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Alibaba (BABA US) Summary Report

Core Content

This report provides an analysis of Alibaba's financial performance and outlook for the fiscal year ending in 2018 (FY4Q18) and the fiscal year 2019 (FY19E). It highlights the company's strong results, revenue guidance, and valuation analysis, along with key business segments and financial metrics.

Main Points

FY4Q18 Results

• Revenue: Increased by 61% YoY to RMB51bn, beating the consensus by 5%.
• Non-GAAP Net Profit: Increased by 1% YoY, with a slight beat against expectations.
• Gross and Operating Profits: Decreased by 7% and 10% YoY respectively due to margin pressure from New Retail initiatives and seasonality in China retail.
• Key Drivers:
  • Core e-commerce business (including Intime, Hema, and Tmall Import).
  • Cloud computing.
  • Cainiao Network consolidation.

FY19E Guidance

• Revenue Growth: Expected to grow over 60% YoY, significantly above the consensus of 39.8%.
• Excluding Consolidations: Revenue growth is expected to be over 50%.
• Investment Focus: Continued investment in core e-commerce, New Retail, and content/technology.
• Growth Catalysts:
  • Expanded TAM from online to offline retail.
  • Algorithm improvements to balance merchant ROI and monetization.
  • New Retail initiatives driving top-line growth and online traffic.

Financial Forecasts

• Revised Revenue Forecasts: Increased by 18% for FY19E and 30% for FY20E.
• Non-GAAP Net Profit: Revised down by 3% for FY19E and up by 6% for FY20E.
• Non-GAAP Net Margin: Expected to be 26% for FY19E and 27% for FY20E.
• Target Price (TP): Raised to US$262, implying 42x FY19E non-GAAP earnings.

Key Business Highlights

Core E-commerce

• Revenue Growth: 62% YoY to RMB51bn.
• Non-GAAP EBITA Margin: 43%, down from previous quarter.
• Customer Management Revenue: Grew by 35% YoY.
• Commission Revenue: Increased by 39% YoY, driven by Tmall physical goods GMV.
• Annual Active Buyers: Increased to 552mn from 515mn.
• Mobile MAU: Increased sequentially to 617mn from 580mn.

Cloud Computing

• Revenue Growth: 103% YoY, driven by paying users and service offerings.
• Adjusted EBITA Margin: Dropped to -8% from -5% in the previous quarter.
• Projected Break-even: Expected to achieve quarterly breakeven in the next few quarters.

Digital Media and Entertainment

• Revenue Growth: 34% YoY to RMB5.3bn.
• Adjusted EBITA Margin: -49%, down from -41% in the previous quarter, due to increased investment in original content.

Financial Metrics

Valuation Analysis

• Target Price (TP): US$262, based on SOTP with the following multiples:
  • Core Commerce: 20x FY19E EV/EBITDA.
  • Cloud: 6.5x FY19E EV/sales.
  • Digital Media and Entertainment: 3.5x FY19E EV/sales.
  • Innovation Initiatives and Others: 4.2x FY19E EV/sales.
  • Equity Investees: 9% of total valuation.
  • Net Cash: 3% of total valuation.
• Current P/E: 30.3x FY19E.
• Valuation Components:
  • Core Commerce: 80% of total valuation, valued at RMB3,486bn.
  • Cloud: 4%, valued at RMB157bn.
  • Digital Media and Entertainment: 2%, valued at RMB84bn.
  • Innovation Initiatives and Others: 0.5%, valued at RMB17bn.
  • Equity Investees: 9%, valued at RMB49bn.

Risks

• Cloud Computing Deceleration: Potential slowdown in growth.
• Intensifying Competition: In China and ASEAN e-commerce markets.
• Monetization Challenges: Weaker-than-expected monetization from core commerce's user base.
• Investment Pressures: Aggressive spending on content and new initiatives may affect gross margin.

Conclusion

Alibaba continues to demonstrate strong revenue growth and strategic expansion into new markets. Despite margin pressures from New Retail initiatives and increased investments, the company is expected to maintain its growth trajectory. The report recommends a BUY rating with a revised target price of US$262, reflecting confidence in its long-term growth potential.