If you buy it on Alibaba, it's the right one

Company business
Alibaba Group Holdings Co., Ltd. is a holding company. Through its subsidiaries, Alibaba Group is engaged in providing technical infrastructure and marketing influence to help merchants, brands, and other businesses interact with users and customers.

The company has four operating and reporting divisions, namely core commerce, cloud computing, digital media and entertainment, and innovation programs and others.

The core business segment mainly consists of retail and wholesale business business, logistics service business, and local consumer service business. The retail business in China mainly includes mobile commerce and third-party online mobile platforms for brands and retailers, such as Tmall and Taobao. The overseas retail business includes an e-commerce platform across Southeast Asia operated by Lazada Group S.A., a global retail market that enables global consumers to buy directly from manufacturers and distributors mainly in China, and an imported e-commerce platform that enables overseas brands and retailers to reach out to Chinese consumers. China's wholesale business includes a comprehensive domestic wholesale market, and the overseas wholesale business includes a comprehensive international online wholesale market (Alibaba Network). The logistics service business includes a logistics data platform and a national logistics network established through Cainiao Intelligent Logistics Network Co., Ltd. The local consumer service business includes on-demand delivery and local service platforms operated by Rajax Holdings Limited, as well as a catering and local service shopping guide platform for in-store consumption operated by Reputation Holdings Co., Ltd.

The company's cloud computing business includes Alibaba Cloud, which provides a full range of cloud services, including elastic computing, databases, storage, network virtualization services, computing, security, management and application services, big data analysis, machine learning platforms, and IoT services.

The digital media and entertainment sector uses its data insight to serve the interests of consumers through two important distribution platforms, Youku and UC Browser, as well as through Alibaba Pictures and other content platforms that provide online video, movies, live events, news sources, literature, and music.

Innovation plans and other segments include businesses such as Amap, DingTalk, and Tmall Genie. Amap is China Mobile's digital map, navigation, and real-time traffic information provider. DingTalk is a digital workplace platform that serves businesses and organizations of all types and sizes, providing unified communications services, intelligent mobile workplaces, and network collaboration services. Tmall Genie is an AI-powered smart speaker.

Company moat
Based on Alibaba's strong network effect, we believe Alibaba has a broad moat, that is, the value of the platform to consumers increases as the number of sellers increases, and vice versa. Despite recent macroeconomic uncertainty, based on penetration into underdeveloped regions, consumer disposable income and consumption trends, increased internet and mobile application rates, and highly fragmented physical retail, we expect the digital commerce industry in China and Southeast Asia to have an extended growth path. This is in stark contrast to other web-based industries, which have often reached a more mature state when leaders have fully established meaningful network effects.

Alibaba's “ecosystem” consists of several leading online retail platforms in China. Taobao Marketplace, China's largest consumer-to-consumer online shopping site; Tmall, China's largest third-party business-to-consumer platform for branded products. According to iResearch data, Alibaba's core retail market in China (Taobao and Tmall) generated a total product volume of 5.7 trillion yuan (807 billion US dollars) in the year ending March 2019, surpassing the sum of Amazon and eBay in 2018 (we estimate it to be 311 billion US dollars and 950 billion US dollars, respectively), and accounting for a large part of China's 8.0 trillion yuan online shopping industry.

Since Alibaba's various online marketplaces are interconnected, it has compounded its network effects and then nurtured other competitive advantages and growth opportunities. We believe that by operating two of China's most popular online shopping marketplaces, Alibaba has also formed a powerful source of intangible brand assets. Millions of Chinese consumers think Taobao and Tmall are their default first choice when seeking products and services online. According to multiple online shopping surveys, we believe that more than two-thirds of Chinese consumers think Taobao or Tmall is the online market they use the most. In addition, Taobao users with strong demand for branded products can shop on Tmall to get a better shopping experience and higher quality assurance, while Tmall shoppers can search for more product options on Taobao. In fact, we think Taobao has diverted user traffic to Tmall, thereby reducing Tmall's customer acquisition costs. We are also beginning to see some new growth opportunities for Alibaba's Chinese retail platform, including participation in the 88VIP loyalty program, short video brand content, and retail formats such as Freshippo/Hema, digitalization of traditional offline retailers such as Sun Art Retail and Intime, and Tmall branded convenience stores. Overall, we currently expect the average annual revenue growth of Alibaba's retail sector in China over the next five years to be around 20.

Additionally, through its cooperative logistics affiliate Cainiao (Alibaba increased its shareholding ratio to 51% from the previous 47% and began merging in financial statements in October 2017), the company operates as a third-party platform without controlling inventory — we think this is unlikely to change — adding another layer of cost advantage and driving profit margins higher than JD, Vipshop, and other competitors in the region. Although the decision to integrate Cainiao and invest more in new smart warehousing and other logistics technologies will shift Alibaba from a delivery data model (where the courier company supported by Cainiao's data assumes responsibility for order execution from its warehouses) to a more traditional execution model (where Cainiao assumes responsibility for execution through its own or partner warehouses) and has an impact on short-term profit margins, it will create opportunities for execution and inventory storage bundling (similar to Amazon's Fulfilment), which will drive increased monetization rates. We also believe that the enhanced logistics capabilities brought about by its collaboration with Suning and other retailers (which gives consumer staple food products greater next-day and same-day delivery opportunities in more cities) and other omnichannel investments (including nearly 200,000 offline stores with mobile ordering and payment capabilities) have strengthened the network effect of this platform, making it a more attractive platform for buyers and sellers.

We expect globalization to be Alibaba's main growth driver over the next few years. In particular, we think Alibaba's holding of the Southeast Asian e-commerce platform Lazada is a positive factor in its desire for international expansion. First, we think Lazada has a positive effect on Alibaba's network effect — which we believe is the main source behind its vast moat — and will provide Alibaba's third-party merchants with access to potential 200 million active Internet users in Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam (based on real-time internet statistics). Second, although the success rate of Alibaba's e-commerce business outside of China was limited, Lazada's probability of success is higher given the lack of existing players with mature network effects in Southeast Asia and the lack of full penetration of the e-commerce market (according to data from the National Bureau of Statistics of China, the total estimated share of total retail sales in 2019 was 3% to 5%, compared to 21% in China). Finally, we believe the similarities between e-commerce in China and Lazada's main operating markets—including the high adoption rate of mobile commerce and the fragmented traditional retail market—provide revenue growth and cost synergies by combining Alibaba's mobile commerce, payment, and logistics technology with Lazada's existing HelloPay payments and LazadaExpress logistics solutions. We also believe that the acquisition of Koala, NetEase's cross-border e-commerce platform, is a complement to Tmall Global. Considering the dual-brand strategy — Tmall Global will continue to use the third-party model and Kaola will deploy the first-party model — global merchants will have more flexibility in their market-entry strategies, which will help Alibaba speed up its import services.

Over the past few quarters, Alibaba's desktop and mobile monetization rates (revenue as a percentage of GMV) have generally been on the rise, indicating that sellers are increasingly reliant on Alibaba's marketplace platform to reach Chinese consumers. We believe the company's recent UX investment is a prudent move to maintain network effects, particularly as other local and global players seek to expand their business in China. We believe that over time, Alibaba can increase its monetization rate through personalized search efforts to improve seller conversion rates, mobile sellers' acceptance of data-rich marketing tools, and increased Tmall's contribution.

Given Alibaba Cloud's first-mover advantage in big data and cloud computing in China — giving it a clear advantage over AWS and Azure in China — and increased demand from businesses and other government groups looking to reduce IT spending, we think Alibaba Cloud is likely to evolve into a more significant contributor to cash flow over time. Management has stated that they believe Alibaba Cloud can eventually be as profitable as Amazon Web Service. Amazon Web Service's operating profit margin in 2019 was 26.3%. We agree with management on Alibaba Cloud's long-term profit margin potential, but we remind investors not to automatically assume that Alibaba Cloud will achieve the same growth and profit trajectory as Amazon Web Services. We anticipate that a profit margin similar to AWS may take at least five years due to continued customer acquisition jobs and technology investment, as well as potential competition from Tencent Cloud service products.

Also, in the innovative business, Ali's DingTalk is becoming a dark horse that cannot be ignored. Although DingTalk's predecessor failed, DingTalk's transition to the corporate service market was a very wise choice. In fact, when evaluating Alibaba, many people only think that Alibaba is an e-commerce company, but Ali's old banks have always been corporate services. From Taobao and Alipay, which were initially launched, to Tmall and Alibaba Cloud later, they are actually all aimed at better serving tens of thousands of small and medium-sized enterprises. Now, according to Alibaba Cloud President Zhang Jianfeng (Xing Lu) in early June, “Many people understand DingTalk as a communication tool, but DingTalk goes far beyond communication itself. Just like the combination of PC and Windows in the traditional information age, enterprises need not only a new computing architecture such as the cloud, but also a new operating system like DingTalk. This is a whole. The former provides computing power infrastructure such as water, electricity, and coal, while the latter is like Windows in the new era, so that enterprises can quickly develop and manage all applications for organization and business. Furthermore, as a new operating system, DingTalk has a successful case. As a new type of operating system, DingTalk has become a “toodle” in the mobile phones of tens of thousands of salesmen, thousands of sales teams, and hundreds of suppliers through exclusive customization. DingTalk has achieved online core indicators: inventory satisfaction rate, timely delivery rate, cost write-off rate, material distribution rate, etc., thus achieving real-time tracking and utilization, improving the working efficiency of Libai Group. Furthermore, we can compare DingTalk with Microsoft's Teams. Microsoft has accumulated a large number of enterprise customers through Office 365. When Microsoft launched Teams, this group of Office-era customers became potential users of Teams, thus making Microsoft Teams surpass Slack in one fell swoop. Although the Slack product is doing very well, it is still unable to do so on the basis that Microsoft has accumulated a large number of customers in the early stages. However, Ali, like Microsoft, has accumulated enterprise customers for decades, which will surely bring great advantages to DingTalk's rapid development.

Company risks and uncertainties
We believe that Alibaba's most pressing risks are the continued slowdown in China's consumption model, e-commerce competition, increased regulatory scrutiny, and the possibility that ancillary business may divert management's attention.

The e-commerce landscape in China is increasingly competitive. With Tencent's traffic support and its group buying traffic generation method, Pinduoduo is growing faster than Alibaba, while Pinduoduo positions itself as a credible competitor through its ability to perform contracts, quality assurance, and partnerships with Tencent. These platforms do not yet have the scale of Alibaba in China, but they focus on specific products, services, or markets, which may hinder Alibaba's growth.

Alibaba is also subject to more regulation of online and mobile payments. China's financial regulators are constantly scrutinizing online and mobile payment services. Considering that in the year ending March 2019, about 70% of transactions in Alibaba's Chinese retail market were settled through Ant Financial's Alipay, any kind of regulatory tightening and regulatory policy may affect Alibaba's operations. Alibaba continues to face the problem of counterfeit and infringing products on the marketplace. The appointment of representatives from the Hangzhou municipal government to work within Alibaba has also raised concerns among some investors, although there is no evidence of the consequences of the damage to Alibaba's value.

Expansion to surrounding businesses may distract management and reduce profitability without substantially improving Alibaba's ecosystem. Although we are optimistic about Alibaba's ability to become the partner of choice for international retailers and consumer brands looking to sell in China, the company does not enjoy the same network effects and brand recognition in other countries, and it may face the challenge of expanding directly in these markets.

Company valuation
Morningstar and Valueline valuations. As mentioned above, Morningstar and Valueline's research have ignored the tremendous power of DingTalk's new operating system, so I think Ali is underestimated.