alibaba jan 2015 cs

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

Client-Driven Solutions, Insights, and Access

30 January 2015

Asia Pacific/China

Equity Research

Consumer Internet

Alibaba Group Holding Limited

(BABA.N / BABA US) DECREASE TARGET PRICE

Monetization adjustments should lead to

stronger ecosystem in long-term

■ Alibaba reported CY4Q14 revenue of Rmb26.2Bn (up 55.6% QoQ and up 39.7% YoY), missing consensus of Rmb27.6Bn, and CSe of Rmb28.7Bn. Non-GAAP NI of Rmb13.1Bn (up 93.5% QoQ, up 46.4% YoY), beat our forecast of Rmb11.2Bn and estimates of Rmb11.7Bn.

■ Structural decline in take rate? Or short-term issue. While China retail GMV surprised on the upside with 49% YoY growth, China retail revenue lacks (with 32% YoY), given: (1) higher mobile penetration, (2) lower PC take-rate (down to 3.2% from 3.5% a year ago) due ad system changes, and (3) TMall GMV growth slower than expected. Alibaba has been changing its P4P ad system with (1) higher focus on search quality (rather than keyword pricing), and (2) introducing long-tail, but lower-price keywords. These changes bring better buyer experience and higher ROI for merchants, but lead to near-term decrease in monetization rate. The new system should be positive for Alibaba's ecosystem in the long-term. We expect negative impacts could last for another 1-2 quarters become normalizing at a higher level.

■ Good operating metrics in CY4Q14: Mobile accounts for 42% of GMV.

Active buyers reach new high of 334Mn, with 265Mn on mobile. Margins improved QoQ with better seasonality.

■ Maintain OUTPERFORM, TP US$113 (down from US$118). We revise down FY16E earnings by 0.6%. We turn more conservative in near-term take-rate assumptions, but maintain our view that monetization rate continue to increase with better buyer experience and mobile ad roll-out. We see weakness as good buying opportunity. Our DCF-based valuation of US$113 implies 43.8x CY15E, 33.5x CY16E, and 26.8x CY17E dil adj EPS.

Share price performance

80

100

120

140

80

90

100

110

120

Sep-14 Dec-14

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the

MSCI CHINA F IDX which closed at 6930.22 on 29-01-15

On 29-01-15 the spot exchange rate was US$1./US$1

Performance Over 1M 3M 12M Absolute (%) -6.9 -0.2 — — Relative (%) -10.6 -5.7 — —

Financial and valuation metrics

Year 3/14A 3/15E 3/16E 3/17E Revenue (Rmb mn) 52,504.0 76,041.0 105,012.7 135,089.2 EBITDA (Rmb mn) 26,259.0 25,720.7 34,841.3 49,521.9 EBIT (Rmb mn) 24,920.0 23,361.0 30,877.6 43,666.2 Net profit (Rmb mn) 27,278.0 34,035.1 45,610.4 59,844.7 EPS (CS adj.) (Rmb) 11.52 13.33 17.31 22.27 Change from previous EPS (%) n.a. 6.2 -0.6 2.0 Consensus EPS (Rmb) n.a. 13.4 18.8 25.3 EPS growth (%) 94.1 15.8 29.9 28.6 P/E (x) 53.4 46.1 35.5 27.6 Dividend yield (%) 0 0 0 0 EV/EBITDA (x) 58.5 59.0 42.4 28.7 P/B (x) 49.7 10.9 8.7 6.8 ROE (%) 186.1 39.4 27.6 27.9 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM Price (29 Jan 15, US$) 98.45 Target price (US$) (from 118.00) 113.00¹ Upside/downside (%) 14.8 Mkt cap (US$ mn) 247,407 (US$

247,407) Enterprise value (Rmb mn)

1,517,208 Number of shares (mn) 2,513.02 Free float (%) 13.0 52-week price range 119.2 - 85.0 ADTO - 6M (US$ mn) 470.5

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

[V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Dick Wei

852 2101 7339

[email protected]

Evan Zhou

852 2101 6745

[email protected]

Jialong Shi

852 2101 7437

[email protected]

30 January 2015

Alibaba Group Holding Limited (BABA.N / BABA US) 2

Focus charts Figure 1: Blended monetisation on Alibaba's China retail

marketplaces

Figure 2: Monetisation rate – PC vs mobile

8.7 8.6

16.1

9.4

12.6 12.8

21.3

14.7

19.7 20.8

32.7

22.7

2.51%2.31%

3.05%

2.18%

2.52%

2.30%

2.70%

2.28%

2.67%

2.65%

3.10%

2.83%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Total revenue (Rmb in billions) Blended monetisation rate

2.77%2.61%

3.53%

2.63%

3.03%

2.54%

3.23%

2.70%

3.15%3.05%

3.70%

3.30%

0.58%0.61%

1.12%0.98%

1.49%

1.87%1.96%

1.70%

2.10%2.20%

2.50%2.40%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Blended monetisation rate PC Mobile

Source: Company data Source: Company data

Figure 3: GMV generated by mobile on Alibaba's China

retail marketplaces

Figure 4: Mobile revenue on Alibaba's China retail

marketplaces

41 55

104 118

164199

327

274

335374

527417

12.0%14.7%

19.7%

27.4%

32.8%35.8%

41.6%42.5%45.5%

47.5%50.0%

52.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

-

100.0

200.0

300.0

400.0

500.0

600.0

Mobile GMV (Rmb in billions) Mobile as % of total GMV

0.2 0.3

1.2 1.2

2.5

3.7

6.4

4.7

7.0

8.2

13.2

10.0

2.8%3.8%7.3%

12.4%

19.4%

29.1%30.2%

31.8%

35.8%

39.5%

40.3%

44.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

(1.0)

1.0

3.0

5.0

7.0

9.0

11.0

13.0

15.0

Mobile revenue (Rmb in billions)Mobile as % of total revenue

Source: Company data Source: Company data

Figure 5: GMV mix in Alibaba's China retail marketplaces

257 275 346 295 342 380

494 434 493 523

632 505

88 99

183

135 159

176

293

211

243 264

423

296

25.5% 26.5%

34.6%

31.4% 31.7% 31.7%

37.2%

32.7% 33.0% 33.6%

40.1%

36.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

-

200

400

600

800

1,000

1,200

Toabao GMV Tmall GMV Tmall GMV as % of Total GMV

Source: Company data

30 January 2015


CY4Q14 results review Alibaba reported CY4Q14 revenue of Rmb26.2Bn (up 55.6% QoQ and up 39.7% YoY),

missing consensus of Rmb27.6Bn, and CSe of Rmb28.7Bn. CY4Q14 non-GAAP net

income of Rmb13.1Bn (up 93.5% QoQ, up 46.4% YoY), beat our forecast of Rmb11.2Bn

and consensus estimates of Rmb11.7Bn.

Revenue lower than expectation mainly due to: (1) higher mobile GMV contribution; (2)

lower PC take rate (down to 3.2% from 3.5% a year ago); (3) TMall GMV growth slower

than expectation, and (4) commission revenue rate also down YoY (to 2.2% from 2.8%).

What we like about the results: (1) Strong China retail GMV growth continues at 48.9%

YoY growth, (2) annual active buyers registered strong improvements, reaching 334Mn;

(3) Mobile GMV strong with 41.6% penetration, vs. 35.8% last quarter; (4) mobile take rate

up to 1.96% from 1.87%, due to user / merchant adoption and higher Tmall transaction

volume on mobile; (5) GPM (76.7%) and OPM (52.8%) higher better than our earlier

forecasts, showing strong spending discipline and control.

Areas of concerns: (1) Overall take rate at 2.7% (lower than our forecast of 3.2%), due to

changes in ad system, (2) High SBC expenses of Rmb4.3 Bn (vs. GAAP NI of Rmb 5.98 Bn).

Changes in ad system shall be positive in long-term

Started in summer, Alibaba has been updating its search ranking algorithm to improve

buyers' experience as well as raising ROI for merchants. The new keyword ranking

algorithm puts higher score on quality, and decrease weigh on bid price. As such there is a

negative impact on CPC.

Furthermore, company also introduces more long-tail, lower price keywords. Again this

improves merchant ROI, but at the expense of revenue.

We expect both of these changes shall be positive for Alibaba ecosystem in the long-term.

As we have seen in algorithm changes in other search companies: Baidu: Phoenix Nest,

Yahoo: Panama, the transition leads in higher monetization in the long-term.

Figure 6: Commission revenue contribution in China retail marketplace revenue

(Rmb mn) FY12 FY13 FY14 FY2Q14 FY3Q14 FY2Q15 FY3Q15

Commission revenue 2,915 6,161 12,023 2,144 4,845 4,278 7,872

Commission revenue as % of total revenue 21.7% 22.8% 28.1% 24.8% 30.0% 33.5% 37.0%

Non-commission revenue 10,507 20,809 30,809 6,501 11,304 8,491 13,403

Total China retail marketplace revenue 13,422 26,970 42,832 8,645 16,149 12,769 21,275

Source: Company data.

Figure 7: China retail marketplace GMV breakdown

China retail marketplace (Rmb Bn) CY4Q14 Actual Cse Var (%) QoQ (%) YoY (%) CY3Q14 CY4Q13

Total GMV 787.0 755.7 4.1% 41.6% 48.9% 555.7 528.7

Total revenue 21.3 24.3 -12.5% 66.6% 31.7% 12.8 16.1

Blended take rate 2.70% 3.22% 2.30% 3.05%

PC GMV 460.0 461.0 -0.2% 29.0% 8.4% 356.6 424.3

PC revenue 14.9 18.0 -17.4% 64.1% -0.8% 9.1 15.0

PC take rate 3.23% 3.90% 2.54% 3.53%

Mobile GMV 327.0 294.7 11.0% 64.3% 213.2% 199.1 104.4

Mobile revenue 6.4 6.3 1.3% 72.6% 448.1% 3.7 1.2

Mobile take rate 1.96% 2.15% 1.87% 1.12%

Source: Company data, Credit Suisse estimates

30 January 2015


Figure 8: Monetisation rate revision

Revised Prior

FY15E FY16E FY17E FY15E FY16E FY17E

Blended monetisation rate 2.42% 2.68% 2.91% 2.62% 2.84% 2.94%

PC monetisation rate 2.82% 3.07% 3.24% 3.10% 3.33% 3.30%

Mobile monetisation rate 1.79% 2.28% 2.66% 1.84% 2.33% 2.66%


30 January 2015


Maintain OUTPERFORM and new target price of US$113 Earnings revision

We revised up our FY15 by 6.2%, mainly due to stronger than expected CY4Q14 results.

For FY16, we revise down diluted EPS by 0.6%.

The revision is mainly driven by ~4% decline in revenue (with lower take rate) with slightly

higher overall GMV assumptions, driven by strong users growth in CY4Q14.

We also assumed better GPM and OPM. We expect the company to be more conservative

in spending than what we had previously expected.

Figure 9: Earnings revision

Revised Changes

Rmb Bn FY4Q15E FY1Q16E FY2015E FY2016E FY4Q15E FY1Q16E FY2015E FY2016E

Total Revenue 17.3 22.7 76.0 105.0 -5.4% -1.2% -4.4% -4.3%

Gross profit 12.0 16.2 56.2 74.9 -4.1% 0.2% -2.1% -3.1%

GPM (%) 69.5% 71.5% 74.0% 71.3%

Adj. Op Profit 7.1 10.4 36.2 48.8 -7.5% -0.7% -0.4% -4.9%

Adj. OPM (%) 41.3% 46.0% 47.6% 46.4%

Adj. EBITDA 8.5 11.9 40.7 55.4 -6.4% -0.4% -0.3% -3.9%

Adj. EBITDA (%) 49.1% 52.4% 53.5% 52.7%

Net Income (GAAP) 2.1 4.9 23.3 25.1 -60.2% -34.4% -19.8% -31.4%

NPM (%) 12.0% 21.4% 30.7% 23.9%

Adj. NI (ex-SBC) 7.0 9.8 34.0 45.6 -1.8% 2.5% 5.5% -2.0%

Adj. NPM (%) 40.5% 43.2% 44.8% 43.4%

Dil. EPS (Rmb) 0.80 1.86 9.11 9.51 -59.7% -33.5% -19.1% -30.4%

Dil. adj. EPS (Rmb) 2.69 3.75 13.33 17.31 -0.4% 3.9% 6.2% -0.6%


DCF valuation: New TP of US$113

We use DCF valuation as the key valuation methodology, as we see DCF captures the

longer-term growth opportunities of Alibaba. We assume ~20% growth over 2020-25, a

WACC of 11% and a 3% terminal growth rate. Our base-case DCF valuation yields a

target price of US$106 of its core business. By considering the value from Ant Financial

Services Company (US$17.5Bn) or US$6.7per share, we arrive at our final target price of

US$114 for the whole Alibaba business.

Our TP of US$113, implies 43.8x CY15E, 33.5x CY16E, and 26.8x CY17E dil adj EPS,

and market cap of US$338Bn.

Figure 10: Alibaba core business DCF model assumptions (base-case scenario)

Drivers FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26

Sales Growth 44.8% 38.1% 28.6% 22.9% 23.3% 20.7% 21.9% 20.7% 20.0% 19.5% 19.0% 19.0%

EBIT Margin 47.6% 46.4% 47.7% 49.1% 50.7% 51.7% 53.0% 54.2% 54.4% 54.7% 54.0% 54.0%

NOPAT Margin 22.2% 20.3% 22.6% 24.1% 26.3% 27.3% 28.8% 30.3% 30.7% 31.0% 31.3% 39.4%

Year end net fixed assets turns 6.0 6.3 6.6 7.0 7.7 8.5 9.7 11.3 13.4 16.5 20.9 20.0

Year end net working capital turns -32.7 -32.7 -30.1 -29.4 -33.7 -31.9 -30.0 -30.0 -29.9 -29.7 -29.5 (8.0)

Year end net other assets turns 0.8 1.2 1.5 1.8 2.3 2.7 3.3 4.0 4.8 5.7 6.8 11.0

Cash operating taxes as as % of EBIT 27.7% 30.8% 30.1% 30.6% 29.4% 29.9% 29.8% 29.0% 29.3% 29.6% 29.9% 27.0%


30 January 2015


Figure 11: Alibaba core business DCF sensitivity analysis

Terminal growth rate

Target price in US$ 0.0% 1% 2% 3.0% 4.0% 5% 6%

WACC (%)

8.0% 162.0 169.8 180.2 194.7 216.5 252.9 325.7

9.0% 136.0 140.7 146.8 154.8 166.1 183.0 211.2

10.0% 115.9 118.7 122.3 126.8 132.9 141.4 154.1

11.0% 99.9 101.6 103.6 106.2 109.5 113.9 120.0

12.0% 87.0 88.0 89.1 90.5 92.3 94.5 97.5

13.0% 76.5 77.0 77.5 78.2 79.1 80.1 81.5


30 January 2015


CY4Q14 earnings call summary Prepared remarks

SAIC white paper

Alibaba is a company with strong value and highest standard of ethics. We believed the

report was flawed, and incorrect. The "white paper" was unfair, and we prepared a formal

complaint against the SAIC. We still have a zero-tolerance policy on fake products. SAIC

has removed the "white paper" from the website now. Alibaba has never requested the

SAIC to delay the publication of any report.

GMV

GMV grew 49% YoY to Rmb787Bn and was up 42% QoQ. Active buyers in the last 12

months grew to 334Mn, up 45% YoY. Mobile MAUs grew to 265Mn in the month ended

December, a record high, net adds of 48Mn MAUs in two months' time.

Revenue

Revenue grew 40% YoY to Rmb26.2Bn and was up 56% QoQ. Non-GAAP EBITDA

margin was 58%, down from 60% in the year-ago period and up from 51% in the previous

quarter.

Take-rate:

Mobile monetization rate has continued to improve, but may not always be linear given the

seasonality and other factors that change each quarter. We continue to strongly believe

that the longer-term trend in mobile monetization is possible.

Discretionary spending on new initiatives will likely continue at similar or greater levels in

the following quarters.

OPEX:

R&D: we stopped paying royalty fees to Yahoo after our IPO in mid-September.

S&M: 1) consolidation of investee companies, such as UC and AutoNavi, 2) increase

spending in lower tier cities, 3) promotions of new business initiatives.

G&A: YoY decrease was mainly due to one-time equity-settled donation expense of

Rmb1.3Bn made in quarter ended December 31, 2013

CAPEX:

1) We incurred lower real estate related CapEx in this quarter; 2) non-real estate CapEx

decreased sequentially as we invested last quarter to build our infrastructure ahead the

peak shopping season of the year.

Q&A

Q: On take-rate, what is the driving factor? What was the rationale for the system

changes during the quarter?

A: 1) mobile shift; 2) PC P4P ranking mechanism changes to improve user experience.

Q: For the commission revenue, seems to come down as well YoY? Any category

changes?

A: Commission revenue weakness is due to some category mix changes.

Q: On SAIC, any impact on 1Q/near term?

A: We think the report is based on faulty methodology, so we're prepared to file official

complaint.

30 January 2015


Q: On GMV, comment on general trend on the monthly basis, slowdown in Dec?

also trend in January?

A: Some seasonality in 1Q, but see good growth in especially in the lower tier cities.

Q: On CPC, will continue on monetization rate slow down trend?

A: CPC has some declines. We launched keyword recommendation tool to recommend

long-tail keywords. Decrease the rate of keyword bidding and monetization component of

our ranking methodology to improve keyword search. Personalized and customized results,

so organic search results become more relevant.

Q: On promotional spending/subsidy, what’s the magnitude of that? O2O initiatives

going forward?

A: 4Q S&M due to: 1) Nov 11 promotion; 2) UC consolidation, not including subsidy of taxi

(burdened in invested entity) . We still think we have the good margin to invest.

Q: Ad revenue up 20% YoY, besides PSP tweaks, any other reasons?

A: Commission grew better than ads. User improvement will continue to put some

pressure on P4P revenue growth.

Q: on 2015 investment strategy? Priorities?

A: 1) user base growth, 2) integration with acquired companies.

Q: Integration with invested company, UCWeb and AutoNavi?

A: On UCWeb and AMAP, UCWeb understands mobile user behavior. Shenma is #2

mobile search in China. 100Mn + DAU. AMAP #2 mobile map app. AMAP also enjoys

good relation with auto OEMs, Tmall auto channel, YunOS installation and cooperation

with OEMs.

Q: On lower P4P monetization, when was the adjustment first rolled out? How long

should we expect impact marketing revenue?

A: We try to improve ROI of advertisers. That's the principle of our P4P business. We

launched more features on personalization and put more weights on quality factor. The

bidding part is only one of the component of our P4P. We need to make sure advertisers

would love to continue spend on our platform for the longer run. The impact should

continue in the near-term. We just started the personalization effort.

Q: New categories? Like healthcare?

A: Auto-related, furniture and decorations, and other auction models grew well in 4Q. All

are pretty low-penetration categories. Healthcare is still very early stage, we're working

with the government on the feasibility of selling drugs based on prescription. Now only

OTC is allowed.

Q: On margins, EBITA margins bounce around QoQ, how should we expect that?

A: No changes in message. Payroll, colocation are fixed costs. So 4Q is a seasonally

strong quarter. 1Q is seasonally weak. We also have some discretionary marketing

spending on new initiatives such as mobile OS. Spending will continue at similar or even

greater level. EBITA margin remain unchanged for the year.

Q: on rural area penetration, any goals?

A: It's still early stage. 9% of rural population in China shop online. Large appliance, food

and beverages will continue to grow online.

Q: Any thoughts on digital entertainment initiatives?

A: We spend/invest in YT, OTT box, SmarTV of our partners. Living room is a very

important channel. Content is very important strategy. We will purchase and self-produce

unique contents.

30 January 2015


Q: Why TB GMV up a lot and TM down QoQ this much?

A: Base effect. TM also affected by mobile shift. We promote our Taobao apps more than

Tmall apps. Tmall has less organic mobile traffic comparatively speaking. We will promote

Tmall apps more.

Q: Ant Financial consumer credit business? Potential risks on B/S?

A: Ali Group will benefit from Ant Financial performance. Credit risk will be borne by Ant

Financial B/S.

Q: Potential VIE changes impact?

A: It's still very much a draft stage for the proposal. We're taking a wait-and-see approach

and will not comment on that.

30 January 2015


China SAIC blames Alibaba for failing to curb fakes According to people.com.cn and Bloomberg, Alibaba is blamed for failing to curb fakes on

its domestic online retail platform by SAIC of China in a white paper released on

Wednesday.

SAIC pointed out five major issues in the operation of Alibaba’s China online retail

platform:

1) Alibaba failed to employ strict entry qualification checking of retailers on its

platform;

2) Alibaba was unable to provide comprehensive anti-fake control on the products

sold on its platform;

3) Alibaba didn’t successfully manage to eliminate inappropriate sales and

advertisements on its platform;

4) Deficiencies in Alibaba’s credit rating system lead to fake transactions, lack of

faithful review, and potential issues in after-sales services;

5) Alibaba didn’t conduct effective internal control to avoid information leaking in the

quality inspection by government agencies.

Local SAIC agencies also commented that Alibaba should strictly comply with regulations,

and maintain normal order in its online retail platform.

Alibaba are required by SAIC to:

1) Cooperate with government agencies to enhance market supervision and improve

internal control;

2) Being practical in solving existing problems;

3) Proactive in information sharing, and build open, competitive and orderly online

platform;

4) Stick to principles and avoid being arrogant;

5) Keep honesty and self-disciplined in business operation;

6) Improve efficiency in internal management by leveraging information technology

Initial feedback from related parties in Alibaba are:

1) Alibaba has its own difficulties in anti-fake and credit control due to large in scale

and open platform;

2) Alibaba will proactively cooperate with government agencies to solve the existing

problems by enhancing internal control, building sample products inventory, and

strengthening anti-fake criteria;

3) Alibaba will enhance its management quality and provide support to the

supervision by government agencies.

4) Alibaba will strictly comply with regulations, and actively look for better solutions

on anti-fake and credit control issues.

5) Alibaba will establish effective communication channel with SAIC and its local

agencies in quality inspection.

Original report on people.com.cn (in Chinese):

http://finance.people.com.cn/n/2015/0128/c1004-26463776.html

http://finance.people.com.cn/n/2015/0128/c1004-26463776.html

30 January 2015


Companies Mentioned (Price as of 29-Jan-2015)

Alibaba Group Holding Limited (BABA.N, $98.45, OUTPERFORM[V], TP $113.0)

Disclosure Appendix

Important Global Disclosures

Dick Wei, Evan Zhou and Jialong Shi each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Alibaba Group Holding Limited (BABA.N)

BABA.N Closing Price Target Price

Date (US$) (US$) Rating

29-Oct-14 98.31 114.00 O *

05-Nov-14 108.67 118.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover mu ltiple sectors.

30 January 2015


Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 46% (54% banking clients)

Neutral/Hold* 38% (50% banking clients)

Underperform/Sell* 14% (44% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Alibaba Group Holding Limited (BABA.N)

Method: We use DCF valuation as the key valuation methodology, as we see DCF captures the longer-term growth opportunities of Alibaba. We assume mid-teens growth rate from 2020- 2025, WACC of 11% and 3% terminal growth rate. Our base-case DCF valuation yields a target price of US$106 of its core business. By considering the potential upside from Ant Financial Services Company (US$17.5Bn), we arrive at our final target price of US$113 for the whole Alibaba business.

Risk: Risks that could impede achievement of our US$113 target price for Alibaba Group Holding Limited include: (1) Macro slowdown; (2) Slower-than-expected category expansion (medical, O2O local services) due to execution or competition; (3) Slower mobile traffic growth and monetization; and (4) Higher-than-expected investments in business initiatives.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (BABA.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (BABA.N) within the past 12 months.

Credit Suisse has managed or co-managed a public offering of securities for the subject company (BABA.N) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (BABA.N) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (BABA.N) within the next 3 months.

As of the date of this report, Credit Suisse makes a market in the following subject companies (BABA.N).

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (BABA.N) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (BABA.N) within the past 3 years.

30 January 2015


As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse (Hong Kong) Limited .................................................................................................................... Dick Wei ; Evan Zhou ; Jialong Shi

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

30 January 2015


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