Alibaba

	Column 1
0	Alibaba (BABA): FY1Q16 Preview: Near Term Headwind. LT Fundamental Intact.
1	Rating BUY Price Target $98.00 Price $81.07
2	Key Takeaway Our recent meeting with management indicated near-term revenue pressure from suspension of online lottery sales and reduction of Juhuasuan’s fee. We believe continued mobile investment weighs on margins. We revise down FY1Q16/FY16 revenue est. by 2.6%/0.9% and FY1Q16/FY16 non-GAAP net profit est. by 5.7%/4%, respectively. Maintain Buy; PT USD98. Lottery sales suspension and Juhuasuan fee reduction implies ST headwind. FY1Q16 will be the first quarter incorporating a full quarter impact from the suspension of online lottery sales since late Feb 2015. Lottery sales was approximately RMB1.5bn, representing 2% of FY15 total revenue or RMB500mn in FY1Q15, accounting for 3.2% of revenue, according to management. Reduction of Juhuasuan’s commission fee and promotional slot fee, including a commission fee cut by 40% across all product categories for certain sale events may result in an RMB600mn revenue impact in FY1Q16, equivalent to a 0.1% impact on overall monetization rate, based on our checks. We revise down FY1Q16 revenue est. by 2.6% to RMB20.9bn and FY16 est. by 0.9% to RMB100.4bn, +31.7% YoY. Margin pressure from mobile investment. We expect gross margin pressure to remain as Alibaba steps up investment in mobile Internet services, including UCWeb, Autonavi and Shenma mobile search. Alibaba is also looking to expand Alimama’s advertising ecosystem to non-eCommerce areas. We revise down FY1Q16 non-GAAP EBITDA margin by 1.4pcpt to 51.3% and FY16 est. by 1.3pcpt to 50%, -3.5pcpt YoY. Expanding into Internet finance and O2O local services with Ant Financial. On June 25, Alibaba’s affiliate Ant Financial launched MyBank, an Internet bank that aims to meet the under-served financing needs of SME merchants and individuals, particularly rural consumers, by running at much lower operational costs compared to traditional banks. Alibaba also announced an O2O local service JV with Ant Financial called Koubei.com, which will integrate Taodiandian’s existing food ordering and delivery service with Ant Financial’s offline resources and merchant base. Valuation/Risks Maintain Buy; our DCF-based PT of USD98 is based on a LT EBIT margin of 41.7%, terminal growth rate of 4.9% and WACC of 10.2%, implying a CY16 P/E of 29x, 42% discount to global e-Commerce peer avg of 47.6x and 22% discount to China e-Commerce peer group of 37.1x. Risks: limited ability to influence corporate matters by individual shareholders and potential conflict of interest arising from the company’s corporate structure.

Column 1

Alibaba (BABA): FY1Q16 Preview: Near Term Headwind. LT Fundamental Intact.

Rating BUY
Price Target $98.00
Price $81.07

Key Takeaway
Our recent meeting with management indicated near-term revenue pressure from suspension of online lottery sales and reduction of Juhuasuan’s fee. We believe continued mobile investment weighs on margins. We revise down FY1Q16/FY16 revenue est. by 2.6%/0.9% and FY1Q16/FY16 non-GAAP net profit est. by 5.7%/4%, respectively. Maintain Buy; PT USD98.

Lottery sales suspension and Juhuasuan fee reduction implies ST headwind. FY1Q16 will be the first quarter incorporating a full quarter impact from the suspension of online lottery sales since late Feb 2015. Lottery sales was approximately RMB1.5bn, representing 2% of FY15 total revenue or RMB500mn in FY1Q15, accounting for 3.2% of revenue, according to management. Reduction of Juhuasuan’s commission fee and promotional slot fee, including a commission fee cut by 40% across all product categories for certain sale events may result in an RMB600mn revenue impact in FY1Q16, equivalent to a 0.1% impact on overall monetization rate, based on our checks. We revise down FY1Q16 revenue est. by 2.6% to RMB20.9bn and FY16 est. by 0.9% to RMB100.4bn, +31.7% YoY.

Margin pressure from mobile investment. We expect gross margin pressure to remain as Alibaba steps up investment in mobile Internet services, including UCWeb, Autonavi and Shenma mobile search. Alibaba is also looking to expand Alimama’s advertising ecosystem to non-eCommerce areas. We revise down FY1Q16 non-GAAP EBITDA margin by 1.4pcpt to 51.3% and FY16 est. by 1.3pcpt to 50%, -3.5pcpt YoY.

Expanding into Internet finance and O2O local services with Ant Financial. On June 25, Alibaba’s affiliate Ant Financial launched MyBank, an Internet bank that aims to meet the under-served financing needs of SME merchants and individuals, particularly rural consumers, by running at much lower operational costs compared to traditional banks. Alibaba also announced an O2O local service JV with Ant Financial called Koubei.com, which will integrate Taodiandian’s existing food ordering and delivery service with Ant Financial’s offline resources and merchant base.
Valuation/Risks
Maintain Buy; our DCF-based PT of USD98 is based on a LT EBIT margin of 41.7%, terminal growth rate of 4.9% and WACC of 10.2%, implying a CY16 P/E of 29x, 42% discount to global e-Commerce peer avg of 47.6x and 22% discount to China e-Commerce peer group of 37.1x. Risks: limited ability to influence corporate matters by individual shareholders and potential conflict of interest arising from the company’s corporate structure.