OVERVIEW
Alibaba Group Holdings Ltd (NYSE:BABA) is the largest online and mobile commerce company in the world in terms of gross merchandise volume in 2013, according to the IDC GMV (Gross Merchandise Value) Report. BABA accounts for about 80 percent of all online retail sales in China.
BABA operates its marketplaces as a platform for third parties, and does not engage in direct sales, compete with merchants or hold inventory.
Based in Hong Kong, China, Alibaba (BABA) filed for a $20.2 billion IPOs Friday, September 5, 2014, with a market cap of $155 billion, at a price range mid-point of $63. BABA is scheduled to IPO Friday, September 19, 2014.
Price range raised to $66-68.
Manager, co-managers: Credit Suisse; Deutsche; Goldman; J.P. Morgan; Morgan Stanley; Citi
Joint managers: BOCI, CICC, CLSA, DBS Bank, HSBC, Mizuho, Pacific Crest, RBC, Stifel, Wells Fargo, BNP PARIBAS, Evercore, Raymond James, SunTrust Robinson Humphrey. SEC Documents
Rate of growth June '14 quarter vs June '13 quarter
- +46% revenue
- +26% operating income
- +60% adjusted net income
- +74% free cash flow
ONLINE SHOPPING, 36% CAGR (compound annual growth rate)
Overall, online shopping, which represented 8.0% of total China consumption in 2013, is projected to grow at a compound annual growth rate, or CAGR, of 36.1% from 2013 to 2016
VALUATION (Glossary)
|
Valuation Ratios |
Mrkt Cap ($mm) |
Price /Sls |
Price /Erngs |
Price /BkVlue |
Price /TanBV |
% offered in IPO |
| Annualizing June qtr | ||||||
| Alibaba (BABA)* |
$155,295 |
15.3 |
32.9 |
9.2 |
13.3 |
13% |
| *Adj net income | ||||||
|
Compare & contrast |
||||||
|
Valuation Ratios |
Mrkt Cap ($mm) |
Price /Sls |
Price /Erngs |
Price /BkVlue |
Price /TanBV |
|
| Annualizing June qtr | ||||||
| Alibaba (BABA)* |
$155,295 |
15.3 |
32.9 |
9.2 |
13.3 |
|
| Tencent ((OTCMKTS:TCTZF) |
$150,000 |
11.7 |
37.7 |
13.1 |
n/a |
|
| Baidu (NASDAQ:BIDU) |
$79,500 |
10.2 |
34.5 |
1.8 |
3.3 |
|
| JD.com (JD)* |
$42,020 |
0.5 |
-95.5 |
7.1 |
9.5 |
|
| *March qtr | ||||||
| . | . | June qtr comparisons, 2014 vs 2013 | ||||
| . | . |
BABA |
Tencent |
Baidu |
||
| Rev | . |
+46% |
+37% |
+59% |
||
| Gross Profit % of rev | . |
62% |
71% |
62% |
||
| Operating margin | . |
43% |
40% |
30% |
||
| Profit increase | . |
+60% |
+59% |
34% |
||
CONCLUSION
At a $155 billion market cap ($63 per share) BABA is a recommended buy.
BABA has very good growth metrics, see below, and is priced competitively with Tencent, see 'Valuation' below.
60% of the IPO is allocated to selling shareholders.
One ADR is equivalent to one share.
To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.
BUSINESS
BABA is the largest online and mobile commerce company in the world in terms of gross merchandise volume in 2013, according to the IDC GMV (Gross Merchandise Value) Report.
BABA operates its marketplaces as a platform for third parties, and does not engage in direct sales, compete with merchants or hold inventory.
CHINA MARKETPLACES comprises 85% of revenue
BABA operates Taobao Marketplace, China’s largest online shopping destination, Tmall, China’s largest third-party platform for brands and retailers, in each case in terms of gross merchandise volume, and Juhuasuan, China’s most popular group buying marketplace by its monthly active users, in each case in 2013 according to iResearch.
These three marketplaces, which comprise BABA's China retail marketplaces, generated a combined GMV of RMB1,833 billion (US$296 billion) from 279 million active buyers and 8.5 million active sellers in the twelve months ended June 30, 2014.
In addition to the three China retail marketplaces, BABA operates Alibaba.com, China’s largest global wholesale marketplace in 2013 by revenue, according to iResearch, 1688.com, the China wholesale marketplace, and AliExpress, the global consumer marketplace, and as well provides cloud computing services.
Revenue from commissions & fees
BABA's revenue is primarily generated from merchants through online marketing services (via Alimama, BABA's proprietary online marketing platform), commissions on transactions and fees for online services.
BABA does not allocate revenue among each of its China retail marketplaces.
Marketing customers are typically brand owners, distributors and merchants who are sellers on BABA's marketplaces. Marketing customers do not have long-term marketing commitments.
The price a merchant is willing to pay for online marketing services generally depends on its expected GMV, profit margins and lifetime value of customers derived from such marketing investment.
Third-party Platform Business Model
BABA's exclusively third-party platform business model allows us to scale rapidly without the risks and capital requirements of sourcing, merchandising and holding inventory borne by direct sales companies. This business model drives our profitability and strong cash flow, which give BABA the flexibility to further invest in and improve the platform, expand the ecosystem and aggressively invest in people, technology, innovative products and strategically important assets.
MARKET OPPORTUNITY
BABA's market opportunity is primarily driven by the following factors:
China’s real consumption in 2013 was 35.8% of total GDP, which is a rate that is significantly lower than that of other countries, such as the United States, which had a consumption penetration rate of 67.1% in 2013, according to Euromonitor International. BABA believes that growth in consumption will drive higher levels of online and mobile commerce.
Note: BABA has 279 million active buyers, or 92% of China's online shoppers.
China’s online shopping population is relatively underpenetrated. According to CNNIC, China had the world’s largest Internet population with 618 million users as of December 31, 2013. According to CNNIC, China had 302 million online shoppers in 2013.
BABA believes the number of online shoppers will increase, driven by continued growth in the number of Internet users as well as by the higher percentage of Internet users making purchases online.
Note: BABA had 188 million monthly average mobile users in June '14, or 38% of the mobile market of 500 million mobile users, but those users accounted for 87% of total mobile retail gross merchandise volume.
China has the world’s largest mobile Internet user base with 500 million users as of December 31, 2013, according to CNNIC, and mobile usage is expected to increase, driven by the growing adoption of mobile devices. (UPDATE with users)
Mobile Leadership -- BABA is the leader in mobile commerce in China in terms of mobile retail GMV (gross merchandise value) with mobile GMV transacted on BABA's China retail marketplaces accounting for 87.2% of total mobile retail GMV in China in the three months ended March 31, 2014, according to iResearch. Our Mobile Taobao App has been the most popular mobile commerce app in China by mobile MAUs every month since August 2012, according to iResearch. We had 188 million mobile MAUs on our China retail marketplaces in June 2014.
ONLINE SHOPPING, 36% CAGR (compound annual growth rate)
Overall, online shopping, which represented 8.0% of total China consumption in 2013, is projected to grow at a compound annual growth rate, or CAGR, of 36.1% from 2013 to 2016, according to iResearch, as more consumers shop online and e-commerce spending per consumer increases.
SHIPPING
BABA takes a platform approach to shipping and delivery by working with third-party logistics service providers through a central logistics information system operated by Zhejiang Cainiao Supply Chain Management Co., Ltd., or China Smart Logistics, our 48%-owned affiliate. Through BABA's acquisition of UCWeb, BABA is able to leverage its expertise as a developer and operator of mobile web browsers to enhance mobile offerings beyond e-commerce, such as general mobile search, which gives access to UCWeb’s large base of mobile users and offers the existing user base additional mobile solutions.
BABA's Ecosystem
Buyers
• Chinese consumers buy on Taobao Marketplace, Tmall and Juhuasuan
• While browsing or searching on Taobao Marketplace, consumers see product listings from both Taobao Marketplace and Tmall
• Global consumers buy on AliExpress
• Global wholesalers buy on Alibaba.com
Retail sellers
• Small sellers in China sell on Taobao Marketplace and AliExpress
• Chinese brands sell on Taobao Marketplace, Tmall, Juhuasuan and AliExpress and global brands sell on Tmall Global
• Sellers source products on 1688.com
Wholesale sellers
• Chinese wholesalers and manufacturers supply retail merchants in China on 1688.com and global wholesale buyers on Alibaba.com
• Chinese wholesalers and manufacturers supply directly to global consumers on AliExpress
• Global wholesalers and manufacturers supply global wholesale buyers on Alibaba.com
CONCERNS
The complicated ownership structure with Jack Ma having too much ownership prevented Alibaba from doing its IPO on the Hong Kong Exchange.
60% of the IPO is allocated to selling shareholders, but BABA is not a capital intensive business.
Alipay
BABA relys on Alipay to conduct substantially all of the payment processing and escrow services on the marketplaces. Alipay’s business is highly regulated, and it is also subject to a range of risks. If Alipay’s services are limited, restricted, curtailed or degraded in any way or become unavailable to BABA for any reason, the business may be materially and adversely affected.
Pirated items
BABA has in the past received negative publicity regarding the sales of counterfeit and pirated items on its marketplaces. In 2008, 2009 and 2010, Alibaba.com, and in 2008, 2009, 2010 and 2011, Taobao Marketplace, were named as “notorious markets” in the annual Special 301 Report or Special 301 Out-of-Cycle Review prepared by the Office of the U.S. Trade Representative.
The U.S. Trade Representative subsequently removed these marketplaces from the list. Continued public perception that counterfeit or pirated items are commonplace on BABA's marketplaces or perceived delays in BABA's removal of these items, even if factually incorrect, could damage BABA's reputation, result in lower list prices for goods sold through BABA's marketplaces, harm the business, result in regulatory pressure or action against BABA and diminish the value of BABA's brand name.
CORPORATE STRUCTURE RISK
The Alibaba Partnership and related voting agreements will limit shareholders ability to nominate and elect directors.
Alibaba is a Cayman Island-based holding companies with no direct operations, and relies to a significant extent on dividends and other distributions on equity paid by principal operating subsidiaries to fund offshore cash and financing requirements
Proceedings instituted by the SEC against five PRC-based accounting firms, including the affiliate of BABA's independent registered public accounting firm, and/or any related adverse regulatory development in the PRC, could result in BABA's financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
DIVIDEND POLICY
No dividends planned.
BABA is a holding company incorporated in the Cayman Islands. In order for BABA to distribute any dividends to shareholders and ADS holders, BABA relies on dividends distributed by PRC (China) subsidiaries.
Dividend distributions from PRC subsidiaries to BABA are subject to PRC taxes, such as withholding tax. In addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China.
INTELLECTUAL PROPERTY
BABA relies on a combination of trademark, fair trade practice, copyright and trade secret protection laws and patent protection in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect its intellectual property and our trademarks.
BABA also enters into confidentiality and invention assignment agreements with all of employees, and rigorously controls access to proprietary technology and information.
As of June 30, 2014, BABA had 363 issued patents and 1,083 publicly filed patent applications in China and 569 issued patents and 2,113 publicly filed patent applications in various countries and jurisdictions internationally.
COMPETITION
BABA faces competition principally from established Chinese Internet companies, such as Tencent, Baidu and their respective affiliates, JD.com as well as from offline retailers, in particular those offline retailers establishing e-commerce websites. These competitors generate significant traffic and have established brand recognition, significant technological capabilities and significant financial resources. The areas in which BABA competes include:
Buyers – BABA competes to attract, engage and retain buyers based on the variety and value of products and services listed on its marketplaces, overall user experience and convenience, online communication tools, integration with mobile and networking applications and tools, mobile apps and availability of payment settlement and logistics services.
Sellers – BABA competes to attract and retain sellers based on our size and the engagement of buyers, the effectiveness and value of the marketing services we offer, commission rates and the usefulness of the services we provide including data and analytics for potential buyer targeting, cloud computing services and the availability of support services including payment settlement and logistics services.
Talent – BABA competes for motivated and effective talent and personnel, including engineers and product developers to build compelling apps, tools and functions for all participants in our ecosystem.
BABA also faces competition from major global Internet companies. However, at this time, foreign e-commerce companies have a limited presence in China.
USE OF PROCEEDS
60% to selling shareholders.
BABA estimates it will receive net proceeds from this offering of approximately US$7,643 million after deducting estimated underwriting discounts and commissions and the estimated offering expenses payable by us and based upon an assumed initial offering price of US$63.00 per.
BABA plans to use the net proceeds from the IPO for general corporate purposes.
The full IPO calendar is available at IPOpremium
Disclaimer: This BABA IPO report is based on a reading and analysis of BABA’s S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.