Traders@UST Publications Written by: Matthew Zayco ​ ​ ​ ​ ​ ​ ​ ​ 08/17 No. 1 ​ ​

EQUITY: (BABA) ALIBABA GROUP HOLDING LTD (U.S.) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ INTRODUCTION & COMPANY OVERVIEW ​ ​ ​ ​ ​ ​ Owners: ​ ● Jack Ma ​ ​ ● Joseph Tsai ​ ​ ● Michael Evans ​ ​ ● Daniel Zhang ​ ​ ● Maggie Wu ​ ​ Business model: ​ ​

Media Live media, news production, media interaction ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Food KFC China, Koubei, Ele.me ​ ​ ​ ​ ​ ​ Travel Air/train tickets, hotel booking ​ ​ ​ ​ ​ ​ Entertainment Audio/video solutions, video game services, ecommerce, Youku, AGTech ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interaction Online shopping support ​ ​ ​ ​ Search Personalized search, direct marketing service, big data analytics ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Education Media education services ​ ​ ​ ​ Health Utilities payment, Hospital Patient Comm, smart diagnosis ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

List of subsidiaries: ​ ​ ​ ​ Alibaba AliPay, Taobao, Tmall, Alibaba.com, Alibaba Express, Yue’bao, Tmall, Alibaba Cloud (750mn) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Youku, Weibo, UCWeb, Cainiao Logistics, Yahoo! China, SCMP, AliWangWang, LaiWang, PAI, Ding ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Talk ”Connected Car” with SAIC, AutoNavi, Ali Health, KFC Platform for Artificial Intelligence (PAI 2.0), ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tmall Genie Ali Cloud ​ ​ ​ ​ ​ ​

POINT 1: FUNDAMENTAL INDICATORS | CURRENCY: CNY ​ ​ ​ ​ ​ ​ ​ ​​ ​​ ​ ​ ​​ ​​ ​​ ​ ​ ​ 10-k Report Indicators (in ​ ​ ​ ​ ​ ​ millions CNY) 2017 2016 2015 ​ ​ Revenue 176,303.00 158,273.00 76,204.00 Revenue Growth Rate (3 year ​ ​ ​ ​ ​ ​ ​ ​ average) 55.95 56.48 32.73 EBITDA 57,543.00 39,125.69 28,582.00 E-commerce, Online auction hosting, Online money transfer, Mobile ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ commerce & credit and lending services. Alibaba has expanded into ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ banking services, however the only thing that is missing is the ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Brand entertainment and media industry. ​ ​ ​ ​ ​ ​ Tencent: Strong transaction platform with Tencent pay. Growing market ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ share, currently at 40% while alipay has 55%. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taobao Amazon: Strong presence outside of China and hosts 43% of all ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ e-commerce transactions in the US. Alibaba Group may have trouble ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Substitute resistance penetrating outside e-commerce markets. ​ ​ ​ ​ ​ ​ ​ ​ R&D N/A 106,857.77 78,807.39 Table 1: 10k Report indicators ​ ​ ​ ​ ​ ​ ​ ​

Revenue: Revenue growth has slowed down from 107% to 11%. However, the spike was caused ​ because Alibaba introduced many new services such as their cloud, PAI and Ant Financial. These services provided large opportunities as it successfully dominated their respective markets and as a result revenue growth grew rapidly. ​ ​ ​ ​ ​ ​ ​ ​ R&D: R&D has been a cost center for Alibaba and created new services. Developments in AI, credit ​ rating systems and transaction platforms have allowed Alibaba to diversify revenue platforms. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

China Commerce 38.46% ​ ​ Other Worldwide 115.27% ​ ​ USA + EU 40.09% Cloud Computing 105% ​ ​ ​ ​ ​ ​ Figure1: Geographic Segment Revenue, Revenue Breakdown ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

International Revenue is very diverse, however majority of revenue comes from China. Growth rate outside of China, US and EU is very promising. The diversification and investment into new geographic segments mitigates risk and is a good sign. In addition, Alibaba is diversifying revenue into different media streams. High growth in cloud computing shows further market dominance and currently has 41% market share in China. This is notably higher than main competitors Tencent who currently only have 7% market share. However, revenue is mainly dominated by commerce. At this point, geographic revenue and and product segment is heavily focused on one stream, however high growth in other streams show big potential for future revenue growth, lowering risk. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Ratio Indicators 2017 2016 2015 ​ ​ EBITDA Margin 36.36 38.68 37.51 ​ ​ Dividends payout ratio 0 0 0 ​ ​ ​ ​ EV/EBITDA 25.1 P/E Ratio 59.1 ​ ​ EPS 23.44 16.75 13.97 Altman Z score 7.64 8.08 9.34 ​ ​ ​ ​ ​ ​ P/B Ratio 6.66 5.8 8.82 ​ ​ Current Ratio 1.95 2.58 3.58 ​ ​ Quick Ratio 1.65 2.25 3.2 ​ ​ WACC 9.21 8.23 7.56 ROA 12.62 23.06 13.22 ROE 19.21 17.5 39.32 Table 2: Ratio analysis ​ ​ ​ ​ ​ ​ EBITDA Margin: Margins have been relatively the same for the past 3 years at around 36-38%. This can ​ be considered good as other E-commerce orientated businesses have around 1-26%, JD.com being a major rival only have 2%. This shows that the company is efficient in cost cutting and maximises revenue extremely well compared to peers. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Dividends: Alibaba Group is a company that does not pay dividends. This can be considered a weak ​ point, however, solely considering the net cash balance of Alibaba. Cash and cash equivalents has been increasing, meaning that the company can still handle cash flow positively. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ EV/EBITDA: Generally the average range of Chinese Tech companies lie between 20-30. Although this ​ suggests a lot of debt, it is understandable as Alibaba is expanding both its product portfolio and into new geographical regions. ​ ​ ​ ​ EPS: EPS has been increasing each year, showing that Alibaba is becoming more efficient generating ​ profit. This is a good sign. Compared to peers, … ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Altman Z Score: Very unlikely for bankruptcy. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ P/E and P/B Ratio: Compared to major competitors such as Amazon and Tencent, the ratios are better. ​ However compared to other Blue chip technology firms these ratios show that Alibaba is very overpriced. Efficiency ratios: Ratios in the past were over the margin, showing that assets highly surpassed ​

liabilities. This was a problem, however ratios have decreased close to the optimum brackets. Inferring from this, Alibaba is able to use their assets to invest more efficiently. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ WACC: With profit margin of 28.2%, Alibaba yielded returns of 18% in 2017. This means this is a good ​ investment as profit margins cover the interest rates. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ROA: The drop in ratio shows a decrease in efficiency of Alibaba since 2016. This shows that their ​ increases in capital has not had the same rate of increase in their net income. ​ ​ ​ ​​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ROE: Return on equity has almost halved since 2015. This shows that equity capital generated has been ​ less efficient in generating more profit. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equity Ownership: ​ ​ % of new buyers: 4.37% increased to 641 institutions ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of sellers: -3.41% decreased to 469 institutions ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Judging from ownership trends, we can see a larger increase of more buyers buying BABA stock and ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ less people selling the stock. Based on this knowledge, it is an estimate that more funds and analyst are ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ predicting for the stock to go up. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

POINT 2: TECHNICAL INDICATORS ​ ​ ​ ​ ​ ​ Triple Moving Averages: 50, 100,200 days. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Graph 1: Triple simple moving averages ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Looking at momentum indicators, the stock is on a very high upward trending momentum. The actual ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ stock chat is above all moving averages, and shorter moving averages are above longer ones. In terms ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ of price action, the stock is seeing a very strong bullish trend, without many fluctuations. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

RSI Indicator ​ ​

Graph 2: RSI ​ ​ ​ ​ RSI indicator shows that recently the stock is becoming overbought, therefore inferring a possible ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ momentum switch soon. ​ ​ ​ ​ MACD Indicator ​ ​

Graph 3: MACD ​ ​ ​ ​ The MACD indicator shows recent cross over of the shorter moving average, therefore indicates an ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ upward trend. ​ ​

POINT 3: SWOT ANALYSIS ​ ​ ​ ​ ​ ​ Strengths Weaknesses

● Revenue Diversification ● Credit health ​ ​ ​ ​ ● Operational health ● Cognitive services (crucial to AI ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ● Leaders in: development) is behind the capabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ○ Fintech (Ant financial's + Alipay) of US tech firms and Amazon. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ○ Insurtech (Zhong an) ● Entertainment business; Tencent has ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ○ Healthtech Tencent pictures. ​ ​ ○ Cloud (China; Ali cloud 40% ● Unintentional data sources; specifically ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ market share) social media ​ ​ ​ ​ ○ Data Collection ​ ​ ○ Lifestyle ○ Securities ○ Artificial intelligence (PAI 2.0) ​ ​ ​ ​ ​ ​ Opportunities Threats

● Chinese government policy on AI, ● International expansion: Amazon, Apple, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ promoting commercialisation of AI Google ​ ​ ​ ​ ​ ​

products ● Local threats: Tencent WeChat pay ​ ​ ​ ​ ​ ​ ​ ​ ● Target expansion plans for rural sections ● Potential for new regulations for online ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ of China conduct to cause disruption. China is ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ● Banking: Wealth management funds, enforcing more control over what is ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ credit rating based system & transaction posted on the internet and has stated it ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ platform is more efficient, widely used will monitor the tech giants closely. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ than big 4 firms in China. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ● 60% earnings growth, 10 times more ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ than industry average. ​ ​ ​ ​ Table 2: SWOT analysis ​ ​ ​ ​ ​ ​

CONCLUSION

Alibaba’s success with its range of services provide a very risk adverse investment. The exponential ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ growth of the cloud has dominated its competitors and is a very aggressive and successful strategy. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Therefore we can expect to see their revenues rise. However, regulatory risk is important to consider as ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ China will be monitoring their content more intensively. Technical analysis indicated upward ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ momentum growth. Therefore BABA is recommended as a good buy with a 12 year target price range ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ of 190-200 USD. ​ ​ ​ ​

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