I’ve been using the Alibaba (and more recently the AliExpress platform) for the last five years. I was incredibly excited to get access to their prospectus and being able to pore over the business in detail from the the boards position. From a personal experience there are four key points, highlighted below, on why I’m bullish on Alibaba.
Alibaba will change eCommerce. Worldwide.
I’ve noticed a fascinating pattern emerging with consumer products from China. The quality and design of Chinese made has improved significantly over the last few years with manufacturers finding some product design mojo. In recent times we’ve been able to import technically amazing products, well designed, well branded at rock bottom prices directly from the ‘manufacturer.’
More importantly these companies are becoming very vertically integrated quickly. One supplier which I visited in Shenzhen several years ago was working in a small office above their design factory and has recently doubled-down on their sales and marketing efforts as well as their overall product design. This year they have been doing the rounds at global-centric tradeshows including CEBIT and CES. I wouldn’t be surprised to see them being stocked in local retail stores in the next few years.
eBay is one giant that appears in trouble, around 78% of its products are new and no doubt a significant amount of Alibaba sellers are already on eBay. Unfortunately eBay.NYSE don’t appear to split out their enterprise marketplace sales proportion but I’d guess that a significant portion of the earnings is derived from these ‘Alibaba’ type sellers.
Rise of Chinese OEMs
Chinese manufacturers have been designing and manufacturing cellphones for years and traditionally niche brands such as Oppo, Coolpad and Huawei have been focussed on internal Chinese markets. However recently I have seen killer brands starting to enter the international market with Xiaomi, Huawei and most importantly OnePlus. I think Oneplus is one of the most interesting technology brands to emerge from China in the recent times and sets a very interesting blueprint for the future of Chinese brands. It is fascinating because they are based in Shenzhen and appear to have been very successful in developing a cult-like following and sales to match their status. You only need to look at the phone in person and read the passionate reviews to be able to see the future.
Factory of World
One of my more recent experiences involves sourcing custom printed and sized boxes. You would think someone in New Zealand would be able to sort this out for a MOQ of 1000 units cost effectively? We spent quite some time searching but were completely unable to find anyone in the country to even consider talking to us - there was not a chance we were going to pay $1000 for a design consultation and few hundred dollars for a sample. This was before even considering production - which was likely not recommended for a MOQ of 2500 units or less
Instead we looked at Alibaba. Within about 48 hours we had found a supplier willing to talk and offered to print a sample for us. Being able to easily chat with the supplier over instant messaging and email they were able to help us with selecting stock weight, stock coating and net design. After paying around $50 we had a few samples air freighted to our doorstep within about a week. Shortly after we had a whole van load of boxes arrive via air freight (we later found that sea freight would have been much cheaper) for a few thousand dollars - worked out at around $0.6 per box. Completing the transaction through Alibaba allowed us to compare manufacturers and gain a level of trust it would be difficult to otherwise gain.
Essentially we were able to work with a packaging company in the middle of Guangzhou, China and have samples delivered in a matter of days and full production flown to our doorstep in a matter of weeks. Quality was top-notch and I doubt we could have found anything similar in New Zealand at the same quality using the same processes. But most importantly for us the pricing was simply incredible. We were able to get an entire production run completed and delivered from halfway across the world for less than we could even get a single sample out of a manufacturer in the same country.
This really highlights the power of Alibaba - connecting customers to the raw manufacturing powerhouse of China.
Rising Middle-Class
The Economist has been pining for some time about the burgeoning size and wealth of middle class China. Developing products for customers in the backyard of the biggest consumer market has some significantly lean development advantages. This is another reason why more of our consumer products will be coming directly from China and will be (most likely) distributed through Alibaba.
Why Alibaba?
Alibaba has an incredible reputation and pure market depth of both buyers and sellers. This has enabled them to launch amazing features including credit lines for buyers and their own payment platform. The depth and success of Alibaba in this deeply regulated Chinese business also affirms its long term potential.
There is plenty of upside in both the global market (as highlighted above) and in the domestic market (expansion of AliPay, TaoBao and T-Mall) representing boundless opportunity for Alibaba. The regulatory environment, first move advantage and global exposure (particularly through this IPO) will pressure any emerging competitors.
Prospectus Highlights & Fundamentals
Fairly impressive growing separation of revenue and cost of sales, with no sign of research and development slowing down…
Year on Year Growth
In 2006 Amazon had revenue of similar to what Alibaba is turning over now (~$8B USD). Between 2006 and 2009, Amazon had approximately 38% average revenue growth. Alibaba looks like it will exceed this over the next three years, comfortably. eBay is probably a better listed comparable - over a similar period eBay had approximately 15% average revenue growth after hitting ~$8B USD revenue.
YoY Growth 2011 2012 2013 2014
China Commerce (% growth) 106.27% 104.01% 86.53% 54.74%
Intl Commerce (% growth) 31.03% 9.67% 10.49% 16.61%
Side note - I think we may be seeing an uptick in international commerce revenue as well ^ - I’d expect the increased IPO publicity to drive this further (in addition with other growth initiatives).
EPS
Alibaba is actually turning a profit despite growing product development expense (~R&D) at a staggering 46% average rate over the last four years. As noted in the notes that the majority of this relates to payroll expenses which reflects the impressive growth of talent. Alibaba also has over $7B USD in cash and cash equivalents pre-IPO - plenty to fuel the company indefinitely.
Compared to the likes of Amazon and eBay - with negative EPS’ - it is easy to suggest that Alibaba is perhaps undervalued at its current 40x P/E ratio.
EPS: P/E Ratio: Alibaba: $1.61 (diluted) 40.48 Amazon: -$0.04 808.62 eBay: $-0.11 (diluted) 23.62
Integration
Alibaba has recently invested heavily across its value chain, including a S$313 million investment in SingPost. They also have a substantial legacy investments in Youku (Chinese ‘equivalent’ of YouTube) and Weibo (Chinese ‘equivalent’ of Facebook). These should help stave of any future competitors to some degree.
Mobile
Mobile is becoming a large part of Alibaba’s business with 32% of the GMV being obtained from mobile across the China retail marketplaces (eg TaoBao).
Opportunity
“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..”
“China’s offline retail market faces significant challenges due to few nationwide brick and mortar retailers, an underdeveloped physical retail infrastructure, limited product selection and inconsistent product quality..”
“scalability of this [delivery] network was demonstrated by its success in the handling of 156 million packages generated on our Singles Day promotion in 2013.”
” the average active buyer on our China retail marketplaces placed orders in 10.1 of our 118 product categories, compared to 9.4 product categories in the same period in 2013 and 8.0 product categories in the same period in 2012.”
I also don’t think the Alibaba Cloud Computing platform should be under-looked either. There is going to be substantial growth in the China Internet space and Alibaba have the necessary resources to capture large marketshare (reminiscent of the Amazon Web Services play).
*“In the twelve months ended June 30, 2014, the logistics system ensured the successful delivery of an average of approximately 16.6 million packages per day. *”
“…we began hosting seminars and training sessions to help the residents of Qingchuan to learn basic computer skills and how to open and operate online stores to sell local specialties such as honey…. Within two years, the cumulative online sales volume on the storefronts operated by local entrepreneurs exceeded RMB2 million and created job opportunities for more than 100 people.”
Risks
The treatment and proposition of legal, political and implicitly foreign exchange risks are the most significant. The RMB is still ‘loosely’ pegged to the USD and shows no sign of loosening further. Political risk, I believe has been minimised by the (fast-growing) incumbent nature of Alibaba (keep in mind total headcount is over 25,000), and its international status, reputation and reluctance of PRC governance to taint its reputation as a supporter of exporters.
Conclusion
It will be fascinating how the next twelve months will pan out for Alibaba and in particular the perception on Wall Street. The stock price has already popped around 30% as of today and the so-called tech bubble has pushed down valuations somewhat despite the fanatic publicity of this IPO drawing interest from ‘mum and dad’ investors. Prediction is for a >US$100 share price within the next 12 months given another year of stunning growth and increase confidence in the sector.
Look forward to reading the annual report in due course.