Alibaba: e-Commerce Excellence

(part 1)

#1 Global B2C Online Marketplace

#1 Global Livestreaming e-Commerce

#1 Global Online Wholesale Marketplace

The "Zoo" of Digital Applications

Alibaba has outperformed the Nasdaq with a return of +360% the last 5 years and I continue to see great shareholder value from these levels. In Part 1 of my Alibaba thesis I'll introduce you to Alibabas largest business segment: Core Commerce.

Enjoy the read and stay tuned for part 2!

Alibaba has three consumer-faced business areas: Core Commerce, Digital Media and Entertainment, and Innovation Initiatives

On the back-end side we have the business areas Marketing Services and Data Management, Payment and Financial Services, and Technology and Systems Infrastructure.

To give you a sense of the standalone value of all the cartoons above, listed Ali Health (67.5% owned) has a market cap of $26 billion USD, Cainiao (70.7%) recently had a private valuation of $20 billion and BNP Paribas value Ant Group (32.6%) at $316 billion - just to mention a few. Below I'll show you how Alibaba use the aforementioned companies to create great scale, synergies and high barriers to entry. 

2021 Q1 Results

Alibaba made a robust recovery from the COVID-19 pandemic in the first quarter with a +34% YoY revenue growth (Alibaba’s fiscal year Q1 starts in April). Cloud outgrew the global market with +59% YoY and Core Commerce outperformed the domestic retail market with +34% YoY. Monthly active users were up +16% YoY to a staggering 874 million users. Gross margin recovered to 45% and - simply put, the best Q1 ever.

The pandemic accelerated the growth of online retail sales, as the self-quarantine policy forced consumers to do most of their shopping online. Online retail sales of total sales reached 30% in China the latest quarter, the highest number on record. In the US online penetration grew +49% YoY and reached 16.1% online retail sales of total sales. One of the most interesting parts - that I believe will further fuel the secular shift to online - is that people aged above 50 years experienced the sharpest increase, many of which made their first online order. 

If we break it down by segments, new and important business areas such as Alibaba Cloud and "New Retail" continued to grow at a break neck speed.

Core Commerce: Global Leader

Below are some of the domestic consumer facing e-Commerce platforms in Alibabas portfolio.

Tmall
World's largest B2C Marketplace and representing the premium brand image of the group.

Taobao
Chinas largest mobile commerce platform with over 700 million monthly active users, providing a variety of long-tail products from specialized small merchants. Xianyu 90 million MAU engaged in second-hand trading, or "re-commerce". 

Juhuasuan, Taobao Deals
Brings customized Customer-to-Manufacturer (C2M) products directly from agricultural producers and factories to customers with the best prices and helps Alibaba further penetrate lower-tier cities.

Tmall Global, Kaola
Controlling 60% of Chinas cross-border-ecommerce GMV, an ever more popular segment for consumers in China. 

A scheme highlighting the unique selling points for every segment below. For multi-branding to work the distinction and value proposition has to be very clear. I'll illustrate how Alibaba has been extremely successful in pursuing this strategy. 

  • Taobao alone surpassed Amazon with a GMV of $480 billion - Alibaba Group as a whole did 1$ trillion, during 2020.

  • 190 million unique customers spend +7 000 rmb or more, annually, on Alibaba platforms.

  • Customers who spent +2 500 rmb or more in year 1 - on average spend 4x more in their fourth year, with a retention rate of 96%.

  • IKEA debuted a flagship store on the Tmall Marketplace in 2020, making it the only third-party platform the world’s largest furniture retailer is selling its products on.

Core Commerce: Tmall 2.0 - Luxury 

Tmall (B2C) and Taobao (B2C & C2C) are the two jewels of Alibaba - having over 740 million monthly active users. Metaphorically, Taobao would be a Bazaar of Booths and Tmall would be a Shopping Mall of many branded shops. Tmall stores can only sell their own brand products, or authorized products of other brands. As of last quarter 250 000 brands had a presence on Tmall. 

Tmall was explicitly mentioned in conference calls by over 20 different American & European companies this spring, underlining how relevant Tmall really is for the biggest brands and companies in the world. 

Tmall is an exceptional partner, and we are having very good business with them. The strength of Tmall is that we control our business and the ability to deliver the right equity for the brands in the communication. - Estée Lauder 

For luxury, clearly, one of the growth drivers of our business in China by the way has been e-commerce and our success on Tmall.- L’Oréal

Nike made headlines earlier this year leaving Amazon. In 2018, Amazon and IKEA started a trial project to sell lamps on Amazon - but IKEA bailed before the final launch to go live. Other first-party vendors that has decided to leave are the house of LVMH, Vans, Rolex and North Face - to name a few. While Amazon might very well succeed in a Luxury transition, I believe Alibaba pulled a ingeniously and correct strategic decision a long time ago; Taobao for huge quantity and diversification at low prices; Tmall for genuine brands, quality and a superior shopping satisfaction. 

15 years of marketing Tmall as a quality platform and cooperating directly with brands makes the transition to Luxury a lot easier; both in brand participation and customer acceptance. Tmall’s invitation-only Luxury Pavilion boasts more than 400 luxury brands including Cartier, Burberry, Versace, Stella McCartney, Kering, LVMH, Givenchy, Tag Heuer, Valentino, Tod’s, Maserati, and Alexander Wang, to name a few. Tmall Luxury GMV is up 400% in only 2 years. 

Tmall Luxury Pavilion gives brands complete autonomy over their digital storefronts with brands having the power to control the look-and-feel, content, campaigns, pricing, distribution, enabling brands to better provide a unique experience to represent the brand and connect with consumers. Currently, online sales make up just 10% of total Chinese luxury spending; however, this market is expected to CAGR at 10% to 2025 - double the growth rate of luxury spending in general. 

This is merely one example in how Alibaba, time after time, succeeds to transition an already leading platform to something even bigger, with a new vertical. Historically, Alibaba has managed to grow 1) amount of annual orders 2) and number of categories 3) and basket size for the majority of its customers - year after year

Core Commerce: Live Streaming 

Bolstered by the Generation Z, demand and excitement for live streaming e-commerce is exploding. According to iResearch live streaming e-commerce TAM is set to be
2 800 billion yuan, within 3 years from now.

Taobao Live launched in 2016 and received 200 billion yuan GMV last year, becoming the largest live streaming e-commerce platform in China. In 2018 Alibaba announced a target for Taobao Live to reach 499 billion yuan GMV by the end of 2021. Two weeks ago, Alibaba upped their guidance announced that they will reach this target already this year, one year ahead...

5 months ago, Alibaba announced that Taobao Live will offer training for 200 000 farmers in a effort to digitize rural parts of China. The livestreaming platform aims to generate $2.1 billion GMV of agricultural sales, this year alone. Not completely different to when Taobao Live decided to help 200 000 brick and mortar stores to go live with their operations during peak-C19. 

Taobao is not their only live streaming platform. Below are two screenshots from Tmall Live streaming, with two of the largest cosmetic companies in the world. 

This hybrid of e-commerce & entertainment is growing at a break neck speed in China, and in the rest of South East Asia. Live streaming e-commerce has the benefit of attracting consumer traffic with its entertaining and interactive character, and is a convenient way to promote products and create engagement. Although not clear if it will break through in the west, early signs of it are emerging on the Facebook and Instagram platforms (another holding of mine, another write-up).

Core Commerce: Capturing The Value Chain

What makes a market of 1.4 billion people highly enticing is the consumption polarization: First- and Second-tier cities are maturing in online shopping penetration, but instead trading up in value of purchase. At the same time, Lower-tier cities are experiencing their online shopping renaissance. China online shopping user penetration is below 40% for Lower-tier cities, and above 80% for First-tier cities. 

To strengthen its position in Lower-tier markets Alibaba recently launched Taobao Deals, alongside existing Juhuasuan, to provide value-for-money products via Group Buying - another phenomenon that is highly popular in China, but very much less so here in the West.

Now, what makes Alibaba a world class operator in terms of profitability is its high participation in several parts of the value chain. Example. With a mass buying platform Alibaba can create, and specify, demand for a set of products and then take a cut via financing the manufacturer, then another via logistics, and then another cut via supply chain software. Everything without holding inventory or taking credit risk. 

To date, 500 000 factories and 1.2 million merchants have signed up to Taobao Deals; connecting manufacturers with consumers seeking direct-from-factory goods at highly competitive prices. TB Deals was launched 6 months ago...

3 weeks ago Alibaba unveiled Xunxi Digital Factory. For three years they have researched and developed an industrial manufacturing platform which integrates Cloud computing, IoT, AI, and other cutting-edge technologies to increase efficiency in production, reaction to orders (and ultimately, achieve zero inventory production). As of now, 200 small and medium sized producers of the apparel industry are online with the platform, and roll-out to other types of manufacturing will happen in the future. I can't stress enough of how exciting this opportunity is. It is reasonable to assume that a decent amount of sellers of Amazon and Shopee source their inventory via the largest wholesale platform in the world, Alibaba. If they're are successful with this industrial manufacturing platform it would mean another possible cut for the Alibaba Group, irrespective of where the end customer makes its purchase. 

Alibaba wholesale, the largest wholesale marketplace in the world, started its business 21 years ago and currently has over 1 million producers, serving over 65 million companies with over 550 million product listings. American producers joining the platform grew +120% YoY. Last year over 220 thousand trade shows where held online via Alibabas platforms, with over 2.6 million companies tuning in. THE middle man.

Core Commerce: Cross-Border e-Commerce

Cross-Border e-Commerce is up 400% in 5 years, strongly supported by millenials and government de-regulation. In November 2018 Xi Jinping announced that the country will import for more than $30 trillion worth of goods in the next 15 years (cumulative). To this affect the government has doubled the purchase limit per year per person, enabled more cities to have tax exempt cross-border warehouses and lowered the VAT/TAX on most categories, and removed it altogether on others. 

Alibaba runs two platforms in this segment: Kaola (1P) and Tmall Global (3P) - controlling +60% of the market. Another new vertical with decades of growth ahead where Alibaba will take a cut via the portal, payments, logistics and CRM - and so on.


Core Commerce: Monetization

The reason why I like Alibaba is its ability to monetize so many levels in the value chain. Observing other investors I believe there's a unhealthy obsession regarding GMV, or just the front-end of e-commerce. When I, based in Thailand, last month ordered a Yoga mat on Shopee for $6 it was sent to me via air from a seller based in China. Perhaps that seller used the biggest wholesale platform in China (Alibaba) to source his inventory, perhaps not. I discovered the $6 Yoga mat via a purchased ad on Facebook. Furthermore, I payed the transaction with my Mastercard and the Yoga mat arrived to my condo - via free shipping - in a DHL van. Shopee can proudly declare my transaction as $6 GMV, but I do remain skeptical there's any profit left after the domestic logistic operator in China, Mastercard, Facebook and DHL took their share. My personal experience aligns with that of CGS-CIMB research, dated 8 October 2020, projecting EBITDA loss per order for Shopee is to reach cashflow neutral, not until late 2023.

This is not the case for Alibaba. They more or less own the whole value chain. 

Last week Alibaba for the first time unveiled their Take Rate on a company-wide basis and the level - especially the growth - is mind blowing. As this contains several business areas that are new, growing and unprofitable - a reasonable assumption would be that mature areas such as Tmall are north of 15%. 

To summarize it - Alibaba continues to dominate e-commerce in China, the largest e-commerce market in the world. Both on a total level, but most importantly - on a individual user level as well.  

Core Commerce: Valuation

As I (hopefully) conveyed above, Marketplace-Based Core Commerce is a highly profitable, market leading and innovative business segment that's growing at double-digits. It produced $29 billion USD EBITA rolling last twelve months and if we were to value it at EV/EBITA 25x (drastically below peers) it would alone equal the market cap of Alibaba Group.

That valuation would imply that the following segments are valued at zero (0):

Furthermore, it would imply that Alibaba Cloud, the largest Cloud-provider in China and third in the world, is valued at zero (0):

Finally, it would imply that Ant Group, AutoNavi, Dingtalk, Youku and many other leading businesses are valued at zero (0):

Now, while my clickbait-ish sum-of-the-parts may be exciting - it’s rarely that simple. Specifically, outside the segment Marketplace-Based Core Commerce there’s a universe of businesses that are currently non-profitable: “New Retail”, Lazada, Cainiao, Alibaba Cloud and others. Adjusted for this, the whole group is currently trading at ~ ev/ebit 30-35x trailing twelve months. Still below most peers.

But then…

In last weeks Investor Day Alibaba surprised the market announcing that Alibaba Cloud will be profitable this financial year, and Cainiao cash flow positive. The news sent the stock up +4% and analyst had to tune up their profit forecast coming years, substantially.

Median consensus (produced post-ID) are $24.5 billion net profit for this financial year, growing to $32 billion net profit next financial year. So, in short, this stock is trading for P/E 25 next financial year - which is simply too cheap. If it were to trade closer to the multiples of JD, PDD, Meituan, Amazon, Zalando and SE - combined with expected organic profit growth - total return from here could be substantial. As of writing this, October 8, the market seems to agree - as we hit a new all time high today.

Thanks for reading and stay tuned for part 2!

  • Alibaba Cloud

  • Cainiao

  • “New Retail”

  • Lazada

Disclaimer

- I own shares (I’m obviously biased)
- Before investing please read all chapters regarding “Risks” in the Annual Reports
- Do your own due-diligence before investing

Share