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Dr. Kai-Fu Lee's Talk on Innovation with Chinese characteristics. Videos
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US venture arm, www.ideabulb.vc
China venture arm, www.chuangxin.com
More on Kai-Fu Lee,
http://en.wikipedia.org/wiki/Kai-Fu_Lee
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1. M c I n t i r e I n v e s t m e n t I n s t i t u t e
1
MCINTIRE INVESTMENT INSTITUTE
AT THE UNIVERSITY OF VIRGINIA
Presented by James Xinye Zhang| October 21st, 2014
Case Study:
Alibaba Group (BABA)
NYSE
2. M c I n t i r e I n v e s t m e n t I n s t i t u t e
PRESENTATION OVERVIEW
• Company Overview
• Alibaba’s Ecosystems
• Valuation
1
2
3
• Potential Risks
4
2 6
3. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ALIBABA?
3
4. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ALIBABA?
4
5. M c I n t i r e I n v e s t m e n t I n s t i t u t e
INTRODUCTION
• Alibaba Group started out as a small
online retailer.
• Various mergers and strategic deals
enabled the company to dominate e-
commerce in China
• Evolution into unique company
- ecosystem rather than service
5
6. M c I n t i r e I n v e s t m e n t I n s t i t u t e
PRIOR GROWTH
• Rise of e-commerce in China helped spur
the company’s growth
• Chinese middle class begins spending
more money, more consumption
• 79% of Chinese e-commerce market
6
7. M c I n t i r e I n v e s t m e n t I n s t i t u t e
PRIMARY BUSINESS COMPONENTS
• Taobao
• Tmall
• Alipay
• Alibaba Cloud Computing
• Cainiao
• AliExpress
7
8. M c I n t i r e I n v e s t m e n t I n s t i t u t e
UNIQUE BUSINESS MODEL
• Alibaba doesn't directly compete with
merchants; works with them and provides
a platform for dual profits. Leads to
profitability and strong cash flows
• Seeks to innovate and thrive
• No specialty in one area; create online
ecosystem rather than focus on niche
8
9. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ALIBABA VS AMAZON
• Revenue growth- still outpaces Amazon’s. The U.S.
online retailer reported a 23% jump in third-quarter
revenue to $19.34 billion, just about half of Alibaba’s
pace of expansion.
• Size- In 2012, the combined transaction volume of
Taobao and Tmall topped one trillion yuan ($163 billion)
- more than Amazon and eBay combined.”
• Profitability- Alibaba profit totaled $2.8 billion for the
nine months ended Dec. 31 on revenue of $6.5 billion.
- A penny for every dollar in revenue vs 43 cents.
9
10. M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAST NETWORK
• Unlike Amazon, which buys goods from
suppliers and sells them to customers,
Alibaba has always acted as a middleman,
connecting buyers and sellers and
facilitating transactions between them.
• Merchants don't pay to sell products on
Taobao. Instead, they pay Alibaba for
advertising and other services to allow
them to stand out from the crowd.
10
11. M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAST NETWORK
• Collective entrepreneurship- Alibaba
provides platform, merchants provides
products.
• Revenue sharing simplifies business;
makes it easier for additional merchants to
join network.
• Larger network- greater benefits and thus
attracts more customers
11
12. M c I n t i r e I n v e s t m e n t I n s t i t u t e
CHINESE CONSUMER GROWTH
• China is changing from manufacturing-
oriented to consumption-driven economy
• Huge increase in white collared middle
class
• “Our business benefits from the rising
spending power of Chinese consumers”
- Alibaba SEC Prospectus
12
13. M c I n t i r e I n v e s t m e n t I n s t i t u t e
E-COMMERCE DEVELOPMENT IN CHINA
• Smartphone access grants online
accessibility to everyone, of all ages and
demographics
• Leapfrogging
• E-commerce in China does not just occur
in urban regions.
- Citizens in rural and interior regions now
have access to online services
13
14. M c I n t i r e I n v e s t m e n t I n s t i t u t e
TAOBAO
• Comparable to eBay
• China’s largest e-commerce website
• Features thousands of non-brand name
products sold by smaller-unknown merchants
14
15. M c I n t i r e I n v e s t m e n t I n s t i t u t e
TAOBAO ONLINE MARKETPLACE
15
16. M c I n t i r e I n v e s t m e n t I n s t i t u t e
TMALL
• Assumption Driver; increase in
consumption of high end consumer
goods
• Tmall’s “LuxCity” provides platform
for world renowned luxury brands to
cater legitimate products to Chinese
consumers
16
17. M c I n t i r e I n v e s t m e n t I n s t i t u t e
LUXCITY
17
18. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ALIBABA’S ECOSYSTEMS
• Entertainment
• Alipay
• Guangzhou Evergrande FC
• Investment in small US companies.
- Vendio Services Inc. and Auctiva
- ShopRunner
- Quixey
- TangoMe Inc.
18
19. M c I n t i r e I n v e s t m e n t I n s t i t u t e
WHERE DOES ALIBABA’S REVENUE COME FROM?
• Chart from Seeking Alpha
19
20. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ECOSYSTEMS (ENTERTAINMENT)
• Alibaba has made around $4 billion in
entertainment investments
- The company will benefit greatly from
Chinese cinema market
• China’s box office projected to increase
from $3.13bn in 2013 to $5.9bn by 2018
• Chinese demand for films, both
domestic and Western (Hollywood) will
spur revenues in entertainment
20
21. M c I n t i r e I n v e s t m e n t I n s t i t u t e
LIONS GATE ENTERTAINMENT CORP.
• Lionsgate Entertainment World to stream
Hollywood movies and television in China
- Offer “Twilight,” “The Hunger Games” series,
“Divergent,” “Mad Men”
• “We are committed to expanding our
ecosystem where our users can meet, work
and live,”
- Patrick Liu, president of Alibaba Group’s digital
entertainment business
21
22. M c I n t i r e I n v e s t m e n t I n s t i t u t e
CHINAVISION MEDIA GROUP LTD.
• $804 million
investment, 60
percent controlling
stake in the company
• Main distributor in
Journey to the West:
Conquering the
Demon, 1.25 billion
yuan revenue.
22
23. M c I n t i r e I n v e s t m e n t I n s t i t u t e
CHINAVISION MEDIA’S MULTIPLE SEGMENTS
23
1. Producing and distributing film rights, television
programs and dramas
2. ChinaVision distributes the most popular morning
newspaper in Beijing, the Beijing Times
3. Mobile handset devices, and develops and distributes
Mobile TV
Alibaba is not only buying mobile tech company, but
exposure to news media, television, and the continued rise of
Chinese film market
24. M c I n t i r e I n v e s t m e n t I n s t i t u t e
WASU DIGITAL TV MEDIA GROUP
• Alibaba Group acquired a 20% stake in Wasu Media,
$1.05 billion, collaborate in online content and Internet
TV.
• Support in original content development, video
communication, games, music, education, cloud
computing, big data
• The companies collaborated last year in co-launching
television set-top box
- Set up box connecting businesses
24
25. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ONLINE VIDEO MARKET IN CHINA
• Statista.com
25
26. M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR 1- ROBERT CAIN, CHINA FILM BIZ
• Producer, entertainment industry
consultant
• China’s film industry is expanding at
around 4x its GDP growth
• “The Chinese population has embraced
movies, both foreign and increasingly
domestically made Chinese movies, with
exuberance.”
26
27. M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR 1 GRAPH
27
28. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ALIBABA.COM
• B2B
• Connects Chinese manufacturers with
foreign buyers
• Negotiate order; no shopping cart
• “Made to order” rather than advertise
ready-made products
• High MOQ
28
29. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ALIBABA.COM
29
30. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ALIEXPRESS
• B2B and B2C
• Portal to link Chinese trading companies
with foreign buyers
• Smaller “ready-made” items, aimed at
smaller companies
• MOQ is usually 10+ items
30
31. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ALIEXPRESS
31
• sensortower.com
32. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ECOSYSTEMS- ALIPAY AND ONLINE BANKING
• Zhejiang Ant Financial Services Group- vital in
Alibaba’s push to further financial operations for
small consumers and merchants online.
• Alipay- Subsidiary of Zhejiang Ant, is online 3rd
party payment platform. Most of Alibaba e-
commerce transactions go through Alipay.
• Started in 2004, now has 190 million active
users, online transactions worth $660 billion.
• Alipay Wallet- mobile electronic pay system
32
33. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ALIPAY RESTRUCTURING
• Restructured Alibaba’s loan business to
Small and Micro Financial Services
CompanyGives Alibaba smaller exposure
to financial services while gaining
potential to profit from such micro-
financing businesses
33
34. M c I n t i r e I n v e s t m e n t I n s t i t u t e
BANKING IN CHINA
• China still has a huge financial system that rather limites middle
class opportunities in investments
• Traditional financial system is rigid and concentrated in state
institutions, but changing rapidly
• Can Alibaba use technology to give more exposure to the middle
class?
34
35. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ONLINE BANKING OPERATIONS
• Alibaba wants to provide full range of
online transactions w/o physical banking.
• will soon apply to create a micro-loans and
micro-savings private bank.
• This “will fully leverage technology as well
as big data analysis to better serve grass-
root individual consumers and small and
medium enterprises”
- Yu Shengfa, VP of Zhejiang Ant
35
36. M c I n t i r e I n v e s t m e n t I n s t i t u t e
TRANSFORMING ONLINE BANKING
• The new private bank will cater more to consumers and small
businesses
• Use transaction data online to examine customer credit
• State-owned banks and institutions underserve such customers
36
37. M c I n t i r e I n v e s t m e n t I n s t i t u t e
E-COMMERCE SYNERGY
• Alibaba will achieve synergy through its own industry platforms
37
38. M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR 2- BCG CONSULTANT
• “Digital penetration is happening faster
than people would imagine in China. More
and more elderly people are getting used
to digital channels—even my mother-in-
law [uses] online banking and WeChat.”
- Zhang Yue, project leader at Boston
Consulting Group, Shanghai. “
38
39. M c I n t i r e I n v e s t m e n t I n s t i t u t e
YU’E BAO FUND
• Yu’e Bao (余额宝) is an investment
product offered by Alipay.com.
-managed by Tianhong Asset Management
• Alipay users deposit money into Yu’e bao,
invests in funds (4.2% versus 3.3% -one
year deposit)
• Growing trend of depositors transferring
money away from banks and into internet
money market funds.
39
40. M c I n t i r e I n v e s t m e n t I n s t i t u t e
MONEY MARKET FUNDS IN CHINA
• Assumption Driver-
as money market
funds become more
popular, Yu’e Bao will
grow with tremendous
potential in the near
future.
40
41. M c I n t i r e I n v e s t m e n t I n s t i t u t e
YU’E BAO HIGH YIELD SUSTAINABILITY
• 90% of the funds’ deposits invested in interbank deposits
• Investment is relatively safe, as long as the state-owned
banks do not default on loans they exercised from
Tianhong, which should not occur.
• Yield could be sustainable, but the 6% is “not the norm”
41
42. M c I n t i r e I n v e s t m e n t I n s t i t u t e
YU’E BAO
42
43. M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR 3- TIANHONG FUND MANAGER
• “We allocate investments and match maturities based
on data analysis. At different stages a bank's ability to
take deposits varies. On one hand, there are banks that
can only take, say, 10 billion yuan, but we have 11
billion yuan that needs to be taken care of. That is when
we hit the limit of their deposit-taking ability. We can
deal with other banks or lower the interest rates we
charge. On the other hand, a larger size brings greater
negotiating power. We can ask for higher interest
rates.”
- Wang Dengfeng (oversees money market fund
connected with Yu’e Bao)
43
44. M c I n t i r e I n v e s t m e n t I n s t i t u t e
GOVERNMENT RESPONSE
• The Chinese government is receptive to the idea of internet banking
• In “state of the union” address, Premier Li Keqiang promised to
deliver and “promote the healthy development of internet banking.”
• BUT, expect some changes in regulators’ supervision
44
45. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ALIYUN- ALIBABA CLOUD COMPUTING (阿里云)
• Primarily serves Alibaba’s e-commerce
and internal businesses such as AliPay
• Provides technology and supports online
services for businesses
• 2013; Processed 14.5 billion order
exchanges from 70,000 merchants and
279 million online consumers
45
46. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ALIYUN- OUTSIDE CLIENTELE
• “The services of AliYun are similar to the
services of public electric power networks.
Without these public utilities, you may have to
spend lots of money on buying a generator for
making electricity. Our cloud services enable our
clients to only pay for their present demand and
save on initial investments, just like we use
electricity today,”
-Alibaba Cloud Computing
46
47. M c I n t i r e I n v e s t m e n t I n s t i t u t e
CLOUD COMPUTING
• Alibaba planning to start operating its cloud
business globally, AliYun
• AliYun collects revenue from companies and
clients that use its data centers and computing
resources
47
48. M c I n t i r e I n v e s t m e n t I n s t i t u t e
IMPORTANCE OF CLOUD COMPUTING
• “We will continue to implement our data
strategy through the application of data
intelligence and deep learning
technologies to several fields, including
marketplace design, user interface, search,
targeted marketing, logistics, location-
based services and financial services,
among others.”
-SEC Prospectus
48
49. M c I n t i r e I n v e s t m e n t I n s t i t u t e
USING CLOUD TO SUPPORT ALIBABA ECOSYSTEMS
• Distributed computing infrastructure
• Serves its own platform, Alipay, and subsidiaries
• Provides cloud computing services to sellers
49
*Cloud Computing Cafe
50. M c I n t i r e I n v e s t m e n t I n s t i t u t e
ALIYUN OPERATING SYSTEM
• Engineered by Alibaba Cloud Computing
• Linux based operating system
50
51. M c I n t i r e I n v e s t m e n t I n s t i t u t e
OS FEATURES
• Fully functioning with cloud
100 GB in storage space
(free)
Ability to stream apps from
web instead of storing in
phone memory.
Mostly designed to run
cloud applications in own
ecosystems
• AliYun OS is open-source
based OS
51
52. M c I n t i r e I n v e s t m e n t I n s t i t u t e
INVESTMENTS
• Alibaba has made forays into the U.S.
market
- Vendio Services Inc. and Auctiva
- ShopRunner
- Quixey
- TangoMe Inc.
52
53. M c I n t i r e I n v e s t m e n t I n s t i t u t e
VENDIO SERVICES INC.
• Alibaba can match 80,000 small
businesses in the U.S with supplier
sourcing via Alibaba’s platforms.
• More effective sourcing- allows AliExpress
to utilize Vendio platform for selling
across multiple marketplaces
53
54. M c I n t i r e I n v e s t m e n t I n s t i t u t e
AUCTIVA
• “Acquisition will help provide tools and
resources for U.S. small businesses
looking to leverage e-commerce.”
54
55. M c I n t i r e I n v e s t m e n t I n s t i t u t e
SHOPRUNNER
• Retail website investment allows Alibaba
to enter U.S. marker
• “Trojan Horse” to Amazon
55
56. M c I n t i r e I n v e s t m e n t I n s t i t u t e
TANGOME
• Extremely popular messaging app
Free video calls
Miniature ecosystem
Become increasingly broad- creating platform for
TangoMe users to engage in activities such as
texting, gaming, photo-sharing
• Alibaba can expand into U.S. mobile
phone platform
56
57. M c I n t i r e I n v e s t m e n t I n s t i t u t e
EFFECTS OF INVESTMENTS
• Why does Alibaba seem to sprawl its
investments in so many companies?
57
TaoBao, Tmall
customers
Ecosystems
within its
ecosystem
Gain
Foothold in
innovative
US startups
Synergy!
58. M c I n t i r e I n v e s t m e n t I n s t i t u t e
STOCK METRICS
• High growth stock
Earnings is extremely important
• Alibaba could grow 40% in 2015, 30% in 2016
• 58.5% EBIDTA margin in 2014
• High P/E Ratio
58
59. M c I n t i r e I n v e s t m e n t I n s t i t u t e
GROWTH COMPANY VALUATION
• Classic Growth Company- Creates new product,
establishes demand due to technology/innovation
• Market Share Growth Company- Mature industry,
rapid growth due to increasing market share via product
quality, brand name, or service
• Consolidator- Fragmented industry, grows
inorganically through multiple acquisitions and taking
advantage of synergies.
59
60. M c I n t i r e I n v e s t m e n t I n s t i t u t e
COMPARABLE MULTIPLES
60
61. M c I n t i r e I n v e s t m e n t I n s t i t u t e
• Does earnings reflect long term trend or is
it a temporary occurence?
61
62. M c I n t i r e I n v e s t m e n t I n s t i t u t e
FUTURE STOCK GROWTH
• Strong brand, enormous scale, rapidly
increasing impact of ecosystem
• Growth and margins should justify high
valuation
• How will high revenue growth translate
into stock performance
62
63. M c I n t i r e I n v e s t m e n t I n s t i t u t e
AMERICAN DEPOSITORY SHARES
• “US dollar-denominated equity share of
foreign company for purchase on
American stock exchange”
• Investors do not own common shares, but
claims to foreign shares.
• Not buying a piece of the company
• Shareholders have almost no say in how
the company will be run
63
64. M c I n t i r e I n v e s t m e n t I n s t i t u t e
WHAT ARE INVESTORS BUYING?
• Investors purchasing shares of Alibaba in
offshore, Cayman Islands entity
Alibaba Group Holding Limited
Plot twist!
......The entity doesn’t actually own Alibaba……
64
65. M c I n t i r e I n v e s t m e n t I n s t i t u t e
VARIABLE INTEREST ENTITIES
• Alibaba conducts business via complex
investment vehicles.
• Allows the company to have offshore
entities, used to accept foreign investors’
money
• Complications may arise
65
66. M c I n t i r e I n v e s t m e n t I n s t i t u t e
PARTNERSHIP STRUCTURE
• Convoluted ownership structure
• A labyrinth of partnerships, subsidiaries,
offshore vehicles.
• Controlling partnership of Alibaba have most
power
27 partners effectively control the Alibaba’s
board
small group make decisions regarding the
entire company without much outside input.
66
67. M c I n t i r e I n v e s t m e n t I n s t i t u t e
EXPOSURE TO RISKS IN CHINA
• Alibaba can be impacted by economic
slowdown
• May be subject to future anti-monopoly
laws
Enforcement action against abusive market
dominance and heavy fines
• Potential consequences of government
perception against Alibaba
67
68. M c I n t i r e I n v e s t m e n t I n s t i t u t e
FUTURE PLANS
• Increase active buyers and wallet share
• Expand categories and offerings
• Extend mobile leadership
• Enhance success of sellers
• Enhance data and cloud computing
• Develop cross-border commerce
opportunities
68
69. M c I n t i r e I n v e s t m e n t I n s t i t u t e
CONCLUSION
• Alibaba; Silk Road 2.0?
• Misperception that Alibaba is “just like Amazon”
• Ecosystem in various industries; is self-
sustaining, various operations of Alibaba
support internal systems
• Ideal investment opportunity?
69
70. M c I n t i r e I n v e s t m e n t I n s t i t u t e
QUESTIONS?
70