organises the

ordering, warehousing, and delivery activities in real-time to effectively eliminate the

logistics burden of merchants by providing one-stop logistics services.

In the Ali Logistics framework, merchants are freed from the tedious logistics processes,

and are able to pay more attention to their core businesses, such as marketing and

customer service. By collaborating with high-quality third-party logistics companies, Ali

Logistics could monitor the warehousing and delivery processes, and ensure the last-mile

service in the full business cycle. In order to improve the online shopping experience, in

May 2012, Tmall entered into strategic collaborations with nine third-party logistics

companies, including EMS, S.F. Express to provide tailored services, such as delivery

within 24 hours, night time delivery, and payment-on-delivery in many cities across China.

In 2010, Alibaba Group Treasury Limited, as a cornerstone investor, bought 13.5 mn

shares from the IPO of Global Logistic Properties (GLP), one of the leading providers of

modern logistics facilities in China.

In May 2013, Alibaba collaborated with eight companies, including Intime, Fosun Group,

Forch Group, and five major logistics companies, including S.F. Express and Yunda

Express, to start the Cainiao Network Technology Co Ltd. With a registered capital of

Rmb5 bn, Cainiao Network is aimed at building a China Smart Logistics Network (CSN) in

One major scenario in

reaching out to customers is

through the fulfilment

process, when couriers

hand the parcels to

customers in person. The

speed of delivery and quality

of services account for an

important part of the

customer experience

29 October 2014

Alibaba Group

(BABA.N) 57

five to eight years to facilitate China’s online shopping business. The Cainiao Network will

deploy physical warehouse and logistics infrastructures by both self-built and collaboration

methods in order to cover hundreds of cities across China. In September 2013, Alibaba

announced to merge its Ali Logistics with Cainiao Network in order to integrate the

logistics resources and improve the efficiency of the workflows.

By combining the Cainiao Network, which includes the warehouse and logistics

infrastructures, and Ali Logistics, which is the centralised logistics platform that utilises the

big data and cloud technologies to analyse logistics information from merchants, users

and third-party logistics companies, the new Cainiao network is expected to guarantee

deliveries between any two of China’s 658 cities within 24 hours, and provide intelligence

and convenient shopping services to customers in the future.

In December 2013, Alibaba teamed up with Haier, the Chinese appliance-maker, by

investing US$364 mn to expand its logistics and distribution network.

Admittedly, there are many challenges and uncertainties, including operating,

management, competition, and policy risks, in setting up a comprehensive logistics system

despite a promising plan. In 2012, Stars Express, an Alibaba-invested logistics company,

went bankrupt due to liquidity issues.

Figure 101: Ali Logistics + Cainiao Network structure

Source: Company data, Credit Suisse research

After a series of investments in logistics and related infrastructures, Alibaba has well

positioned itself in the next generation logistics development, and established its greater

Taobao ecosystem to facilitate the large volume transactions on Taobao and Tmall. The

greater Taobao ecosystem creates a closed loop covering the full business cycle of e-

commerce. Merchants first store their merchandises at the designated warehouse under

Cainiao Network. When a customer wants to make a purchase online, Alibaba's online

shopping platform, Taobao and Tmall, provide the goods that the customer needs. Once

the order is placed, Ali Logistics, as a central information system, notifies the merchants,

and transfers the order information to warehouse through its cloud system. After receiving

the order information, warehouses under Cainiao Network automatically process the order

with picking, packaging and delivery based on the instruction from Ali Logistics. The whole

workflow is monitored by the central system, and sends tracking information update to

each party involved.

29 October 2014

Alibaba Group

(BABA.N) 58

By leveraging the powerful computing capability of Ali Logistics cloud system, Ali Logistics

could potentially predict the supply and demand based on the existing transaction data,

and pre-transfer the merchandise to the designated warehouses covering areas with

strong demand of specific merchandise.

With the powerful logistics infrastructure and cloud computing platform, Alibaba could

handle a large volume of orders and packages efficiently and effectively. In the 12 months

ended 30 June 2014, there were a total of 6.1 bn packages delivered by Alibaba’s logistics

partners from transactions generated in its China retail marketplace.

The “Double 11” Singles Day sales as one of Alibaba’s signature event in its China retail

marketplace has grown significantly in the past few years, and continuously breaks

Taobao's and Tmall's one-day sales record YoY. In the Singles Day sales 2013, the total

transaction volume on Tmall was Rmb36.2 bn, up 83% YoY, and the total packages

handled by Alibaba’s logistics platform reached 156 mn, compared with 16.6 mn daily

packages generated from transactions on its China retail marketplace.

Cainiao ownership

Alibaba owns a 48% share in the Cainiao JV. In May 2013, Alibaba made a commitment to

invest Rmb2,150 mn in the JV, and made an additional commitment of Rmb250 mn in

February 2014. As of now, Alibaba Group has made a total capital commitment of

Rmb2,400 mn, of which it has already contributed Rmb1,680 mn. The other Rmb720 mn

will be invested over a two-year period. This JV is accounted under equity method.

We note that for each warehouse project (e.g., a warehouse in Shanghai), Cainiao will be

a general partner for that project, with minority stakes in the project. This ensures an

efficient use of Cainiao capital, while still allowing Cainiao to control the project.

Figure 102: Controlling structure of Cainiao Network

(CSN)*

Figure 103: "Double 11" Singles Day sales volume

YTO Express1%

Alibaba43%

SF Express1%

Intime32%

Yunda Express

1%

Fosun Group10%

STO Express1%

Forch Group10%

ZTO Express1%

100 936

5,200

19,100

36,200 836%

456%

267%

90%

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2009 2010 2011 2012 2013

Sales (Rmb mn) YoY growth (%)

*As of FY4Q14; Source: Company data Source: Company data, Credit Suisse estimates

29 October 2014

Alibaba Group

(BABA.N) 59

Initiate with OUTPERFORM and a TP of US$114 We initiate coverage on Alibaba with an OUTPERFORM rating and a target price of

US$114.

Alibaba was listed in the US on 19 September 2014 with an offering price of US$68; on

the debut day its shares surged 38.1% to US$93.89. On 27 October 2014, the share price

of Alibaba was US$97.79, a ~44% increase from the offering price, mainly due to the

positive outlook on FY2Q15, and the recent bounce back in investors’ sentiment towards

the China internet stocks.

We have OUTPERFORM on the stock, which is based on the current valuation post a

44% share price rally after the IPO. The GMV growth trajectory, category expansion and

mobile monetisation will be our main areas of focus in the coming quarters.

We believe Alibaba's future price performance will be anchored on: (1) sustained strong

GMV growth; (2) monetisation improvement; (3) product/service launches in new

categories and markets; and (4) cooperation progress with portfolio companies.

We arrive at our target price considering the following three valuation methodologies:

(1) Main valuation methodology: Discounted Cash Flow (DCF)

We use DCF valuation as the key valuation methodology, as we see DCF captures the

longer-term growth opportunities of Alibaba. We assume ~20% growth over 2020-25, a

WACC of 11% and a 3% terminal growth rate. Our base-case DCF valuation yields a

target price of US$107 of its core business. By considering the value from Ant Financial

Services Company (US$17.5 bn) or US$6.7per share, we arrive at our final target price of

US$114 for the whole Alibaba business.

Our target price implies a fair valuation of US$296 bn. We estimate a net cash position of

around US$6.6 bn by the end of CY3Q14.

Figure 104: Alibaba core business DCF model assumptions (base-case scenario)

Drivers FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Sales growth 52.1% 52.5% 38.3% 23.7% 22.4% 22.4% 19.8% 21.3% 20.6% 20.0% 19.5% 19.2%

EBIT margin 55.4% 45.7% 47.2% 48.1% 49.3% 50.6% 51.4% 52.4% 53.5% 53.5% 53.3% 53.0%

NOPAT margin 41.5% 31.3% 30.0% 31.0% 32.7% 34.3% 35.3% 36.5% 37.6% 37.8% 37.8% 37.7%

Year-end net fixed assets turns 7.3 7.6 7.9 7.6 7.7 8.2 8.8 9.9 11.3 13.4 16.2 20.3

Year-end net working capital turns -8.0 -10.3 -9.5 -9.8 -9.6 -10.1 -9.9 -9.9 -9.9 -9.8 -9.8 -9.8

Year-end net other assets turns 3.3 1.2 1.7 2.0 2.5 3.1 3.7 4.5 5.4 6.4 7.7 9.2

Cash operating taxes as a % of EBIT 12.6% 19.1% 25.7% 24.6% 25.0% 25.3% 25.6% 25.9% 26.0% 26.3% 26.5% 26.7%


Figure 105: Alibaba core business DCF sensitivity analysis

Terminal growth rate

Target price in US$ 0.0% 1% 2% 3.0% 4.0% 5% 6%

WACC (%)

8.0% 169.5 177.4 187.9 202.7 224.8 261.6 335.2

9.0% 140.8 145.5 151.5 159.6 170.8 187.7 215.8

10.0% 118.6 121.4 124.9 129.4 135.4 143.7 156.3

11.0% 101.1 102.7 104.7 107.2 110.4 114.7 120.6

12.0% 87.0 87.9 89.0 90.3 92.0 94.2 97.0

13.0% 75.5 76.0 76.5 77.2 78.0 78.9 80.2


We initiate coverage on

Alibaba with an

OUTPERFORM rating and a

target price of US$114

29 October 2014

Alibaba Group

(BABA.N) 60

Figure 106: Alibaba's China retail marketplaces GMV penetration forecast

(Rmb tn) CY14E CY15E CY16E CY17E CY18E CY19E CY20E CY21E CY22E CY23E CY24E

China GDP 62.0 67.6 73.0 78.8 85.1 91.1 97.5 104.3 110.6 117.2 124.2

Alibaba China retail GMV 2.2 3.0 3.7 4.3 5.1 5.9 6.8 7.7 8.8 9.9 11.0

Penetration (%) 3.6% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.4% 7.9% 8.4% 8.8%


(2) P/E and PEG-based valuation

Our target price of US$114 implies 57.9x CY14E, 44.4x CY15E, 33.7x CY16E, and 27.5x

CY17E diluted adjusted EPS.

At the current share price of US$97.8, Alibaba's market cap is ~US$241 bn. If we look at

2015 forward P/E, Alibaba is currently trading at 38x CY15E earnings. This is ~42% above

Tencent's, and ~50% above Baidu's 2015E P/E multiple. We expect the premium to likely

continue, given (1) long-term earnings sustainability as the leading e-commerce platform

in China, (2) earnings upside from local services and global expansion, and (3) valuation

upside from Ant Financial Services Company.

However, at our target price, Alibaba still trades at a discount to Amazon, the leading e-

commerce company in the US. We see both companies can maintain high forward P/E

multiples, as both companies have opportunities to capture a greater portion of the large

e-commerce market globally.

Figure 107: Alibaba Peer Group—leading internet comps*

Close Mkt cap P/E PEG (2015) P/B P/S

Company Ticker Ccy price (US$ mn) CY14E CY15E CY16E 14-16 15-16 CY14E CY14E CY15E CY16E

Tencent 700 HK HKD 118.1 142,591 35.5 26.8 21.5 0.9 1.1 11.7 10.8 8.9 7.5

Baidu BIDU US USD 219.9 77,106 34.9 24.9 18.2 0.7 0.7 9.1 9.7 7.5 5.6

Google GOOGL US USD 549.9 186,424 21.0 17.7 15.0 1.0 1.0 3.5 2.8 2.4 1.5

Average 30.5 23.2 18.3 0.9 0.9 8.1 7.8 6.3 4.9

Median 34.9 24.9 18.2 0.9 1.0 9.1 9.7 7.5 5.6

*Closing price as of 27 October 2014.

Source: Company data, Thomson-Reuters, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

estimates

Figure 108: Alibaba Peer Group—leading e-commerce comps

Close Mkt cap P/E PEG (2015) P/B P/S

Company Ticker Ccy price (US$ mn) 2014E 2015E 2016E 14-16 15-16 2014E 2014E 2015E 2016E

Ctrip CTRP US USD 55.5 7,897 52.2 32.1 21.6 0.6 0.7 5.1 6.4 5.2 4.4

Vipshop VIPS US USD 210.7 11,905 76.9 43.4 26.8 0.6 0.7 30.3 3.4 2.0 1.4

Rakuten 4755 JP JPY 1178.0 14,442 28.4 21.8 17.7 0.8 0.9 4.3 2.6 2.4 2.1

Facebook FB US USD 80.3 208,732 49.5 39.4 29.5 1.3 1.2 11.4 17.0 12.6 9.1

Amazon AMZN US USD 290.0 134,258 132.2 73.4 40.7 0.9 0.9 12.0 1.5 1.3 1.0

Ebay EBAY US USD 51.2 63,597 17.4 15.6 14.0 1.4 1.3 2.9 3.5 3.2 2.6

Priceline PCLN US USD 1,134.3 59,489 21.7 17.6 14.7 0.8 0.9 7.0 7.0 5.7 4.4

Average 54.0 34.8 23.6 0.9 0.9 10.4 5.9 4.6 3.6

Median 49.5 32.1 21.6 0.8 0.9 7.0 3.5 3.2 2.6

*Closing price as of 27 October 2014.

Source: Company data, Thomson-Reuters, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

estimates

(3) Sum-of-the-parts (SOTP)-based valuation

In the SOTP-based valuation, we divide Alibaba Group into six business segments: Retail

Marketplaces, Wholesale, AliCloud, Others, Investment Portfolio Companies, and Ant

Financial. The following shows how we value each business segment:

29 October 2014

Alibaba Group

(BABA.N) 61

■ Retail Marketplaces (~82% of revenue in CY2Q14): CY2016E revenue of Rmb111.4

bn, revenue from China retail marketplaces accounts for 97% of total retail revenue.

We assume a normalised net margin of 38% with 35x P/E to arrive at a valuation of

Rmb1,462 bn.

■ Wholesale (~12% of revenue in CY2Q14): Our fair valuation estimate for its

wholesale marketplace business is Rmb121.5 bn based on Rmb13.5 bn revenue in

CY2016E, a normalised net margin of 30%, and a P/E multiple of 30x.

■ AliCloud (~2% of revenue in CY2Q14): CY2016E revenue of Rmb4.0 bn. We

assume a normalised net margin of 20% with 20x P/E to arrive at a valuation of

Rmb16.1 bn.

■ Others (~4% of revenue in CY2Q14): CY2016E revenue of Rmb2.5 bn, mainly from

AutoNavi, UCWeb, and Alibaba Pictures. We assume a normalised net margin of 25%

with 30x P/E to arrive at a valuation of Rmb18.5 bn.

■ Investment portfolio companies: By calculating the market or implied value of its

investment portfolio companies, we value its non-controlling investments at cost at

Rmb67.6 bn (US$10.9 bn).

■ Ant Financial: We assume Ant Financial valuation to be Rmb327 bn or US$52.8 bn

(please refer to our Ant Financial valuation below). With Alibaba Group potentially

obtaining a 33% equity stake in Ant Financial, Ant Financial contributes Rmb108.5 bn

(or US$17.5 bn).

■ Cash: By CY2Q14, the estimated net cash and short-term investments should be

Rmb40.9 bn.

In summary, the above calculation gives us an SOTP valuation of Rmb1,835 bn,

corresponding to US$295.8 bn and US$114 per share.

Figure 109: Alibaba Group SOTP analysis

(Rmb bn) CY16E

Rev

Normalised

net margin

Normalised

net income

Multiple

(x)

Bear-case

Val

Multiple

(x)

Bull-case

Val

Mid-point Ownership Value

Retail 111.4 38% 42 30 1,253.1 40 1,670.9 1,462.0 100% 1,462.0

Wholesale 13.5 30% 4 25 101.3 35 141.8 121.5 100% 121.5

AliCloud 4.0 20% 1 15 12.0 25 20.1 16.1 100% 16.1

Others 2.5 25% 1 25 15.4 35 21.6 18.5 100% 18.5

Investment portfolio N.A. 67.6 N.A. 67.6 67.6 N.A. 67.6

Ant Financial 327.6 327.6 327.6 33% 108.1

Net cash 40.9 40.9 40.9 40.9

Total equity value 1,818* 2,290* 2,054* 1,834.6

Total equity value (US$ bn)

293* 369* 331* 295.7

Value per share (US$)

112.8* 142.1* 113.8

*Assuming 100% of ownership in Ant Financial; Source: Company data, Credit Suisse estimates

Our SOTP arrives at TP of

US$114

29 October 2014

Alibaba Group

(BABA.N) 62

Figure 110: Valuing Ant Financial Services Company at US$52.8 bn

Segments Payment infrastructure

Financial Product

Distribution

Small & Micro

Loans Insurance Bank

Total

valuation

Forecast base scenarios

Retail

Sales

Consumer

Spending

Disposable

income Fund AUM

2013A 23,786 24,293 36,420 4,152.6 30.0

2016E 34,320 29,760 48,036 4,360.2 30.0

Cashless % 55.0% 55.0% 55.0% 100.0%

Ali market share 50% 50% 50% 30%

Ant Financial grossing 9,438 8,184 13,210 1,308.1

Economics 0.5% 0.5% 0.5% 0.3% 50.0%

Ant Financial revenue 47 41 66 3.3 15.0

Normalized net margin 35% 35%

Normalized net income 14.3 1.1

P/E (P/B for loan) multiple 20x 20x 1.2x

Valuation 286.4 22.9 18 n.m n.m. 327.3

Valuation (US$ bn) 46.2 3.7 2.9 n.m n.m. 52.8

Source: PBOC, National Bureau of Statistics, Company data, Credit Suisse estimates

Ant Financial mainly consists of five business segments:

■ Payment infrastructure: Alipay

■ Financial product distribution: Yu 'E Bao, Zhao Cai Bao

■ Small & micro Loans: SME loan company

■ Insurance: ZhongAn Insurance

■ Bank: Ant Financial recently received approval from the CBRC to establish Zhejiang

Online Merchants Bank

In payment infrastructure, we use total China consumer spending size as a starting point.

According to MasterCard, non-cash payments now comprise 55% of total consumption in

China, compared with 80% in the US and 89% in the UK.

Figure 111: Non-cash payments’ share of the total value of consumer payments

93%92%

90%89%

86%80%

76%70%

69%62%

57%55%

54%43%

32%31%

0% 20% 40% 60% 80% 100%

BelgiumFrance

CanadaU.K.

AustraliaU.S.

GermanyKorea

SingaporeJapanBrazilChinaSpain

TaiwanIndia

Russia

Source: MasterCard Advisors’ Cashless Journey, Oct-2013.

According to PBOC, National Bureau of Statistics and iResearch, by 2012, Bankcard

consumption value in China reached ~Rmb9,100 bn, ~44% of China's total retail sales.

29 October 2014

Alibaba Group

(BABA.N) 63

Figure 112: Bankcard consumption value as % of total China retail sales—at 44% in 2012

17.0%

21.3% 22.6%

30.1%

35.0%

38.6%

43.9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010 2011 2012

Retail Sales (Rmb Bn) Bankcard Consumption Value Penetration

* Bankcard consumption value excluded wholesale, real estates and auto sales.

Source: PBOC, National Bureau of Statistics, iResearch

We assume in 2016E non-cash payment would account for 55% of total consumption in

China. This will give us 2015E addressable market size of Rmb16,368 bn.

We then use Alipay's current market share of 50% in third-party online payment as a

reference in the future market share dynamics in cashless payment in China. In our

assumptions, we assume Alipay takes 50% of the total cashless payment addressable

market.

Figure 113: Third-party online payment (Rmb bn) Figure 114: Market share of third-party online payment

1.0 2.2

3.7

5.4

7.4

10.4

14.1

18.5

19.8%

26.2%

29.5%31.2% 31.9%

33.4% 34.2% 35.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Transaction volume (RMB in trillions) Penetration (%)

Alipay48.8%

Tenpay19.8%

China UMS11.4%

99Bill6.8%

ChinaPnR5.3%

Yeepay3.2%

IPS2.7%

Others2.0%

Source: iResearch Source: iResearch, CY2Q14

Then we apply 50 bp economics of processing fee that Alipay would earn through

facilitating these payment transactions.

This gives us a ~Rmb41 bn revenue opportunity from payment infrastructure.

In financial product distribution, we start with the total China fund AUM of approx.

Rmb4.4 tn in 2016E. We conservatively estimate Ant Financials would win 30% of the fund

distribution market, with 25 bp of economics as distribution fee.

29 October 2014

Alibaba Group

(BABA.N) 64

Figure 115: Development of mutual funds and money funds in China

Mutual funds Money market funds

Time Number AUM (Rmb bn) Number AUM (Rmb bn)

2013.11 1505 2916.987 85 633.174

2013.10 1466 2813.335 84 575.448

2013.09 1450 2805.344 78 489.008

2013.08 1411 2774.241 75 509.896

2013.07 1369 2654.904 74 409.631

2013.06 1345 2518.054 73 303.869

2013.05 1317 3003.720 73 564.054

2013.04 1282 2828.664 71 561.567

2013.03 1257 2795.376 70 512.729

2013.02 1215 2890.438 65 536.137

2013.01 1193 2785.474 63 571.728

2012.12 1173 2866.1 61 571.728

Source: Asset Management Association of China (AMAC)

This should give Ant Financials around Rmb3.3 bn revenue opportunity in terms of

financial product distribution.

In terms of margin and trading multiple, we look at Visa and MasterCard, who enjoy a

38-42% net margin and ~25x forward P/E. Considering Alipay's early development stage,

we apply some discount and use a 35% net margin and 20x P/E in valuation.

For Small & micro loans, we assume the loan portfolio to grow to Rmb30 bn by 2016E,

and estimate that book value to be ~Rmb15 bn. Applying 1.2x P/B multiple, we arrive at a

~US$2.9 bn valuation.

We think ZhongAn Insurance and the newly planned bank business are still at a very

nascent stage, so we don’t assign value to these two segments at this point.

Summarising all segments up, we arrive at a total valuation of US$52.8 bn for Ant

Financial Services Company.

On top of this US$52.8 bn, we see further upside from potentially more market share gain

and future international expansion as a free option embedded in the business.

Additionally, in the above analysis, we only considered traditional financial business model

based on fees and net interest margins. We haven't factored in its synergistic benefits to

Alibaba's other business lines.

29 October 2014

Alibaba Group

(BABA.N) 65

Share price drivers/risks Positive share price drivers and catalysts

Sustained strong GMV growth

As the largest e-commerce company in the world, we expect Alibaba to maintain its

momentum in GMV growth supported by the network effect in its operation as well as

mobile expansion.

Monetisation rate improvement

We believe that the increase in mobile monetisation and a structural shift to Tmall could

help Alibaba further enhance its monetisation capabilities, and improve monetisation going

forward.

Product/services launch in new categories and markets

In the next two to three years, we expect Alibaba Group's future growth in terms of

category expansion and penetration to mainly come from food & beverages, life/local

services, and entertainment/virtual goods. About three to five years from now, we see

healthcare and financial services could offer more meaningful upside to the longer growth

picture of China Retail marketplaces. Market expansion could be another catalyst, as

Alibaba aims to enhance its presence in overseas market under its internationalisation

strategy.

Cooperation progress with portfolio companies

Alibaba has strategically invested in a wide range of companies with the ambition to

establish a greater Alibaba ecosystem. With efficient cooperation with its portfolio

companies, Alibaba could expand its product and service offerings, and benefit from the

synergies created by the ecosystem.

Downside risks

We see downside risks may emerge from:

Macro slowdown

The operation of Alibaba may be materially and negatively affected by any

macroeconomic slowdown in China as well as globally, as the change in economic

conditions could have a significant impact on the retail consumption. Given the large

business exposure in China, Alibaba’s business is closely knit with China’s economy. Any

deterioration or slowdown in economic growth would challenge the performance of its

domestic business. A global economic slowdown would also adversely affect Alibaba’s

international business, and impose uncertainties in its global expansion.

Slower-than-expected category expansion (medical, O2O local services) due to

execution or competition

As one of the strategic directions, the successful category expansion depends on strong

execution and competitive edge in the business. We see that other internet giants, such as

Tencent and Baidu, as well as new start-ups have joined the battle in these categories.

Intense competition is seen to be the main uncertainty in the operation. Any slowdown in

category expansion in key areas, such as medical and O2O local services, could weigh on

future growth of Alibaba.

29 October 2014

Alibaba Group

(BABA.N) 66

Slower mobile traffic growth and monetisation

We have seen clear trends of consumers shifting from PC to mobile, and mobile presence

has become more and more important to internet companies. Considering the fierce

competition ahead, if Alibaba fails to ramp up its mobile traffic, it could dramatically

damage its existing ecosystem. In addition, given its current low monetisation in mobile

compared to PC, monetisation efficiency in mobile is also crucial to Alibaba. A failure in

improving monetisation on mobile would adversely affect the profitably of Alibaba, and

result in a slowdown in growth.

Higher-than-expected investments in business initiatives

Since Alibaba has aggressively invested in its business initiatives such as mobile,

logistics, and global expansion, higher-than-expected spending could negatively impact its

margins as well as liquidity. Uncertainties in return could also be another potential

downside risk.

29 October 2014

Alibaba Group

(BABA.N) 67

Appendix I: Company profile Figure 116: Company history

1999 … 2003 2004 … 2007 2008 2009 2010 … 2013

Alibaba founded in Hangzhou

Alibaba.com launched

1688.com launched

Taobao Marketplace

launched

Aliwangwang IM launched

Alipay launched

Alimama monetization

platform launched

Taobao Marketplace

started to monetize

Tmall launched

Alibaba Cloud

Computing founded

Juhuasuan launched

AliExpress launched

Mobile Taobao launched

Singles Day GMV

of RMB36.2 Bn


Alibaba was founded in Executive Chairman Jack Ma's Lakeside Gardens apartment in

Hangzhou in 1999. It began operations as Alibaba.com, an English version e-commerce

website for global trade in 1999. It helps small exporters engaged in manufacturing and

trading in China reach global buyers. In 1999, its founders also launched a Chinese-language

wholesale e-commerce website for domestic China trade among small businesses, now

called 1688.com. This domestic platform has since evolved into a wholesale channel for

merchants doing business on its retail websites to source products.

In 2003, Taobao Marketplace was established as a free platform for buyers to explore and

discover products and for sellers to establish a low-cost online presence. According to

iResearch, Taobao Marketplace was the No.1 C2C marketplace in terms of GMV in China

in 2013.

In 2004, Alipay was established to address the issue of trust between buyers and sellers

online. Buyers were unwilling to effect payment before receiving and inspecting their

purchases, and sellers were unwilling to ship the products until they were assured that

payment was forthcoming. Alipay introduced its escrow service as a solution to this

problem. In 2013, Alipay was the largest online third party payment services provider in

China by total payment volume, according to iResearch.

In 2007, Alimama, an online marketing technology platform was launched. It offers sellers

on Alibaba marketplaces online marketing services for both personal computers and

mobile devices. In 2007, Alibaba also started to monetise Taobao Marketplace through

P4P marketing services and display marketing.

In 2008, Tmall was launched as Alibaba's management recognised that Chinese

consumers had developed an increased demand for branded products and a premium

online shopping experience. In 2009, Alibaba Cloud Computing was launched to handle

the traffic volume generated from the substantial scale of transactions and data on its

platform. Today, Alibaba Cloud Computing addresses the data management needs of

Alibaba and affiliated companies in its ecosystem, and serves other third party companies.

29 October 2014

Alibaba Group

(BABA.N) 68

In 2010, AliExpress, Alibaba's global consumer marketplace was launched. It enables

exporters in China to reach and directly transact with consumers around the world. Also in

2010, Juhuasuan, Alibaba's group buying website was launched. Juhuasuan offers quality

products at discounted prices by aggregating demand from consumer groups, mainly

through flash sales.

Funding history before IPO

In 1999, Alibaba raised US$5 mn from Goldman Sachs and other institutions.

In 2000, Alibaba raised another round of funding worth US$25 mn from Softbank

(US$20 mn), Fidelity, Transpac Capital and other institutions.

In 2004, Alibaba raised US$82 mn from Softbank (US$60 mn), Fidelity, GGV Capital

and TDF.

In 2005, Alibaba took over Yahoo! China for US$1 bn from Yahoo! for 40% shares.

In 2007, Alibaba international commerce business (1688.HK) was listed in HKEX at

HK$13.5.

In 2011, Alibaba raised US$2 bn from Silver Lake, DST Global, Yunfeng Capital,

Temasek.

In 2012, Alibaba repurchased 20% shares from Yahoo for US$7.1 bn with CDB, CIC,

Citic, Boyu Capital, etc.

In 2012, 1688.HK was privatised at HK$13.5.

In FY13, Alibaba completed total syndicated loan drawdown of US$4.0 bn denominated

in US dollars under two facility agreements entered with banks.

In FY14, Alibaba completed another series of syndicated loan drawdowns of US$8.0

bn.

Company structure

Figure 117: Key management and background

Name Position Background

Jack Yun Ma Executive Chairman Director of Huayi Brothers Media Corporation

Chair of The Nature Conservancy’s China board of directors and a director of its global

board of directors

Graduated from Hangzhou Teacher’s Institute with a major in English language education

Joseph C. Tsai Executive Vice-Chairman Previous chief financial officer of Alibaba

Previous worked in Hong Kong with Investor AB

Bachelor’s degree in Economics and East Asian Studies from Yale College and a juris

doctor degree from Yale Law School

Jonathan Zhaoxi Lu Chief Executive Officer Previous chief data officer of Alibaba

Master’s degree in business administration from China Europe International Business

School

Daniel Yong Zhang Chief Operating Officer Previous chief financial officer of Shanda Interactive Entertainment Limited

Bachelor’s degree in finance from Shanghai University of Finance and Economics

Maggie Wei Wu Chief Financial Officer Chief financial officer since May 2013

Previous chief financial officer of Alibaba.com

Bachelor’s degree in accounting from Capital University of Economics and Business.

Jian Wang Chief Technology Officer Previous president of Alibaba Cloud Computing

Previous assistant managing director at Microsoft Research Asia

Ph.D in engineering from Hangzhou University


29 October 2014

Alibaba Group

(BABA.N) 69

Figure 118: Alibaba's ownership structure after IPO

Shareholder # of shares (mn) % of shares Category

Jack Yun MA 193.4 7.8% Executive chairman

Joseph C. TSAI 79.2 3.2% Executive vice chairman

Other directors and executive officers 50.6 2.1%

Softbank 797.7 32.4% Institutional

Yahoo 401.8 16.3% Institutional

Fengmao Investment Corporation 52.2 2.1% Institutional

Silver Lake affiliated entities 54.8 2.2% Institutional

Yunfeng affiliated entities 28.3 1.1% Institutional

CITIC Capital Excel Wisdom Fund 20.9 0.8% Institutional

Others 466.0 18.9%

IPO investors 320.1 13.0%

Total 2,465.0 100.0%


Alibaba partnership

Since Alibaba founders first gathered in Jack Ma’s apartment in 1999, they and Alibaba

management have acted in a spirit of partnership. In July 2010, in order to preserve this spirit

of partnership and to ensure the sustainability of Alibaba's mission, vision and values,

Alibaba's founders and management decided to formalise its partnership as Lakeside

Partners, named after the Lakeside Gardens residential community where Mr Ma and

Alibaba's other founders started the company. They refer to the partnership as the Alibaba

Partnership.

Alibaba founders and management believe that its partnership approach has helped them

to better manage the business, with the peer nature of the partnership enabling senior

managers to collaborate and override bureaucracy and hierarchy. The Alibaba Partnership

currently has 30 members—24 members of Alibaba management, five members of

management of Small and Micro Financial Services Company and a member of

management of China Smart Logistics. The number of partners in Alibaba Partnership is

not fixed and may change from time to time due to the election of new partners, the

retirement of partners and the departure of partners for other reasons.

Alibaba partnership is a dynamic body that rejuvenates itself through admission of new

partners each year, which adds to its excellence, innovation and sustainability. Unlike

dual-class ownership structures that employ a high-vote class of shares to concentrate

control in a few founders, the Alibaba approach is designed to embody the vision of a

large group of management partners. This structure is Alibaba's solution for preserving the

culture shaped by its founders, while at the same time accounting for the fact that founders

will inevitably retire from the company.

Consistent with Alibaba's partnership approach, all partnership votes are made on a one-

partner-one-vote basis.

29 October 2014

Alibaba Group

(BABA.N) 70

Figure 119: Current partners

Name Age Gender Year joined Alibaba Current position with Alibaba Group or related/affiliated companies

Jingxian CAI 37 M 2000 Principal Engineer

Li CHENG 39 M 2005 Chief Architect, Ant Financial Services Company

Trudy Shan DAI 38 F 1999 Chief Customer Officer

Luyuan FAN 41 M 2007 President, China Business, Ant Financial Services Company

Yongxin FANG 40 M 2000 Director, Human Resources

Simon Xiaoming HU 44 M 2005 Risk Manager, SME Loan Business; Chief Risk Officer, Ant Financial

Services Company

Fang JIANG 40 F 1999 Vice President, Corporate Integrity and Human Resources

Peng JIANG 41 M 2000 President, Alibaba Cloud Computing, YunOS and Digital Entertainment;

Deputy Chief Technology Officer

Jianhang JIN 44 M 1999 President

Eric Xiandong JING 41 M 2007 Chief Financial Officer, Ant Financial Services Company

Zhenfei LIU 42 M 2006 Vice President, Infrastructure Operations

Jonathan Zhaoxi LU 44 M 2000 Chief Executive Officer

Jack Yun MA 50 M 1999 Executive Chairman

Xingjun NI 37 M 2003 Principal Engineer, Ant Financial Services Company

Lucy Lei PENG 41 F 1999 Chief People Officer, Alibaba Group; Chief Executive Officer, Ant

Financial Services Company

Sabrina Yijie PENG 36 F 2000 Vice President, International, Ant Financial Services Company

Xiaofeng SHAO 48 M 2005 Chief Risk Officer

Timothy A. STEINERT 54 M 2007 General Counsel and Corporate Secretary

Judy Wenhong TONG 43 F 2000 Chief Operating Officer, China Smart Logistics

Joseph C. TSAI 50 M 1999 Executive Vice Chairman

Jian WANG 51 M 2008 Chief Technology Officer

Shuai WANG 40 M 2003 Senior Vice President, China Corporate Communications and Marketing

Sophie Minzhi WU 38 F 2000 President, Alibaba.com and 1688.com

Maggie Wei WU 46 F 2007 Chief Financial Officer

Eddie Yongming WU 39 M 1999 Senior Vice President, Corporate Development

Sara Siying YU 40 F 2005 Associate General Counsel, China

Ming ZENG 44 M 2006 Senior Vice President, Corporate Strategy

Jeff Jianfeng ZHANG 41 M 2004 President, Taobao Marketplace

Daniel Yong ZHANG 42 M 2007 Chief Operating Officer

Yu ZHANG 44 F 2004 Vice President, Corporate Development


VIE Exposure

Figure 120: Financial VIE exposure

Revenue Net income Total assets

FY2012 FY2013 FY2014 FY2012 FY2013 FY2014 FY2012 FY2013 FY2014

Alibaba and its wholly owned subsidiaries 90.42% 91.05% 88.25% 141.11% 135.70% 126.36% 94.58% 92.53% 83.08%

Consolidated VIEs 9.58% 8.95% 11.75% -41.11% -35.70% -26.36% 5.42% 7.47% 16.92%


29 October 2014

Alibaba Group

(BABA.N) 71

Figure 121: VIE structure

Alibaba Group Holding Limited

(Cayman Islands)

Other SubsidiariesAlibaba Investment Limited

(British Virgin Islands)

100% 100%

Toabao China Holding Limited

(Hong Kong)

Toabao Holding Limited

(Cayman Islands)

100%

100%

Alibaba.com Investment

Holding Limited

(British Virgin Islands)

Alibaba.com Limited

(Cayman Islands)

100% (partly through a

holding entity)

100%

Taobao (China)

Software Co. Ltd

Zhejiang Tmall

Technology Co. Ltd

Hangzhou Alimama

Technology Co. Ltd

Alibaba (China)

Technology Co. Ltd

Alibaba

(Shanghai) Co. Ltd

100%

(through

intermediate

holding

entities)

Outside China

Inside China

100% (through a

holding entity)

100%

Zhejiang Taobao

Network Co. Ltd

Zhejiang Tmall

Network Co. Ltd

Hangzhou Ali

Technology Co. Ltd

Hangzhou Alibaba

Advertising Co. Ltd

Alibaba Cloud

Computing Ltd

Jack Ma Simon Xie

WFOEs

VIE equity

holders

Equity Interest

Contractual arrangement

VIEs

100%

(through

intermediate

holding

entities)


29 October 2014

Alibaba Group

(BABA.N) 72

China retail marketplaces

Taobao

Figure 122: Taobao marketplace (PC + mobile)

Categories Recommendations

Promotions

Search

Flash Sales Selected Goods

Search Promotions


29 October 2014

Alibaba Group

(BABA.N) 73

Tmall

Figure 123: Tmall

SearchBrands

Categories Supermarket

Electronics

Medicines


Figure 124: Mobile Tmall

Search

Lottery

Phone Card Top-up

Earn Points

Special Products

My Account

Home Page

Featured Items

Shopping Cart


29 October 2014

Alibaba Group

(BABA.N) 74

Juhuasuan

Figure 125: Juhuasuan (PC + mobile)

Distinct Group Buying ChannelsFeatured Products

Categories New Initiatives

Morning/

Evening

Flash Sales

Low Price

Center

Value Products


Merchant rating system

Figure 126: Merchant rating system on Taobao Rating as a seller

Rating as a buyer

Detail Seller Rating


29 October 2014

Alibaba Group

(BABA.N) 75

Figure 127: Merchant rating system on Tmall

Detail Seller Rating


International retail marketplace: AliExpress

Figure 128:


29 October 2014

Alibaba Group

(BABA.N) 76

China wholesale marketplace: 1688.com

Figure 129: 1688.com

Search Function Mobile ConnectionLatest Trades

Security & ToolsMarket Updates Promotion & Featured Products


29 October 2014

Alibaba Group

(BABA.N) 77

International wholesale marketplace: Alibaba.com

Figure 130: Alibaba.com

Categories Search Function Post-buying Request

Promoted Stores Additional Enablers


29 October 2014

Alibaba Group

(BABA.N) 78

Appendix II: Financial statement analysis Income statement

(1) Revenue

Alibaba has experienced high growth in its top-line supported by the huge expansion of

user base and the increasing trend of online spending. The company's net revenue was

Rmb20 bn, Rmb34.5 bn and Rmb52.5 bn in FY12, FY13 and FY14, respectively.

Alibaba's revenue primarily comes from online marketing revenue, commission on

transactions, membership and storefront fees, and cloud computing services revenue. In

FY14, revenue contributions from online marketing commission/membership/ value-added

services were 53.0%/24.3%/9.8%. Business-wise, its total revenue comprises revenue

from China e-commerce retail, China e-commerce wholesale, International e-commerce

retail, International e-commerce wholesale, Cloud and Other services.

Figure 131: Rapid revenue growth Figure 132: Revenue contribution breakdown in FY14

20.0

34.5

52.5 72.5%

52.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

-

10.0

20.0

30.0

40.0

50.0

60.0

FY2012 FY2013 FY2014

Revenue Growth (%)

(RMB in billions)

Online marketing

53.0%

Commissions24.3%


added services9.8%

Cloud computing

services1.5%

Others11.4%


■ China e-commerce retail

Alibaba generates online commerce retail revenue from its domestic retail e-

commerce websites, including Taobao, Tmall and Juhuasuan. With online marketing

services, payment services and customised storefront services, the China e-

commerce retail business contributes the majority of Alibaba's revenue, accounting for

81.6% of its total revenue in FY14.

■ China e-commerce wholesale

The main revenue source is the fees from memberships and value-added services

paid by wholesalers, who are willing to improve their online storefronts, as well as

utilise premium data analytical tools. In FY14, 74.1% of Alibaba's wholesale e-

commerce revenue was from memberships and value-added services.

In addition, Alibaba also monetises domestic wholesale e-commerce's traffic by

providing online marketing services, which contributes the rest of the wholesale

revenue.

29 October 2014

Alibaba Group

(BABA.N) 79

■ International e-commerce retail

Revenues from Alibaba's international retail e-commerce websites are primary from the

commission charged on transactions settled through Alipay on AliExpress. In addition to

the commission, Alibaba employs a third-party marketing affiliate programme on its

international retail e-commerce websites to provide further revenue stream.

■ International e-commerce wholesale

Similar to China e-commerce wholesale, Alibaba generates revenues on its

international wholesale market from membership fees, value-added services, and

online marketing services. Membership fees and value-added services are still the

primary monetisation model. In FY14, 87.6% of the revenue came from membership

fees and value-added services.

■ Cloud computing and internet infrastructure

As a resource- and traffic-driven business, revenues from cloud computing and

internet infrastructure segments are mainly from the time- and usage-based provision

of cloud computing services, such as elastic computing, database services, large

scale computing, and web-hosting and domain registration services.

(2) Gross margin

Alibaba's cost of revenue consists primarily of payment processing fees paid to Alipay or

other financial institutions, traffic acquisition costs paid to third-party marketing affiliates,

expenses related to the website operation, such as bandwidth and co-location cost, and

the depreciation of physical assets, share-based compensation, as well as allowance for

doubtful accounts related to micro loan business.

Benefit from the high leverage business model, no inventory and other significant cost item

was involved in the operation. As a result, Alibaba has achieved decent gross margin

expansion in the past few years.

However, after previous aggressive investments, Alibaba will consolidate the newly

acquired business with lower margins. Therefore, we expect the gross margin of Alibaba

to trend down to a lower level compared to 76.7% in FY14, and stabilise at ~70% level for

the next few years.

Figure 133: Gross margin

66.0%

68.0%

70.0%

72.0%

74.0%

76.0%

78.0%

FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E


29 October 2014

Alibaba Group

(BABA.N) 80

(3) Product development expenses

As a technology-driven company, Alibaba has invested heavily in research and

development. The expenses primarily include salaries, bonuses, benefits and share-based

compensation expense for the staffs engaged in development. Previously, the product

development expenses also included royalty fees paid to Yahoo in terms of the Yahoo

TIPLA, which has been terminated after Alibaba's IPO.

Considering the fierce competition in the China internet space, we expect Alibaba to

continue to invest in product development, especially in mobile and new initiatives, in

terms of absolute dollar amount, while we maintain a relatively stable proportion of total

revenue in the middle to long term.

(4) Selling, general and administrative expenses

Sales and marketing expenses of Alibaba primarily comprise online and offline advertising

expenses, promotional expenses, sales commissions paid for membership acquisitions,

and salary-related costs for sales personnel, while general and administrative expenses

mainly include salary-related expenses for management and administrative employees,

office facilitates, as well as other supporting expenses.

By leveraging the network effect, we see that the selling, general and administrative

expenses as a percentage of total revenue have improved significantly, and expect

synergies from its business acquisitions.

Figure 134: Operating margin*

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

R&D S&M G&A OPM (RHS) NM (RHS)

*Non-GAAP basis; Source: Company data, Credit Suisse estimates

Balance sheet

Cash and cash equivalents

As of the end of 1Q FY15, Alibaba had cash, cash equivalents and short-term investments

of Rmb65.7 bn, compared with Rmb50.0 bn in 4Q FY14, mainly due to the syndicated loan

drawdown.

29 October 2014

Alibaba Group

(BABA.N) 81

Cash flow statement

Figure 135: Cash flow profile

(RMB mn) FY2012 FY2013 FY2014

Operating cash flow 9,275 14,476 26,379

Investing cash flow (125) 545 (32,997)

Financing cash flow 475 (1,406) 9,364

Exchange rate effect (54) (76) (97)

Net increase in cash and cash equivalent 9,571 13,539 2,649


Operating activities

Thanks to its fast-growing business, Alibaba generated positive operating cash flows of

Rmb9.3 bn, Rmb14,5 bn and Rmb26.4 bn in FY12, FY13 and FY14, respectively. The

strong cash flow enables Alibaba to conduct various business activities without liquidity

pressure from core operations.

Investing activities

Although the investment activities were mild in FY12 and FY13, Alibaba started to

aggressively conduct investments and acquisitions in order to enhance its ecosystem in

the China internet space starting from FY2014. As a result, the cash flow from investments

in FY14 recorded Rmb33.0 bn, which was primarily attributable to equity investments of

Rmb11.5 bn in Youku and Weibo, and business combination expense of Rmb2.5 bn on

UCWeb and OneTouch.

Financing activities

Prior to its IPO, Alibaba has completed several rounds of syndicated loan drawdowns to

finance its operations.

In FY13, Alibaba completed the drawdown of US$2.0 bn denominated in the USD under a

facility agreement with certain banks which is repayable over a three-year period. During

the same period, Alibaba also completed another drawdown of US$2.0 bn, which is

repayable over a four-year period.

In FY14, Alibaba finished three rounds of syndicated loans with a total consideration of

US$8.0 bn. The facilities were primarily used to repay the US$4.0 bn syndicated loan

drawdown in FY13. The loan also requires Alibaba to maintain certain financial ratios,

such as offshore group leverage ratio limit.

29 October 2014

Alibaba Group

(BABA.N) 82

Appendix III: Looking at Alibaba through a global lens Contribution by Stephen Ju

Alibaba will carve its own growth path in the Chinese internet economy, and one that will

have a wider footprint versus its counterparts in the West, but we believe it would be

instructive to look at its global comparables across an array of metrics.

How Alibaba's "take rate" compares

We refer to it loosely as a 'take rate' for the purposes of discussion, but it is really a

monetisation rate as the Taobao and Tmall segments do not specifically charge a set

percentage-based fee on gross merchandise value, but rather an auction-based lead

generation fee or a hybrid fee percentage plus lead generation fee.

This monetisation rate in the aggregate for Alibaba currently stands at about 2.5% (as of

the end of FY2Q15) and the following chart shows how it compares to other lead

generation/marketplaces platforms globally. Granted that there are differences in the

vertical exposure, but we view this as essentially the cost of a lead on a transaction:

Figure 136: Global take rate comparison

29.5%

13.6% 13.3% 13.0%12.2% 11.6%

7.7%6.8% 6.6%

5.0% 4.4%3.5% 3.2% 2.5%


We note that in the above examples, various factors go into why take rates are higher than

others:

Fragmentation of supply source – this is particularly relevant for priceline's

Booking.com as well as Groupon.

Price transparency – OpenTable or HomeAway are unable to specifically tell the

value of the total check at the restaurant or the total booking dollars at a vacation

rental home. Hence, in the case of HomeAway, it monetises via a subscription-

driven model.

Mix – Orbitz versus its competitors' priceline and Expedia sees a higher mix from

air ticketing, which has a structurally lower commission rate

Contribution by Stephen Ju

29 October 2014

Alibaba Group

(BABA.N) 83

Even with these factors in mind, the simple conclusion here is that there is much room

ahead for Alibaba to close this gap.

While we calculate the above for comparison purposes, we have to make note of the

following caveats. Groupon is on a trailing 12 months' basis, and its take rate is calculated

as third-party revenue divided by third-party gross billings. priceline.com is only for its

Agency Bookings on a trailing 12 months' basis to adjust for seasonality. Expedia is only

for its Leisure segment on a trailing 12 months' basis to adjust for seasonality. Amazon is

in our estimate for its Fulfilment by Amazon services. eBay is on a trailing 12 months'

basis to adjust for seasonal change in mix and includes Marketplace and PayPal. Rakuten

includes only Rakuten Ichiba and on a trailing 12 months' basis (excludes Rakuten Travel).

Gmarket is as of its last reported quarter in 2009 – we include it here as the most relevant

comparison to Taobao and Tmall (more detailed discussion to follow). MercadoLibre is on

a trailing 12 months' basis—we note that the company bundles e-commerce and

payments. RetailMeNot is the company's stated commission rate for lead generation.

Orbitz is on a trailing 12 months' basis. HomeAway is an effective take rate based on its

annual subscription fee and our estimate of the volume of travel bookings. OpenTable is

as of the company's last reported quarter; we calculate an all-in take rate, which includes

the monthly subscription fee for ERB, as well as the per-seated diner fee.

A very relevant history lesson: eBay, Google and

Gmarket

As we have noted above, we view Gmarket as a very relevant precedent for where

Taobao and Tmall are headed—aside Google, it is probably the most relevant. While we

acknowledge that the starting point of this data set is now almost ten years old, the

evolution of Gmarket's revenue model should serve as an interesting signal nonetheless

for Alibaba investors.

Gmarket was eBay/Auction.co.kr's main competitor in South Korea, which started from

essentially zero to capture 20%+ market share in a few short years. It went public in mid-

2006 on the NASDAQ until eBay acquired it three years later.

We view it as an interesting business first as it went to market with the following pricing

strategy, which for its time was differentiated:

■ No insertion fee, all final value fee: This was a concept that Half.com (which eBay

ironically acquired in 2000) pioneered, which eliminated the inherent risk of the

insertion fee to drive rapid seller adoption, as they only had to pay when they sold

something on the platform. Amazon's 3P platform also ran with the same pricing setup

to gain share in the US and other markets.

■ Bear cost of credit card fees: This was the primary reason why Gmarket's gross

margin was in the ~45-50% range versus the ~90-95% exhibited by many other

websites' platforms. On the other hand, the company paid sellers net ~15 days

thereafter, which generated a benefit to its working capital and free cash flow in a way

similar to how Amazon sees a negative cash conversion cycle today.

■ Offer sellers auction-based display and search advertising: Power sellers on the

Gmarket platform had the option to promote their product listings with display

advertising or keyword/CPC-based advertising on the site.

Hence, Gmarket had a hybrid monetisation model—one that charged a percentage-based

take rate (which was at nearly half the rate Auction.co.kr was charging at the time), with

the optionality coming from the seller adoption of an auction-based CPC-driven advertising

as a way to generate additional transactions.

29 October 2014

Alibaba Group

(BABA.N) 84

We would make the argument that eBay is at one end of the above spectrum in generating

a fixed fee for its leads, while Google is at the opposite end, hosting a completely auction-

based model. Given that Google's model allows it to capture most if not all of the marginal

economics—in other words, there is NO CAP to the effective take rate—it is therefore a far

superior revenue model (we do not believe this is a controversial conclusion).

Below we show the two underlying pieces of Gmarket's take rate. We note that while the

percentage-based transaction fee came down over the course of time as Gmarket

experienced a negative category mix shift (more consumer electronics), seller adoption of

display and CPC-based advertising began to decline.

Figure 137: Gmarket Inc.—transaction take rate and seller advertising as percentage of gross merchandise value

5.3%5.6%

5.3%5.0%

4.3% 4.4% 4.6%4.3% 4.2% 4.1%

3.9% 3.9% 3.9% 3.9% 3.8% 3.7% 3.8%

1.0%1.1%

1.1%1.2%

1.5%1.7%

1.9%2.0% 2.0%

2.5%

2.3% 2.4% 2.4% 2.7% 2.6%2.6% 2.4%

1Q05A 2Q05A 3Q05A 4Q05A 1Q06A 2Q06A 3Q06A 4Q06A 1Q07A 2Q07A 3Q07A 4Q07A 1Q08A 2Q08A 3Q08A 4Q08A 1Q09A

SellerAdvertising

TransactionFee


Financial comparison with global companies

Figure 138: GMV comparison with global e-commerce

companies

Figure 139: Revenue comparison with global e-commerce

companies

103.7

171.3

274.2

62.0 69.9

78.7 83.6

110.7

143.3

FY2012 FY2013 FY2014

Alibaba eBay Amazon

(US$ in billons)

3.1 5.5

8.6 12.4 14.5 16.6

51.4

64.0

78.1

FY2012 FY2013 FY2014

Alibaba eBay Amazon

(US$ in billions)

Source: Company data, Credit Suisse estimates Source: Company data

29 October 2014

Alibaba Group

(BABA.N) 85

Figure 140: Margin comparison with global e-commerce peers*

77%

0%

8% 8% 7%

55%53%

69%

0%

18%

10% 9%

25%

3%

28%

11%

4%8%

1% 2% 2%

GPM Fulfilment S&M R&D G&A Adj. OPM Adj. NM

Alibaba eBay Amazon


*FY2014 non-GAAP basis

Figure 141: Revenue comparison with global internet

companies

Figure 142: Margin comparison with global internet

companies

3.1 5.5

8.6

40.0

48.3

58.0

4.3 5.5 8.9

FY2012 FY2013 FY2014

Alibaba Google Facebook

(US$ in billions)

77%

8% 8% 7%

55%53%

61%

11% 9% 8%

33%30%

79%

11% 10%7%

51%

33%

GPM S&M R&D G&A Adj. OPM Adj. NM

Alibaba Google Facebook


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Figure 143: Quarterly financial By Calendar Year 2012 2013 2014E 2015E 2016E 2017E

FY4Q12 FY1Q13 FY2Q13 FY3Q13 FY4Q13 FY1Q14 FY2Q14 FY3Q14 FY4Q14 FY1Q15 FY2Q15E FY3Q15E FY4Q15E FY1Q16E FY2Q16E FY3Q16E FY4Q16E FY1Q17E FY2Q17E FY3Q17E FY4Q17E FY1Q18E FY2Q18E FY3Q18E

(RMB in Bn, year-end March) CY1Q12 CY2Q12 CY3Q12 CY4Q12 CY1Q13 CY2Q13 CY3Q13 CY4Q13 CY1Q14 CY2Q14 CY3Q14E CY4Q14E CY1Q15E CY2Q15E CY3Q15E CY4Q15E CY1Q16E CY2Q16E CY3Q16E CY4Q16E CY1Q17E CY2Q17E CY3Q17E CY4Q17E

Total Revenue 5.1 6.8 7.5 11.6 8.7 10.8 11.0 18.7 12.0 15.8 17.1 28.9 18.3 22.2 24.2 37.7 26.7 29.9 32.0 42.8 32.4 36.3 39.1 52.2 30.9 49.1 73.8 102.3 131.4 159.9

COGS -1.6 -2.1 -2.2 -2.8 -2.2 -2.6 -2.7 -3.9 -3.1 -4.0 -5.5 -8.4 -5.9 -6.7 -7.5 -11.1 -8.4 -8.8 -9.6 -12.4 -10.0 -10.3 -11.3 -14.5 -8.8 -11.3 -20.9 -31.2 -39.2 -46.1

Gross Profit 3.4 4.7 5.2 8.8 6.5 8.2 8.3 14.8 8.9 11.8 11.6 20.5 12.3 15.5 16.7 26.6 18.3 21.1 22.4 30.4 22.3 26.0 27.8 37.7 22.2 37.8 52.9 71.1 92.1 113.8

Operating Expense -2.1 -2.4 -6.3 -3.7 -2.0 -2.8 -3.1 -6.0 -3.5 -4.9 -5.6 -9.1 -5.7 -6.9 -6.9 -10.8 -7.8 -9.1 -8.9 -12.5 -9.3 -10.5 -10.3 -14.5 -14.5 -13.9 -23.0 -30.4 -38.3 -44.8

Sales & Marketing -0.6 -0.8 -0.9 -1.2 -0.5 -0.7 -0.6 -1.9 -1.2 -1.2 -1.2 -2.9 -1.6 -1.6 -1.7 -3.4 -2.1 -2.1 -2.1 -3.6 -2.5 -2.4 -2.3 -4.2 -3.6 -3.6 -6.5 -8.2 -9.9 -11.4

Product development -0.7 -0.7 -0.7 -1.1 -0.8 -0.9 -0.9 -1.5 -0.9 -1.7 -1.9 -2.8 -2.0 -2.3 -2.3 -3.4 -2.7 -3.1 -3.1 -4.3 -3.5 -3.9 -4.0 -5.5 -3.2 -4.1 -7.3 -10.1 -13.2 -16.9

General & administrative -0.5 -0.5 -0.7 -0.9 -0.5 -0.8 -0.6 -1.9 -0.3 -0.8 -1.0 -1.1 -0.6 -1.3 -1.0 -1.3 -0.8 -1.5 -1.2 -1.4 -0.9 -1.8 -1.5 -1.7 -2.6 -3.7 -3.2 -4.2 -4.9 -5.9

Others (TIPLA) 0.0 0.0 -3.5 -0.2 0.0 0.0 -0.1 -0.1 -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -3.8 -0.3 -0.8 -0.9 -0.9 -0.9

Share-based comps -0.2 -0.3 -0.5 -0.3 -0.2 -0.4 -0.9 -0.7 -0.9 -1.1 -1.2 -2.0 -1.3 -1.6 -1.7 -2.5 -1.9 -2.2 -2.3 -2.9 -2.3 -2.2 -2.3 -2.9 -1.3 -2.1 -5.2 -7.0 -9.3 -9.7

EBIT 1.4 2.3 -1.1 5.1 4.5 5.4 5.2 8.8 5.5 6.8 6.1 11.5 6.6 8.6 9.8 15.7 10.6 12.0 13.5 17.9 13.0 15.4 17.5 23.1 7.7 23.9 29.8 40.7 53.9 69.1

Adj. EBIT (ex-SBC) 1.6 2.6 -0.6 5.4 4.7 5.8 6.1 9.5 6.4 7.9 7.3 13.5 7.9 10.1 11.4 18.2 12.5 14.2 15.8 20.8 15.2 17.6 19.8 26.0 8.9 26.1 35.1 47.7 63.2 78.7

Adj. EBIT (ex-SBC & others) 1.6 2.6 2.8 5.5 4.7 5.8 6.2 10.7 6.4 7.9 7.3 13.5 7.9 10.1 11.4 18.2 12.5 14.2 15.8 20.8 15.2 17.6 19.8 26.0 12.6 27.4 35.1 47.7 63.2 78.7

Adj. EBITDA (ex-SBC) 1.8 2.9 -0.4 5.6 4.9 6.1 6.5 10.0 6.9 8.6 8.1 14.4 8.8 11.1 12.6 19.4 13.8 15.6 17.3 22.5 17.0 19.6 21.9 28.2 9.8 27.4 37.9 52.0 69.1 86.8

Adj. EBITDA (ex-SBC & others) 1.8 2.9 3.1 5.8 4.9 6.1 6.5 11.2 6.9 8.6 8.1 14.4 8.8 11.1 12.6 19.4 13.8 15.6 17.3 22.5 17.0 19.6 21.9 28.2 13.5 28.8 37.9 52.0 69.1 86.8

Net Interest Income 0.0 -0.4 -0.4 -0.4 -0.4 -0.6 0.0 0.0 0.0 6.4 3.1 0.0 0.1 0.1 0.1 0.2 0.4 0.4 0.5 0.6 0.7 0.8 0.9 1.0 -1.1 -1.0 9.5 0.5 1.8 3.4

Net Other Income 0.1 0.2 0.3 0.2 0.2 0.2 0.6 1.0 0.6 0.7 0.8 0.5 0.7 0.7 0.7 0.8 0.9 0.8 0.9 0.9 1.1 1.0 1.1 1.1 0.8 2.0 2.6 2.9 3.5 4.2

Pre Tax Profit 1.5 2.2 -1.2 4.9 4.3 5.0 5.9 9.8 6.1 14.0 10.0 11.9 7.4 9.3 10.7 16.7 11.8 13.2 14.8 19.4 14.8 17.2 19.4 25.3 7.3 25.0 42.0 44.1 59.2 76.7

Tax (Expense) / Credit -0.2 -0.3 0.2 -0.7 -0.6 -0.6 -0.8 -1.4 -0.4 -1.4 -1.0 -2.1 -1.2 -1.9 -2.2 -3.6 -2.5 -2.8 -3.2 -4.2 -3.2 -3.7 -4.2 -5.6 -1.1 -3.4 -4.9 -9.0 -12.7 -16.7

Minority interest -0.1 0.1 0.5 0.1 -0.5 0.1 0.1 0.2 0.1 0.2 0.1 1.2 0.7 0.1 0.1 -0.1 0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 0.7 -0.2 1.7 0.8 -0.1 -0.3

Net Profit 1.4 1.7 -1.6 4.0 4.2 4.4 4.9 8.3 5.5 12.3 8.9 8.7 5.5 7.3 8.3 13.2 9.2 10.4 11.7 15.2 11.7 13.6 15.3 19.8 5.6 21.7 35.4 34.3 46.6 60.3

Adj. Net Profit (ex-SBC) 1.6 2.0 -1.1 4.3 4.4 4.8 5.7 8.9 6.5 13.4 10.1 10.7 6.8 8.8 10.0 15.7 11.1 12.6 14.0 18.1 13.9 15.8 17.6 22.7 6.9 23.9 40.7 41.3 55.9 70.0

Adj. Net Profit (ex-SBC & others) 1.8 2.0 2.4 4.9 4.6 4.6 5.9 10.5 6.6 7.3 6.8 10.9 7.1 9.1 10.2 16.0 11.4 12.9 14.3 18.4 14.2 16.0 17.9 22.9 11.1 25.5 31.7 42.4 56.9 71.0

Diluted EPS (RMB) 0.54 0.66 -0.60 1.56 1.62 1.69 1.88 3.18 2.13 4.75 3.41 3.30 2.10 2.75 3.12 4.93 3.43 3.86 4.31 5.58 4.26 4.92 5.52 7.11 2.15 8.36 13.59 12.90 17.17 21.82

Adj. Diluted EPS (RMB, ex-SBC & others) 0.69 0.78 0.92 1.89 1.76 1.76 2.28 4.03 2.55 2.82 2.60 4.16 2.69 3.43 3.84 5.96 4.23 4.77 5.25 6.73 5.18 5.81 6.45 8.25 4.27 9.83 12.13 15.92 20.98 25.68

Margins (%)

Gross Margin 67.6 69.5 70.1 75.7 74.5 76.1 75.8 79.2 74.3 74.7 68.0 71.0 67.5 70.0 69.0 70.5 68.5 70.5 70.0 71.0 69.0 71.7 71.2 72.2 71.6 76.9 71.6 69.5 70.1 71.2

Adj. Operating Margin (ex-SBC) 31.1 38.6 -8.6 46.2 53.9 54.0 55.8 50.5 53.0 50.2 42.5 46.7 43.2 45.7 47.3 48.3 46.6 47.5 49.3 48.6 47.1 48.7 50.7 49.9 28.8 53.0 47.5 46.6 48.1 49.2

Adj. Operating Margin (ex-SBC & others) 31.1 38.6 38.1 47.7 53.9 54.0 56.2 57.2 53.0 50.2 42.5 46.7 43.2 45.7 47.3 48.3 46.6 47.5 49.3 48.6 47.1 48.7 50.7 49.9 40.6 55.7 47.5 46.6 48.1 49.2

Adj. EBITDA Margin (ex-SBC) 35.4 42.0 -5.6 48.3 56.6 56.5 59.0 53.2 57.2 54.4 47.1 49.7 48.3 50.2 51.9 51.6 51.5 52.2 54.1 52.5 52.7 54.0 55.9 54.1 31.8 55.8 51.3 50.8 52.6 54.3

Adj. EBITDA Margin (ex-SBC & others) 35.4 42.0 41.2 49.8 56.6 56.5 59.4 60.0 57.2 54.4 47.1 49.7 48.3 50.2 51.9 51.6 51.5 52.2 54.1 52.5 52.7 54.0 55.9 54.1 43.6 58.5 51.3 50.8 52.6 54.3

Net Margin 27.4 25.3 -20.9 34.9 48.4 40.7 44.6 44.1 46.1 78.3 52.1 29.9 30.3 32.8 34.4 35.1 34.5 34.9 36.6 35.6 36.1 37.4 39.1 37.9 18.1 44.2 48.0 33.6 35.4 37.7

Adj. Net Margin (ex-SBC) 31.7 29.5 -14.7 37.4 51.0 44.4 52.5 47.6 53.8 85.1 59.1 36.9 37.4 39.8 41.2 41.7 41.6 42.3 43.8 42.4 43.1 43.5 45.0 43.5 22.2 48.6 55.1 40.4 42.5 43.8

Adj. Net Margin (ex-SBC & others) 35.2 29.8 31.9 42.3 52.6 42.5 54.1 55.8 55.2 46.4 39.7 37.8 38.8 40.9 42.3 42.4 42.6 43.1 44.5 43.0 43.9 44.2 45.6 44.0 35.9 51.9 42.9 41.4 43.3 44.4

Sequential Growth (%)

Revenue 33.6 9.8 55.5 -25.2 24.3 1.6 71.2 -35.8 31.1 8.3 69.3 -36.8 21.4 9.0 55.7 -29.0 11.8 7.1 33.7 -24.3 12.0 7.9 33.4 107.0 58.9 50.2 38.6 28.4 21.7

Gross Profit 37.2 10.7 67.9 -26.3 26.9 1.2 78.8 -39.8 31.8 -1.4 76.8 -39.9 25.8 7.5 59.1 -31.1 15.0 6.4 35.6 -26.5 16.4 7.1 35.3 110.7 70.7 39.8 34.5 29.6 23.6

EBIT 72.6 -147.2 -557.5 -12.0 21.7 -3.2 67.7 -38.1 25.6 -11.4 89.3 -42.5 30.0 14.2 60.4 -32.8 13.5 12.5 32.7 -27.4 18.9 13.4 32.1 109.5 212.4 24.8 36.3 32.4 28.2

Net Profit 23.8 n.m. n.m. 3.8 4.5 11.4 69.3 -32.9 122.7 -27.9 -2.7 -36.0 31.4 14.3 58.8 -30.2 13.1 12.2 30.1 -23.2 16.0 12.8 29.3 97.3 288.2 63.1 -3.1 35.6 29.5

Adj. Net Profit (ex-SBC) 23.8 n.m. n.m. 3.8 4.5 11.4 69.3 -32.9 122.7 -27.9 -2.7 -36.0 31.4 14.3 58.8 -30.2 13.1 12.2 30.1 -23.2 16.0 12.8 29.3 77.0 248.4 70.3 1.7 35.2 25.3

Adj. Net Profit (ex-SBC & others) 24.2 n.m. n.m. 1.9 8.1 20.2 55.3 -27.5 107.4 -24.7 5.7 -35.9 29.1 12.9 57.6 -29.2 13.6 10.9 29.4 -23.1 13.1 11.7 28.9 138.0 130.0 24.0 33.8 34.3 24.8

Diluted EPS 23.8 n.m. n.m. 3.8 4.5 11.4 69.3 -32.9 122.7 -28.3 -3.2 -36.3 30.7 13.7 58.0 -30.5 12.5 11.7 29.5 -23.6 15.4 12.3 28.7 62.5 -5.1 33.1 27.1

Adj. Diluted EPS 13.0 17.8 105.8 -7.0 0.4 29.3 76.8 -36.6 10.2 -7.8 60.4 -35.4 27.4 12.0 55.4 -29.1 12.7 10.1 28.3 -23.1 12.3 10.9 27.9 23.5 31.2 31.8 22.4

2013 2014E 2015E 2016E 2017E2012

Source: Company data, Credit Suisse estimates on calendar year basis

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Figure 144: Quarterly financial By Fiscal Year 2012 2013 2014 2015E 2016E 2017E

FY1Q12 FY2Q12 FY3Q12 FY4Q12 FY1Q13 FY2Q13 FY3Q13 FY4Q13 FY1Q14 FY2Q14 FY3Q14 FY4Q14 FY1Q15 FY2Q15E FY3Q15E FY4Q15E FY1Q16E FY2Q16E FY3Q16E FY4Q16E FY1Q17E FY2Q17E FY3Q17E FY4Q17E

(RMB in Bn, year-end March) CY2Q11 CY3Q11 CY4Q11 CY1Q12 CY2Q12 CY3Q12 CY4Q12 CY1Q13 CY2Q13 CY3Q13 CY4Q13 CY1Q14 CY2Q14 CY3Q14E CY4Q14E CY1Q15E CY2Q15E CY3Q15E CY4Q15E CY1Q16E CY2Q16E CY3Q16E CY4Q16E CY1Q17E 0.3767

Total Revenue 4.1 4.4 6.5 5.1 6.8 7.5 11.6 8.7 10.8 11.0 18.7 12.0 15.8 17.1 28.9 18.3 22.2 24.2 37.7 26.7 29.9 32.0 42.8 32.4 20.0 34.5 52.5 80.1 110.8 137.0

COGS -1.2 -1.3 -1.9 -1.6 -2.1 -2.2 -2.8 -2.2 -2.6 -2.7 -3.9 -3.1 -4.0 -5.5 -8.4 -5.9 -6.7 -7.5 -11.1 -8.4 -8.8 -9.6 -12.4 -10.0 -6.1 -9.3 -12.2 -23.8 -33.7 -40.8

Gross Profit 2.9 3.0 4.6 3.4 4.7 5.2 8.8 6.5 8.2 8.3 14.8 8.9 11.8 11.6 20.5 12.3 15.5 16.7 26.6 18.3 21.1 22.4 30.4 22.3 14.0 25.2 40.3 56.3 77.1 96.2

Operating Expense -2.0 -2.2 -2.6 -2.1 -2.4 -6.3 -3.7 -2.0 -2.8 -3.1 -6.0 -3.5 -4.9 -5.6 -9.1 -5.7 -6.9 -6.9 -10.8 -7.8 -9.1 -8.9 -12.5 -9.3 -8.9 -14.4 -15.4 -25.3 -32.4 -39.8

Sales & Marketing -0.6 -0.8 -0.9 -0.6 -0.8 -0.9 -1.2 -0.5 -0.7 -0.6 -1.9 -1.2 -1.2 -1.2 -2.9 -1.6 -1.6 -1.7 -3.4 -2.1 -2.1 -2.1 -3.6 -2.5 -3.0 -3.5 -4.3 -6.9 -8.8 -10.3

Product development -0.5 -0.6 -0.7 -0.7 -0.7 -0.7 -1.1 -0.8 -0.9 -0.9 -1.5 -0.9 -1.7 -1.9 -2.8 -2.0 -2.3 -2.3 -3.4 -2.7 -3.1 -3.1 -4.3 -3.5 -2.6 -3.3 -4.3 -8.4 -10.8 -13.9

General & administrative -0.4 -0.5 -0.5 -0.5 -0.5 -0.7 -0.9 -0.5 -0.8 -0.6 -1.9 -0.3 -0.8 -1.0 -1.1 -0.6 -1.3 -1.0 -1.3 -0.8 -1.5 -1.2 -1.4 -0.9 -1.9 -2.6 -3.5 -3.5 -4.4 -5.0

Others (TIPLA) 0.0 0.0 -0.2 0.0 0.0 -3.5 -0.2 0.0 0.0 -0.1 -0.1 -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.3 -3.8 -0.4 -0.9 -0.9 -0.9

Share-based comps -0.5 -0.3 -0.3 -0.2 -0.3 -0.5 -0.3 -0.2 -0.4 -0.9 -0.7 -0.9 -1.1 -1.2 -2.0 -1.3 -1.6 -1.7 -2.5 -1.9 -2.2 -2.3 -2.9 -2.3 -1.3 -1.3 -2.8 -5.6 -7.6 -9.7

EBIT 0.9 0.8 2.0 1.4 2.3 -1.1 5.1 4.5 5.4 5.2 8.8 5.5 6.8 6.1 11.5 6.6 8.6 9.8 15.7 10.6 12.0 13.5 17.9 13.0 5.0 10.8 24.9 31.0 44.6 56.3

Adj. EBIT (ex-SBC) 1.3 1.1 2.2 1.6 2.6 -0.6 5.4 4.7 5.8 6.1 9.5 6.4 7.9 7.3 13.5 7.9 10.1 11.4 18.2 12.5 14.2 15.8 20.8 15.2 6.3 12.0 27.8 36.6 52.2 66.0

Adj. EBIT (ex-SBC & others) 1.3 1.1 2.4 1.6 2.6 2.8 5.5 4.7 5.8 6.2 10.7 6.4 7.9 7.3 13.5 7.9 10.1 11.4 18.2 12.5 14.2 15.8 20.8 15.2 6.4 15.7 29.1 36.6 52.2 66.0

Adj. EBITDA (ex-SBC) 1.5 1.4 2.4 1.8 2.9 -0.4 5.6 4.9 6.1 6.5 10.0 6.9 8.6 8.1 14.4 8.8 11.1 12.6 19.4 13.8 15.6 17.3 22.5 17.0 7.1 12.9 29.4 39.8 56.9 72.4

Adj. EBITDA (ex-SBC & others) 1.5 1.4 2.6 1.8 2.9 3.1 5.8 4.9 6.1 6.5 11.2 6.9 8.6 8.1 14.4 8.8 11.1 12.6 19.4 13.8 15.6 17.3 22.5 17.0 7.3 16.6 30.7 39.8 56.9 72.4

Net Interest Income 0.0 0.0 0.0 0.0 -0.4 -0.4 -0.4 -0.4 -0.6 0.0 0.0 0.0 6.4 3.1 0.0 0.1 0.1 0.1 0.2 0.4 0.4 0.5 0.6 0.7 0.2 -1.5 -0.5 9.6 0.8 2.1

Net Other Income 0.1 0.1 0.1 0.1 0.2 0.3 0.2 0.2 0.2 0.6 1.0 0.6 0.7 0.8 0.5 0.7 0.7 0.7 0.8 0.9 0.8 0.9 0.9 1.1 0.3 0.9 2.4 2.8 3.1 3.7

Pre Tax Profit 1.0 0.9 2.1 1.5 2.2 -1.2 4.9 4.3 5.0 5.9 9.8 6.1 14.0 10.0 11.9 7.4 9.3 10.7 16.7 11.8 13.2 14.8 19.4 14.8 5.5 10.1 26.8 43.3 48.5 62.2

Tax (Expense) / Credit -0.2 -0.1 -0.3 -0.2 -0.3 0.2 -0.7 -0.6 -0.6 -0.8 -1.4 -0.4 -1.4 -1.0 -2.1 -1.2 -1.9 -2.2 -3.6 -2.5 -2.8 -3.2 -4.2 -3.2 -0.8 -1.5 -3.2 -5.7 -10.2 -13.4

Minority interest 0.1 0.2 0.3 -0.1 0.1 0.5 0.1 -0.5 0.1 0.1 0.2 0.1 0.2 0.1 1.2 0.7 0.1 0.1 -0.1 0.1 -0.1 -0.1 -0.1 -0.1 0.5 0.3 0.5 2.2 0.3 -0.3

Net Profit 0.8 0.6 1.5 1.4 1.7 -1.6 4.0 4.2 4.4 4.9 8.3 5.5 12.3 8.9 8.7 5.5 7.3 8.3 13.2 9.2 10.4 11.7 15.2 11.7 4.2 8.4 23.1 35.4 38.0 49.0

Adj. Net Profit (ex-SBC) 1.2 0.9 1.8 1.6 2.0 -1.1 4.3 4.4 4.8 5.7 8.9 6.5 13.4 10.1 10.7 6.8 8.8 10.0 15.7 11.1 12.6 14.0 18.1 13.9 5.5 9.7 25.9 41.0 45.6 58.7

Adj. Net Profit (ex-SBC & others) 1.3 1.0 2.4 1.8 2.0 2.4 4.9 4.6 4.6 5.9 10.5 6.6 7.3 6.8 10.9 7.1 9.1 10.2 16.0 11.4 12.9 14.3 18.4 14.2 6.5 13.9 27.6 32.1 46.6 59.7

Diluted EPS (RMB) 0.30 0.22 0.58 0.54 0.66 -0.60 1.56 1.62 1.69 1.88 3.18 2.13 4.75 3.41 3.30 2.10 2.75 3.12 4.93 3.43 3.86 4.31 5.58 4.26 1.63 3.23 8.88 13.56 14.23 18.00

Adj. Diluted EPS (RMB, ex-SBC & others) 0.52 0.37 0.91 0.69 0.78 0.92 1.89 1.76 1.76 2.28 4.03 2.55 2.82 2.60 4.16 2.69 3.43 3.84 5.96 4.23 4.77 5.25 6.73 5.18 2.48 5.34 10.63 12.27 17.46 21.92

Margins (%)

Gross Margin 71.2 69.7 70.3 67.6 69.5 70.1 75.7 74.5 76.1 75.8 79.2 74.3 74.7 68.0 71.0 67.5 70.0 69.0 70.5 68.5 70.5 70.0 71.0 69.0 69.7 72.9 76.7 70.3 69.6 70.2

Adj. Operating Margin (ex-SBC) 32.7 25.9 34.2 31.1 38.6 -8.6 46.2 53.9 54.0 55.8 50.5 53.0 50.2 42.5 46.7 43.2 45.7 47.3 48.3 46.6 47.5 49.3 48.6 47.1 31.3 34.8 52.9 45.7 47.2 48.1

Adj. Operating Margin (ex-SBC & others) 32.7 25.9 36.3 31.1 38.6 38.1 47.7 53.9 54.0 56.2 57.2 53.0 50.2 42.5 46.7 43.2 45.7 47.3 48.3 46.6 47.5 49.3 48.6 47.1 32.0 45.4 55.4 45.7 47.2 48.1

Adj. EBITDA Margin (ex-SBC) 37.7 31.1 37.7 35.4 42.0 -5.6 48.3 56.6 56.5 59.0 53.2 57.2 54.4 47.1 49.7 48.3 50.2 51.9 51.6 51.5 52.2 54.1 52.5 52.7 35.7 37.5 56.0 49.7 51.4 52.8

Adj. EBITDA Margin (ex-SBC & others) 37.7 31.1 39.7 35.4 42.0 41.2 49.8 56.6 56.5 59.4 60.0 57.2 54.4 47.1 49.7 48.3 50.2 51.9 51.6 51.5 52.2 54.1 52.5 52.7 36.3 48.1 58.5 49.7 51.4 52.8

Net Margin 18.9 12.9 23.2 27.4 25.3 -20.9 34.9 48.4 40.7 44.6 44.1 46.1 78.3 52.1 29.9 30.3 32.8 34.4 35.1 34.5 34.9 36.6 35.6 36.1 21.1 24.3 44.0 44.3 34.3 35.8

Adj. Net Margin (ex-SBC) 30.0 20.1 27.2 31.7 29.5 -14.7 37.4 51.0 44.4 52.5 47.6 53.8 85.1 59.1 36.9 37.4 39.8 41.2 41.7 41.6 42.3 43.8 42.4 43.1 27.4 28.0 49.4 51.2 41.2 42.8

Adj. Net Margin (ex-SBC & others) 32.9 22.1 36.3 35.2 29.8 31.9 42.3 52.6 42.5 54.1 55.8 55.2 46.4 39.7 37.8 38.8 40.9 42.3 42.4 42.6 43.1 44.5 43.0 43.9 32.2 40.2 52.6 40.1 42.1 43.6

Sequential Growth (%)

Revenue 6.1 49.0 -21.6 33.6 9.8 55.5 -25.2 24.3 1.6 71.2 -35.8 31.1 8.3 69.3 -36.8 21.4 9.0 55.7 -29.0 11.8 7.1 33.7 -24.3 72.4 52.1 52.5 38.3 23.7

Gross Profit 3.7 50.4 -24.6 37.2 10.7 67.9 -26.3 26.9 1.2 78.8 -39.8 31.8 -1.4 76.8 -39.9 25.8 7.5 59.1 -31.1 15.0 6.4 35.6 -26.5 80.5 60.0 39.7 37.0 24.8

EBIT -7.9 140.0 -30.5 72.6 -147.2 -557.5 -12.0 21.7 -3.2 67.7 -38.1 25.6 -11.4 89.3 -42.5 30.0 14.2 60.4 -32.8 13.5 12.5 32.7 -27.4 114.4 131.8 24.4 44.0 26.2

Net Profit -27.7 168.2 -7.4 23.8 n.m. n.m. 3.8 4.5 11.4 69.3 -32.9 122.7 -27.9 -2.7 -36.0 31.4 14.3 58.8 -30.2 13.1 12.2 30.1 -23.2 98.8 174.6 53.5 7.3 29.0

Adj. Net Profit (ex-SBC) -27.7 168.2 -7.4 23.8 n.m. n.m. 3.8 4.5 11.4 69.3 -32.9 122.7 -27.9 -2.7 -36.0 31.4 14.3 58.8 -30.2 13.1 12.2 30.1 -23.2 76.3 168.2 58.3 11.2 28.7

Adj. Net Profit (ex-SBC & others) -29.1 101.9 -8.7 24.2 n.m. n.m. 1.9 8.1 20.2 55.3 -27.5 107.4 -24.7 5.7 -35.9 29.1 12.9 57.6 -29.2 13.6 10.9 29.4 -23.1 115.0 99.0 16.3 45.2 28.0

Diluted EPS -27.7 168.2 -7.4 23.8 n.m. n.m. 3.8 4.5 11.4 69.3 -32.9 122.7 -28.3 -3.2 -36.3 30.7 13.7 58.0 -30.5 12.5 11.7 29.5 -23.6 52.6 5.0 26.5

Adj. Diluted EPS -28.6 144.2 -23.9 13.0 17.8 105.8 -7.0 0.4 29.3 76.8 -36.6 10.2 -7.8 60.4 -35.4 27.4 12.0 55.4 -29.1 12.7 10.1 28.3 -23.1 15.5 42.3 25.6

2017E2015E 2016E2013 20142012

Source: Company data, Credit Suisse estimates on fiscal year basis

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Companies Mentioned (Price as of 27-Oct-2014)

21 Vianet Group Inc (VNET.OQ, $19.05) 58.com Inc. (WUBA.N, $37.23) Ali Health (0241.HK, HK$4.57) Ali Pictures (1060.HK, HK$1.61) Alibaba Group Holding Limited (BABA.N, $97.79, OUTPERFORM[V], TP $114.0) Amazon com Inc. (AMZN.OQ, $289.97) AutoNavi (AMAP.OQ, $20.9) Baidu Inc (BIDU.OQ, $219.92) China Mobile Limited (0941.HK, HK$88.95) China Telecom (0728.HK, HK$4.65) China Unicom Hong Kong Ltd (0762.HK, HK$11.16) Costco Wholesale Corporation (COST.OQ, $130.92) Ctrip.com International (CTRP.OQ, $55.49) Evergrande Real Estate Group Ltd (3333.HK, HK$2.94) Expedia (EXPE.OQ, $80.38) Facebook Inc. (FB.OQ, $80.28) Fosun International Ltd (0656.HK, HK$8.86) Global Logistic Properties (GLPL.SI, S$2.73) Google, Inc. (GOOGL.OQ, $549.88) Groupon Inc. (GRPN.OQ, $5.93) Grubhub Inc. (GRUB.N, $36.47) Haier Electronics Group Co., Ltd. (1169.HK, HK$20.05) Hisense Electric Co., Ltd (600060.SS, Rmb11.01) HomeAway Inc. (AWAY.OQ, $34.24) Hundsun Technologies Inc (600570.SS, Rmb39.89) International Business Machines Corp. (IBM.N, $161.87) Intime Retail Group Co Ltd (1833.HK, HK$6.54) JD.com, Inc. (JD.OQ, $24.13) Kingsoft Corporation Limited (3888.HK, HK$16.9) MercadoLibre Inc. (MELI.OQ, $109.73) Microsoft Corporation (MSFT.OQ, $45.91) Midea Group (000333.SZ, Rmb19.56) Oracle Corporation (ORCL.N, $38.43) Orbitz Worldwide, Inc. (OWW.N, $8.28) Priceline.com (PCLN.OQ, $1134.26) Qunar (QUNR.OQ, $27.56) Rakuten (4755.T, ¥1,178) Shanda Games Limited (GAME.OQ, $6.5) Sina Corporation (SINA.OQ, $39.08) Softbank (9984.T, ¥7,422) TCL Corporation (000100.SZ, Rmb2.98) Tencent Holdings (0700.HK, HK$118.1) Vipshop Holdings Limited (VIPS.N, $210.66) Weibo Corporation (WB.OQ, $17.95) Yahoo Japan (4689.T, ¥402) Youku Tudou Inc. (YOKU.N, $18.41) eBay Inc. (EBAY.OQ, $51.19)

Disclosure Appendix

Important Global Disclosures

I, Dick Wei, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are b ased on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst w ithin the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attra ctiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10 -

29 October 2014

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(BABA.N) 89

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15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 45% (53% banking clients)

Neutral/Hold* 39% (51% banking clients)

Underperform/Sell* 13% (44% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings o f Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Alibaba Group Holding Limited (BABA.N)

Method: We use DCF valuation as the key valuation methodology, as we see DCF captures the longer-term growth opportunities of Alibaba. We assume mid-teens growth rate from 2020- 2025, WACC of 11% and 3% terminal growth rate. Our base-case DCF valuation yields a target price of US$107 of its core business. By considering the potential upside from Ant Financial Services Company (US$17.5Bn), we arrive at our final target price of US$114 for the whole Alibaba business.

Risk: Risks that could impede achievement of our US$114 target price for Alibaba Group Holding Limited include: (1) Macro slowdown; (2) Slower-than-expected category expansion (medical, O2O local services) due to execution or competition; (3) Slower mobile traffic growth and monetization; and (4) Higher-than-expected investments in business initiatives.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (BABA.N, 0700.HK, GOOGL.OQ, VIPS.N, FB.OQ, AMZN.OQ, EBAY.OQ, PCLN.OQ, WB.OQ, YOKU.N, 3333.HK, SINA.OQ, 4689.T, 9984.T, 3888.HK, 0728.HK, MSFT.OQ, IBM.N, ORCL.N, WUBA.N, 0656.HK, GRPN.OQ, MELI.OQ, OWW.N, AWAY.OQ, COST.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (BABA.N, 0700.HK, GOOGL.OQ, FB.OQ, AMZN.OQ, EBAY.OQ, WB.OQ, 3333.HK, SINA.OQ, 4689.T, 9984.T, 3888.HK, MSFT.OQ, IBM.N, ORCL.N, WUBA.N, 0656.HK, GRPN.OQ, OWW.N) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (BABA.N, 0700.HK, MSFT.OQ, IBM.N, OWW.N) within the past 12 months

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Credit Suisse has managed or co-managed a public offering of securities for the subject company (BABA.N, 0700.HK, GOOGL.OQ, FB.OQ, EBAY.OQ, 3333.HK, SINA.OQ, 9984.T, 3888.HK, WUBA.N, 0656.HK, OWW.N) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (BABA.N, 0700.HK, GOOGL.OQ, FB.OQ, AMZN.OQ, EBAY.OQ, WB.OQ, 3333.HK, SINA.OQ, 4689.T, 9984.T, 3888.HK, MSFT.OQ, IBM.N, ORCL.N, WUBA.N, 0656.HK, GRPN.OQ, OWW.N) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (BABA.N, 0700.HK, BIDU.OQ, GOOGL.OQ, VIPS.N, 4755.T, FB.OQ, AMZN.OQ, EBAY.OQ, PCLN.OQ, WB.OQ, YOKU.N, 3333.HK, 1169.HK, SINA.OQ, 4689.T, 9984.T, 3888.HK, GAME.OQ, 0762.HK, 0728.HK, VNET.OQ, 000333.SZ, MSFT.OQ, IBM.N, ORCL.N, WUBA.N, 0656.HK, GRPN.OQ, GRUB.N, MELI.OQ, OWW.N, AWAY.OQ, COST.OQ) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (BABA.N, 0700.HK, MSFT.OQ, IBM.N, OWW.N) within the past 12 months

As of the date of this report, Credit Suisse makes a market in the following subject companies (BABA.N, BIDU.OQ, GOOGL.OQ, CTRP.OQ, VIPS.N, FB.OQ, AMZN.OQ, EBAY.OQ, PCLN.OQ, WB.OQ, YOKU.N, JD.OQ, SINA.OQ, GAME.OQ, VNET.OQ, MSFT.OQ, IBM.N, ORCL.N, WUBA.N, GRPN.OQ, GRUB.N, EXPE.OQ, MELI.OQ, OWW.N, AWAY.OQ, COST.OQ).

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (1833.HK, 3888.HK, 0728.HK, EXPE.OQ).

Credit Suisse has a material conflict of interest with the subject company (FB.OQ) . Credit Suisse has been named as a defendant in various putative shareholder class-action lawsuits relating to Facebook, Inc.’s May 2012 initial public offering. Credit Suisse’s practice is not to comment in research reports on pending litigations to which it is a party. Nothing in this report should be construed as an opinion on the merits or potential outcome of the lawsuits.

Credit Suisse has a material conflict of interest with the subject company (SINA.OQ) . Credit Suisse is acting as financial advisor to E-House's wholly-owned subsidiary - CRIC Holdings Limited in its merger with SINA Corporation's online real estate business.

Credit Suisse has a material conflict of interest with the subject company (9984.T) . .

As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (ORCL.N). As of the date of this report, an analyst involved in the preparation of this report, Sitikantha Panigrahi, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in call options of Oracle Corporation (ORCL.N).

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Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (BABA.N, 0700.HK, BIDU.OQ, GOOGL.OQ, CTRP.OQ, VIPS.N, 4755.T, FB.OQ, AMZN.OQ, EBAY.OQ, PCLN.OQ, WB.OQ, YOKU.N, 600570.SS, 3333.HK, JD.OQ, 1833.HK, 1169.HK, SINA.OQ, 4689.T, 9984.T, 3888.HK, GAME.OQ, 0762.HK, 0941.HK, 0728.HK, VNET.OQ, 000100.SZ, 600060.SS, 000333.SZ, MSFT.OQ, IBM.N, ORCL.N, ORCL.N, WUBA.N, 0656.HK, GRPN.OQ, GRUB.N, EXPE.OQ, MELI.OQ, OWW.N, AWAY.OQ, COST.OQ, GLPL.SI) within the past 12 months

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Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (BABA.N, 0700.HK, GOOGL.OQ, FB.OQ, EBAY.OQ, YOKU.N, 3333.HK, SINA.OQ, 9984.T, 3888.HK, MSFT.OQ, IBM.N, WUBA.N, 0656.HK, GRPN.OQ, OWW.N) within the past 3 years.

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NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse (Hong Kong) Limited .................................................................................................................... Dick Wei ; Evan Zhou ; Jialong Shi

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