london business school - economist

The Economist and Real Vision

Investment Case Study London Business School

Eric Wen, Kay Tu and Daniel Shun 11-9-2015

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Table of Contents 1. Executive Summary ...................................................................................................................................... 2

2. Similarities: Amazon vs. Walmart in retail .................................................................................................. 3

3. Walmart – a slowly pivoting giant ............................................................................................................... 5

3.1 Groceries are facing intense competitions ......................................................................................... 5

3.1.1 A battle on two-fronts ......................................................................................................................... 6

3.1.2 Shifting consumer trends .................................................................................................................... 7

3.1.3 Price wars ............................................................................................................................................. 8

3.2 Market pressure .................................................................................................................................. 8

3.3 Lack of precedence .............................................................................................................................. 9

3.4 Valuation .............................................................................................................................................. 9

4. Amazon - more than retail......................................................................................................................... 10

4.1 Prime – establishing long-term customer buy-in ............................................................................. 10

4.2 AWS – high growth, high margins, and high potential ..................................................................... 11

4.3 FBA and third-party sellers ................................................................................................................ 12

4.4 Advertising ......................................................................................................................................... 13

4.5 Understand their market and capable of meeting future customer needs .................................... 13

4.6 Amazon’s accounting profit vs. cash profit ...................................................................................... 14

4.7 Trading comparables ......................................................................................................................... 15

5. Recommendation ....................................................................................................................................... 15

5.1 Our position ....................................................................................................................................... 15

Appendices ......................................................................................................................................................... 17

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1. Executive Summary

As giants in the retail business both internationally and within the U.S, Walmart and

Amazon have significant influence in the way the world shops. With over 2.2 million employees,

11,000 stores globally and over US$400bn in net sales, Walmart brings over 4.2 million different

products to over 100 million users per week. Amazon on the other hand has only a fraction of the

employees, no physical stores and yet supplies over a 185 million different products to over 240

million customers across 185 countries.

Though both companies have enjoyed incredible success over last 10 years, there is a

polarizing view of the firms today in the market. Walmart, which is first on the Fortune 500 list

for revenue, was surpassed in market capitalization as the biggest retailer in the world by Amazon,

which has a market capitalization of US$304bn.

In order to assess which company’s stock to select and hold for a decade, we focused our

analysis by first reviewing similarities between the two firms within the retail industry. This like-

for-like comparison compares overlapping retail performance between the two firms and

highlights the differences in performance. We analyse key differences between the two firms, most

notably Walmart’s dominance in the grocery industry and Amazon’s rising status in the cloud

computing space and greater level of diversification.

Our analysis shows that despite Walmart’s strong financials today, fundamental shifts in

the consumer market expected over the next 10 years would favor a nimble, innovative, technology

driven retailer such as Amazon. As such, we have identified Amazon as our preferred stock and

would structure our investment as pure equity and hold for 10 years.

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2. Similarities: Amazon vs. Walmart in retail

Amazon and Walmart are both retail giants – Amazon is the largest online retailer globally

by market capitalization while Walmart is the largest retailer in the world by revenue. Both

Amazon and Walmart’s primary operation is the sale of a wide breadth of products to customers.

Both companies are going through a period of significant change – with core operations

having achieved operational maturity (i.e. online retailing for Amazon and physical retailing for

Walmart), both companies are now seeking additional growth drivers in the e-commerce platform.

Whilst a substantial portion of Amazon’s growth is through its Amazon Web Service (“AWS”), a

virtual cloud-computing platform that offers virtual storage to enterprises, Walmart is trying to

grow its online retailing experience. Table 1 below summarizes the main similarities between

Amazon and Walmart.

Table 1: Amazon and Walmart comparison

Amazon Walmart

Market capitalization

(Nov 6th 2015)

US$309.9bn US$235.0bn

Last 12 months

revenue

US$100.6bn US$485.6bn

Operating industry Online retailing In-store retailing, expanding into

online retailing

Position Largest online retailer globally Largest retailer globally

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Geographical focus Mainly North America and other

developed countries with presence

in 185 countries

Largest market share in North

America, significant presence in

other international countries such

as China. Currently operates in 22

countries

Key revenue source Electronics and general

merchandises

Grocery and general home

appliances

Business model Entire business platform is

ecommerce; no physical stores

Traditionally a ‘brick-and-mortar’

model; early stage in developing

its ecommerce platform for online

grocery and retailing

Growth driver Cloud service, Amazon Web

Services, a virtual storage for

enterprises

ecommerce platform for online

retailing and online grocery

shopping

Source: Bloomberg, CapitalIQ, The Street

Despite seeking similar growth drivers in the ecommerce space, investors are not providing

equal recognition in the companies’ growth potentials and operational roll-out. Table 2 below

outlines the past year’s share price performance for Amazon and Walmart, rebasing to the S&P

500 index. From the chart, Amazon’s share price has increased by 111% whilst Walmart’s share

has decreased by 26%, the drivers of the share price movement are explained in sections 3 and 4

below.

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Table 2: Share price overview

Source: CapitalIQ

3. Walmart – a slowly pivoting giant

3.1 Groceries are facing intense competitions .

The grocery retail industry, despite having high barriers of entry (e.g. high cost and low

margins), is highly competitive. The homogenous nature of the goods retailers sell (e.g. whole-

wheat bread is virtually the same in Safeway as they are at Walmart) increases the threat of

substitution within the industry. Given that the majority (55%) of Walmart’s sales come from the

grocery space, maintaining market share is key to Walmart’s fundamental profitability but this will

be challenged by several key trends discussed below.

50

70

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230

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5

Re

base

d t

o 1

00

Amazon share price Walmart share price S&P 500

+111%

(26%)

+3%

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3.1.1 A battle on two-fronts

Walmart has traditionally maintained low-price on products through optimized supply

chains. This worked historically as evident by past growth rates (UK CAGR 13.5% 2012-151).

However, over the next 10 years the grocery industry will likely experience dramatic shifts that

can already be anticipated.

1. The rise of discount retailers such as Aldi and Lidl has reduced Walmart’s market share (in

the UK, Aldi and Lidl have a combined 18% increase in market share over 2008 to 2015

while ASDA, Walmart’s grocery subsidiary, reduced by 3.5%2)

2. Effects of erosion on the bottom end is further compounded by growth of high end retailers.

UK retailers such as Waitrose, that focus on customer service, have steadily grown (CAGR

6.43% 2013-20153)

1 WMT 2015 Annual Report 2 UBS 3 WMT 2015 Annual Report

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Walmart’s position as a diversified retailer is losing market share as the market is polarized

in two segments. Price sensitive consumers opting for pure discount players and premium

consumers focused on service and quality opting for retailers such as Waitrose.

Though the U.S grocery market is slightly more robust with Walmart commanding a 25%

market share, the same shifts in competitive landscape experienced by similar leaders in the UK

(e.g. Tesco), could be replicated in the U.S. Aldi, which currently operates 1,400 stores in the U.S

is expanding to 2,000 by 2018. This pressure in the bottom end of the market is similarly

compounded in the US at the top end by retailers such as Whole Foods.

3.1.2 Shifting consumer trends

Walmart’s dominance as a grocery leader is further challenged by changes in consumer

trends where bulk orders are being moved from physical stores to online grocery shopping. This

is evident by the growth rates in density populated areas (UK CAGR of 9.15% in 2007-12).

While online orders for grocery is still a fairly nascent technology in the U.S., both Amazon

and Walmart are anticipating shifts toward online orders using various delivery methods (Amazon

is testing home delivery whereas Walmart is testing an order and pick-up model). Amazon, which

was an early adopter of online retail, has invested heavily in the supply chain technology to fulfill

online orders (demonstrated by their success in the retail sector). Given that Walmart is lagging

behind in the e-commerce establishment, Walmart is at a significant disadvantage while attempting

to compete toe-to-toe with Amazon in their field of expertise. Given Walmart’s sheer size and its

traditional brick-and-mortar grocery store experience, we believe Walmart could struggle to adopt

the e-commerce platform at a required pace to deliver a successful online experience. Given this

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trend towards online shopping and the high costs associated with running large supercentres (78%

of all U.S stores), the erosion of market share will have detrimental effects on performance.

3.1.3 Price wars

Lastly, increased competition for market share has created an all-out price war amongst

retailers. In the UK, CPI has dipped below 0% with retailers, including incumbent leaders such as

Tesco, experiencing massive losses (operating margins went from 5% 2013-14 to 1.1% in 2014-

15, Tesco annual report). Such fierce competition is likely to continue and will further reduce

Walmart’s global operating margins and profits.

While Walmart is being proactive in investing to increase same-store sales (e.g. increasing

wages and introducing department managers) in order to enhance customer service, the

fundamentals of the grocery retail industry are changing. This change is likely to compound over

the next 10 years where shifts in consumer trends and increased competition will further erode

Walmart’s existing stronghold in this area.

3.2 Market pressure

As a response to declining share prices, Walmart is attempting to regain investor

confidence by reducing capital expenditure (from US$12.4bn to 11bn), promising dividend

increases, committing to US$20bn share buybacks over the next two years and focusing on

international operations. While such strategies may prove effective in the short-term, the effects

of such high investor expectations often reduces a firm’s ability to cope with a changing

competitive landscape. That is, short-term investment pressure can often hinder long-term

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strategies. For a company as diverse and as large as Walmart, a turn-around will entail a lengthy

assessment. While the company is addressing some changing fundamentals (e.g. investing in their

e-commerce sector), the expectations of maintaining a healthy earnings per share combined with

plans of turn-arounds creates often conflicting strategies which are further compounded by the

complexity and size of Walmart’s operations. In the e-commerce example, branding challenges

especially in emerging markets where leap-frogging due to technology is more likely (e.g. markets

move directly into online retailing as opposed to moving from supercentres and then to online),

make it challenging for a retail giant, known for its large stores to be marketed as an online retailer.

3.3 Lack of precedence

A review of past firms that once dominated the retail space but eventually fell in to

obscurity shows that large complicated firms are rarely able to execute successful large scale new

strategy implementations. Firms such as Sears, K-Mart and Woolworths were all once leaders in

their respective sectors but were all unable to shift their business model at the required pace in the

face of fast changing fundamentals and increased competition.

Walmart was one of the firms that eroded the market shares of incumbents such as K-Mart

by leveraging new technology (e.g. optimizing supply chain through the use of big data). The irony

today is that the use of technology by Amazon is dethroning Walmart as the king of retail.

3.4 Valuation

Table 3 in the appendices shows how Walmart is traded amongst its peers both regionally

(North America) and globally. Based on the market average trading multiples, Walmart is expected

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to continue trading below market average both regionally (North America) and globally in the next

five years. This could imply market’s “wait-and-see” mindset towards Walmart’s several

initiatives, such as its heavy investments in the ecommerce space and online grocery shopping,

with uncertainties surrounding (1) logistics of program roll-out, (2) ability to adapt in the fast-

changing retail landscape given Walmart’s sheer size, and (3) typically profit-challenging online

grocery shopping space.

Furthermore, it is unclear how the shift to ecommerce would cannibalize existing physical

store’s sales, and how Walmart’s ‘Best Price Everyday’ principal would affect its grocery margins.

Table 5 in the Appendices outline the market consensus for Walmart’s forecasted financials for

the next five years. Based on the intense pricing competition on grocery and uncertainty surrounds

e-commerce establish, we view a double digit growth in revenue as relatively aggressive.

4. Amazon - more than retail

Amazon is the largest online retailer globally. However, beyond the main retail portion of

Amazon lies Prime, AWS, Fulfilled by Amazon (“FBA”), and advertising. These all bring

additional revenue as well as diversification from retailing, further explaining why Amazon is the

preferred stock.

4.1 Prime – establishing long-term customer buy-in

A key to Amazon’s unprecedented success in the e-commerce retailing space is its creative

ability to gain customer buy-in. To illustrate, Amazon’s Prime platform provides, for an annual

subscription fee, membership benefits of free 2-day delivery of certain items bought on Amazon

as well as special sales exclusive to Prime customers (such as on Prime Day celebrating Amazon’s

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20th anniversary which outsold Amazon’s Black Friday sales). It also bundles together Amazon’s

television streaming service, which has the additional benefit of increasing switching costs to not

only alternate ecommerce businesses, but also other streaming services. The television streaming

service has also begun to create unique original content, which has had a promising start (being

recognised with a Golden Globe for Prime has attracted and maintained new customers, hence has

been an extremely successful strategy.

Prime provides substantial growth in both international and US markets. It has required

significant capital expenditure which is expected to continue in the near future as the expansion

continues. This has assisted in achieving Amazon’s strong growth in key international markets,

particularly India, where it has also become the number one player. Given the growing Indian

middle class, this has substantial potential in the medium to long-term. The Prime platform further

assists Amazon in being geographically diversified and hence reduces its reliance on any single

market.

4.2 AWS – high growth, high margins, and high potential

At its core, AWS is a pay-as-you-go cloud-computing platform offering storage and

compute resources. It is the leading provider on size, and is multiples larger than its competitors.

Given the cloud computing market rewards significant economies of scale, AWS has distinct

advantage in this market going forward and is ahead in its experience curve. AWS has experienced

accelerated growth in the recent past and is forecast to continue into the future. To demonstrate,

AWS is expected to generate US$10bn in annual revenue in its 10th year; making it one of the

fastest growing companies in history.

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AWS currently enjoys a practical monopoly on the start-up market and is benefiting from

the transition of established larger firms moving to the cloud. This trend is expected to continue,

further growing the size of the market.

AWS experiences substantially higher operating margins than the retail portion of Amazon

given its low fixed costs. The cloud computing market is currently struggling to keep up with

demand, which implies these margins should be maintained in the future. In addition, AWS is

transitioning to position itself to service the premium (and higher margin) end of the cloud market

as indicated by their recent product offerings (such as QuickSight, a Big Data intelligence solution).

Price diversification in the market is another reason to suggest that margins going forward should

be maintained for the medium term.

4.3 FBA and third-party sellers

Roughly 40% of sales on Amazon are from third-party sellers, which Amazon gain revenue

from taking a fee for providing the service. On top of this revenue though, Amazon also earns from

the FBA service, which takes care of all the inventory and delivery issues once merchandise is

sold. Items covered by FBA are included as items that can be delivered under Prime, which has

benefits to all parties involved. Prime customers are better off through the increase in the products

offered covered under Prime, which in turn increases the value of the Prime brand. The sellers also

benefit from an increase in sales (on average 20%). This mutually beneficial scenario further locks

sellers and buyers into the Amazon and Prime environment providing Amazon with not only

revenue through the service fees but also customer loyalty.

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4.4 Advertising

Annual revenue for advertising by Amazon is estimated at US$1bn. Furthermore, the

information collected by Amazon contains not only what items customers are searching for, but

also which items are being converted into sales. This has vast potential for personalised

advertisement. Currently the utilisation of this information is not yet fulfilled (due to concerns that

it may turn customers away). If the environment changes to allow for this though, Amazon is well

situated to maximise its potential, given that it controls both the data and a platform to distributed

targeted advertisement.

Another way in which they leverage their data though, is by nudging multiple products

based on single purchases, which is derived from the data they attain from sales. This bundling

allows them to reduce their shipping costs (by packaging together) as well as increasing their

revenue. This is much more reactive, in real time, and effective online than in bricks-and-mortar

stores.

4.5 Understand their market and capable of meeting future customer needs

Amazon has a track record of adapting to the future trends of the market, from their initial

ecommerce model to more recently the shift towards cloud computing. Walmart on the other hand

has a business model that until quite recently has been unchanged since its inception. Currently

Walmart are scrambling to catch-up with Amazon, reactively investing extremely heavily in the

space as it struggles to compete with Amazon. Walmart is increasing capital expenditure for online

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to US$2bn over the next 2 years4, a clear sign of the shift in focus. Amazon are ahead of the curve

at testing and predicting the trends for the future.

4.6 Amazon’s accounting profit vs. cash profit

Since going public in 1997, Amazon has enjoyed double digit growth in revenue and gross profit

(exceeded 20% in almost all years). However, Amazon has reported disproportionally small net

income (margin ranged from 0% to 4%) and in some years net loss in the past 18 years. This is

due to the non-cash operating expenses that are reported under GAAP such as stock based

compensation and amortization of intangible assets. On actual basis and business operational basis,

Amazon is profit generative, as demonstrated by the significant increase in year-on-year cash

position (Table 5) in the appendices.

Apart from Amazon’s unrivalled growth prospect and market position in its ecommerce platform,

we also place emphasis on Amazon’s ability to generate profit. Amazon’s non-GAAP financials

(as in accordance with market analysts’ consensus) indicate the company’s capabilities to generate

profit and is able to secure the necessary resource and funding to drive its intended growth strategy.

For dividends, we believe it is within market standards to withhold dividend payout during the

high-growth phase that Amazon is currently in.

4 http://blogs.wsj.com/cio/2015/10/14/Walmart-to-pour-2-billion-into-e-commerce-over-next-two-years/

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4.7 Trading comparables

Table 6 in the appendices outlines Amazon’s trading comparables. Amazon is trading at a premium

to other global ecommerce giants, demonstrating market and investors’ confidence in Amazon’s

ability to monetize the AWS growth opportunity discussed in section 4 above.

5. Recommendation

5.1 Our position

We recommend that Amazon is the stock to hold.

While we acknowledge the exceptional performance of Walmart in the past, we believe

that there has been a fundamental shift the retailing space that Amazon is better positioned in the

medium to long-term to maximum value from. Over the next 10 years this trend will only become

more exacerbated, which will be reflected in the stock prices of both companies.

Walmart’s position should worsen as either its margin, its market share, or both are

diminished in the groceries space, and their additional capital expenditure to grow online affects

their profits. Given their perception by the market as having stable, guaranteed dividends, any

difficult to meet these demands will further drive down their shares.

Amazon on the other hand is the dominate player in growth markets and a proven history

of pre-empting market trends. For this reason, as well as its diversified sources of income (all of

which have exceptional upside potential), we believe Amazon is better positioned to benefit from

the continued trend away from bricks-and-mortar stores.

We would structure our investment as pure equity that provides significant upside potential

compared to other hybrid instruments such as preferred equity (dividend play with some downside

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protection) or convertible / traditional debt with conservative fixed cash flow but limited upside

benefits.

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Appendices

Table [3]: Walmart trading comparables

Source: Bloomberg (as at November 6th 2015)

EV / EBITDA P/E ratio

2016F 2017F 2018F 2019F 2020F 2016F 2017F 2018F 2019F 2020F

North America

Walmart 188.45 235.00 6.85x 7.23x 7.15x 6.72x 6.33x 13.04x 14.18x 13.19x 12.03x 11.09x

Costco 68.91 68.88 13.51x 12.31x 11.33x 10.44x 9.62x 27.92x 25.33x 22.80x 20.13x 18.14x

Target 48.53 58.51 7.90x 7.62x 7.40x 7.18x 6.84x 16.37x 14.96x 13.64x 12.66x 11.47x

Dollar General 19.98 22.67 9.82x 5.94x 8.15x 7.41x 6.70x 17.25x 14.96x 13.01x 11.33x 10.53x

Dollar Tree 15.95 23.00 13.50x 9.53x 8.40x 7.86x 7.01x 24.47x 17.60x 14.09x 12.48x 9.67x

Dollarama 8.81 9.10 21.87x 19.92x 17.85x n.a n.a 32.64x 28.62x 24.51x n.a n.a

Average 12.24x 10.43x 10.05x 7.92x 7.30x 21.95x 19.28x 16.87x 13.73x 12.18x

Median 11.66x 8.58x 8.28x 7.41x 6.84x 20.86x 16.28x 13.87x 12.48x 11.09x

Western Europe

Tesco 22.42 37.98 10.08x 9.12x 8.52x 7.49x 7.87x 29.03x 19.46x 14.87x 10.95x 10.39x

Metro 10.02 16.19 5.74x 5.51x 4.88x 4.64x n.a 15.63x 13.77x 11.87x 10.21x n.a

Sainsbury 7.95 9.86 5.35x 5.36x 5.24x 5.18x 4.86x 12.71x 12.71x 12.15x 11.07x 9.50x

Morrison 5.93 9.03 7.63x 7.22x 7.04x 6.75x 6.44x 17.56x 14.79x 13.49x 10.88x 11.96x



Australiasia

Wesfarmers 30.96 34.44 9.53x 8.85x 8.18x 7.67x 7.22x 17.23x 15.89x 14.43x 13.29x 12.55x

Lotte shopping 6.38 17.01 8.97x 8.57x 8.15x 7.67x n.a 11.09x 10.11x 8.80x 9.61x n.a

Don Quijote 5.80 6.57 14.17x 12.98x 11.91x n.a n.a 26.71x 23.99x 22.02x 21.59x n.a

Average 10.89x 10.13x 9.41x 7.67x 0.00x 18.34x 16.66x 15.08x 14.83x n.m

Median 9.53x 8.85x 8.18x 7.67x n.m 17.23x 15.89x 14.43x 13.29x n.m

Latin America

Walmart de Mexico* 47.81 47.68 15.51x 14.30x 12.88x 11.63x n.a 28.02x 25.50x 23.05x 21.39x n.a

Global average 10.75x 9.60x 9.08x 7.55x 6.99x 20.69x 17.99x 15.85x 13.66x 11.70x

Global median 9.53x 8.57x 8.15x 7.41x 6.84x 17.25x 14.96x 13.64x 11.68x 11.09x

Market cap

(US$ bn)

EV (US$

bn)Companies

18

Table [4]: Walmart financials

Source: Bloomberg, UBS

US$ m 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F

INCOME STATEMENT

Revenue 421,849 446,950 469,162 476,294 485,651 446,503 451,593 462,980 477,526 491,257

Growth YoY % 3.3% 9.5% 14.9% 16.7% 19.0% 9.4% 10.6% 13.4% 17.0% 20.3%

Gross profit 106,562 111,823 116,674 118,225 120,565 108,286 109,231 111,972 115,418 119,375

Margin % 25.3% 25.0% 24.9% 24.8% 24.8% 24.3% 24.2% 24.2% 24.2% 24.3%

EBITDA 33,183 34,872 36,338 36,752 36,570 31,301 29,635 29,701 31,622 33,576

Margin % 7.9% 7.8% 7.7% 7.7% 7.5% 7.0% 6.6% 6.4% 6.6% 6.8%

Net income 14,921 15,808 17,022 16,535 16,240 13,372 11,786 11,924 12,719 13,441

Margin % 3.5% 3.5% 3.6% 3.5% 3.3% 3.0% 2.6% 2.6% 2.7% 2.7%

SNAPSHOT

EPS 4.06 4.55 5.03 5.05 5.04 4.15 3.82 4.03 4.42 4.79

Dividend yield 2.16% 2.38% 2.27% 2.52% 2.26% 3.34% 3.46% 3.51% 3.74% 3.96%

Share price 56.07 61.36 69.95 74.68 84.98 - - - - -

Net debt / EBITDA 1.28 1.35 1.28 1.38 1.14 1.21 1.38 1.47 1.29 1.28

Capex (12,699) (17,058) (13,214) (13,115) (12,174) 11,113 10,266 9,911 9,611 10,611

Return on equity 23.58% 22.45% 23.02% 21.00% 20.76% 17.6 15.40% 16.20% 16.60% 17.10%

Return on capital 15.73% 14.35% 14.57% 13.35% 13.68% 13.60% 11.80% 12.00% 12.30% 12.80%

BALANCE SHEET

Assets

Cash & cash equivalent 7,395 6,550 7,781 7,281 9,135

Inventories 36,318 40,714 43,803 44,858 45,141

Other short term assets 8,180 7,711 8,356 9,046 9,002

Total current assets 51,893 54,975 59,940 61,185 63,278

PPE 107,878 112,324 116,681 117,907 116,655

Other long-term assets 20,892 26,107 26,484 25,659 23,773

Total non-current assets 128,770 138,431 143,165 143,566 140,428

Total assets 180,663 193,406 203,105 204,751 203,706

Liabilities

Short term debt 6,022 6,348 12,719 12,082 6,689

Other short term liabilities 52,462 55,952 59,099 57,263 58,583

Total current liabilities 58,484 62,300 71,818 69,345 65,272

Long-term debt 43,842 47,079 41,417 44,559 43,692

Other long-term liabilities 7,090 8,266 8,132 9,508 8,805

Total non-current liabilities 50,932 55,345 49,549 54,067 52,497

Total liabilities 109,416 117,645 121,367 123,412 117,769

Shareholders' equity

Share capital 3,929 4,034 3,952 2,685 2,785

Retained earnings 63,967 68,691 72,978 76,566 85,777

Other equity 3,351 3,036 4,808 2,088 (2,625)

Total equity 71,247 75,761 81,738 81,339 85,937

Total liabilities & SE 180,663 193,406 203,105 204,751 203,706

CASH FLOW STATEMENT

Operating activities

Net income 16,389 15,699 16,999 16,022 16,363

Depreciation 7,641 8,130 8,501 8,870 9,173

Change in WC (1,695) (1,777) (1,060) (2,823) 2,295

Others 1,308 2,203 1,151 1,188 733

Total 23,643 24,255 25,591 23,257 28,564

Investing activities

Acquisition & divestment - (3,548) (316) (15) 671

Others (12,193) (13,061) (12,295) (12,283) (11,796)

Total (12,193) (16,609) (12,611) (12,298) (11,125)

Financing activities

Dividend (4,437) (5,048) (5,361) (6,139) (6,185)

Cash (repurchase) of equity (14,776) (6,298) (7,600) (6,683) (1,015)

Cash (repayment) of debt 7,456 3,130 1,487 3,015 (5,018)

Others (271) (242) (498) (1,210) (2,853)

Total (12,028) (8,458) (11,972) (11,017) (15,071)

Net change in cash (512) (845) 1,231 (500) 1,854

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Table [5]: Amazon trading comparables

Source: Bloomberg

EV / EBITDA P/E ratio

2015F 2016F 2017F 2018F 2019F 2015F* 2016F* 2017F 2018F 2019F

Amazon 309,088 304,020 28.70x 22.61x 15.92x 11.94x 9.22x 132.91x 73.45x 45.48x 35.83x 25.19x

Alibaba 207,010 199,331 43.56x 25.48x 20.16x n.a n.a 66.66x 31.76x 24.46x n.a n.a

eBay 35,299 37,437 10.77x 10.25x 9.12x 8.78x 8.65x 16.09x 14.80x 13.29x 12.46x 12.80x

Vishop 12,347 11,802 31.91x 20.11x n.a n.a n.a 37.43x 25.49x n.a n.a n.a

Mercadolibre 5,241 5,197 28.17x 24.76x 20.69x 16.04x 13.62x 48.68x 39.86x 32.33x 24.96x 20.53x



* Excluding outlier of Amazon

CompaniesMarket cap

(US$ bn)EV (US$ bn)

20

Table [6]: Amazon financials

Source: Bloomberg, CapitalIQ, Deutsche Bank equity research report (Nov 2 2015), Amazon FY2014 annual report

US$ m FY2011 FY2012 FY2013 FY2014 FY2015F FY2016F FY2017F FY2018F FY2019F

INCOME STATEMENT

Revenue 48,077 61,093 74,452 88,988 107,036 129,163 155,808 179,973 206,080

YoY growth % 40.6% 27.1% 21.9% 19.5% 20.3% 20.7% 20.6% 15.5% 14.5%

Gross Profit 10,789 15,122 20,271 26,236 35,648 44,765 57,191 67,285 78,640

Margin % 22.4% 24.8% 27.2% 29.5% 33.3% 34.7% 36.7% 37.4% 38.2%

EBITDA* 1,709 2,508 3,547 4,365 10,663 13,432 19,093 25,468 32,986

Margin % 3.6% 4.1% 4.8% 4.9% 10.0% 10.4% 12.3% 14.2% 16.0%

Net income (as reported) 631 (39) 274 (241)

Margin % 1.3% -0.1% 0.4% -0.3%

Net income (adjusted)* 1,152 1,044 1,228 1,063 2,378 4,565 7,095 9,538 12,579

Margin % 2.4% 1.7% 1.6% 1.2% 2.2% 3.5% 4.6% 5.3% 6.1%

* Actuals are as reported, forecasted are adjusted

BALANCE SHEET

Assets

Cash & cash equivalent 5,269 8,084 8,658 14,557

Inventories 4,992 6,031 7,411 8,299

Other short term assets 7,229 7,181 8,556 8,471

Total current assets 17,490 21,296 24,625 31,327

Net PPE 4,417 7,060 10,949 16,967

Other long-term assets 3,371 4,199 4,585 6,211

Total non-current assets 7,788 11,259 15,534 23,178

Total assets 25,278 32,555 40,159 54,505

Liabilities

Short term debt / capital lease 129 579 753 3,600

Other short term liabilities 14,767 18,423 22,227 24,489

Total current liabilities 14,896 19,002 22,980 28,089

Long-term debt / capital lease 1,415 3,830 5,181 12,489

Other long-term liabilities 1,210 1,531 2,252 3,186

Total non-current liabilities 2,625 5,361 7,433 15,675

Total liabilities 17,521 24,363 30,413 43,764

Shareholders' equity

Share capital 6,995 8,352 9,578 11,140

Retained earnings 1,955 1,916 2,190 1,949

Other equity (1,193) (2,076) (2,022) (2,348)

Total equity 7,757 8,192 9,746 10,741

Total liabilities & SE 25,278 32,555 40,159 54,505

CASH FLOW STATEMENT

Operating activities

Net income 631 (39) 274 (241)

Depreciation & amortization 847 1,832 2,802 4,187

Change in WC 2,131 1,209 1,042 720

Stock based compensation 557 833 1,134 1,497

Other amortisation 236 327 451 559

Others (499) 18 (228) 120

Total 3,903 4,180 5,475 6,842

Investing activities

Capex (1,811) (3,785) (3,444) (4,893)

Cash acquisitions (705) (745) (312) (979)

Others 586 935 (520) 807

Total (1,930) (3,595) (4,276) (5,065)

Financing activities

Dividend - - - -

Cash (repurchase) of equity (277) (960) - -

Cash (repayment) of debt (444) (588) (1,011) (1,933)

Issuance of debt 177 3,378 394 6,359

Others 62 429 78 6

Total (482) 2,259 (539) 4,432

Net change in cash 1,492 2,815 574 5,899

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