Alibaba IPO

Summary

• China’s e-retail market is the fastest growing market globally and valued at $294 billion in 2013

• The Chinese market is characterized with huge marketplaces and not independent merchants - Alibaba is one of the largest with a user growth of 45% from 2012 – 2013 and has a transaction volume that is twice that of Amazon, growing at a faster pace

• In addition, the net profit margin is 24.34% in 2013 which is 11x that of Amazon that validates a premium valuation of $230 billion + (1x GMV)

• Underserviced Tier 3 and Tier 4 cities in China are a huge opportunity for e-retailing

China etail market

• China has the highest number of broadband connections with a penetration rate of only 30%

• Increase of disposable income in tier -3 and Tier-4 cities will lead to increase in China’s etail sector

• China’s e-retail market grew from $120 billion in 2011 to $294 billion in 2013

• This is a growth of 145% in 2 years

Source: Economist, 2013

Alibaba and China

• China’s market place is dominated by Alibaba as of 2013

• China is dominated by huge online marketplaces as compared to the US

Users

• Alibaba has more active users as compared to Amazon given the size of the Chinese population and its penetration rate in China

• Alibaba owes its massive scale to the sheer size of the Chinese market, home to more than 600 million Internet users

• Despite decrease in user growth rate in the last year , Alibaba still maintains the highest growth rate amongst its peers

Users (million)

2010 2011 Growth 2012 Growth 2013 Growth

Amazon 130 164 26.1% 200 22% 237 18.5%

Ebay 94.5 100.4 6.24% 123.5 23% 140.3 13.6%

Alibaba 61.80 76.3 23.4% 160 110% 231 44.4%

Source: Company reports, Internet Retailer

Gross Merchandise Value (GMV)GMV (Billion USD)

2010 2011 2012 2013 2014 Mkt Cap (Billion USD)

Amazon 51.29 79.42 108.72 140.62 TBD 149.17

Ebay 61.82 68.63 67.76 76.5 TBD 61.91

Alibaba 106.724 173.289 269.87

• Amazon has grown its GMV (includes its products and also 3rd party products) by 29.34% from 2012 – 2013.

• Ebay has grown its GMV by 12.89% in the same period• Also, Alibaba has grown its GMV by 55.73% from 2013 - 2013

• In 2013, the combined transaction volume of its consumer shopping sites in China reached $248 billion, according to its IPO filing last month. That is triple the size of eBay and more than double the size of Amazon.

Source: Company reports, Internet Retailer

Commissions

Commissions

Amazon 10%

Ebay 9% Paypal charges an additional 3%

Alibaba 3.5%

• Alibaba will charge the least commission for its “11 Main Street” shop

• Alibaba’s strategy is to be in the volume trade and also give local small business to sell to a larger audience

Source: Company reports, Internet Retailer

Mobile GMV penetration

• Ebay and Alibaba have shown a 12% increase of mobile GMV from 2012 – 2013

• Amazon needs to catch up in this segment that is growing everyday

Mobile GMV (%) 2012 2013

Amazon 6.5%

Ebay 17% 29%

Alibaba 7.4% 19.7%

Source: Company reports, Internet Retailer

Differences

• Amazon sells its products and also provides a marketplace for third party products. Whereas, Alibaba only provides an efficient marketplace for sellers and buyers

• Alibaba doesn't actually handle or ship the goods itself, it just provides the platform for a shop and customers deal with the brands directly while Amazon handles logistics that is a cost centre

Key Valuation Items

• Amazon trades at 2 times Price /Sales and eBay trades at 4 times Price /Sales

• Assuming Alibaba’s valuation estimates of $230 billion , Alibaba is priced at around 27 times sales – which is a premium

Alibaba NA 62.12 27.3 46.65 NA 44.43

Alibaba’s price based on a mkt consensus valuation estimate of $230 billion Amazon and eBay numbers are TTM

Alibaba’s numbers are yearly, Ratios calculated on 2014 yearly numbers

Profitability trends

• Alibaba’s Gross Profit Margin was 2X that of Amazon in 2013

• EBIT Margin of Alibaba was 2X that of Ebay in 2013

• This indicates a sustainable growth model in the near term and higher retained earnings in future

Profitability trends

• Net Profit Margin of Alibaba was 11X that of Amazon in 2013

• Alibaba’s FCF margins also score highly over Amazon (12x) and Ebay (2.5x)

• This indicates an efficient operating business and a premium market valuation to this peer as indicated earlier

Growth rates

• Amazon had an inflection point in 2013 resulting in positive earnings growth

• Alibaba consistently shows better revenue growth YOY as compared to Amazon and Ebay